Reading a commercial lease feels like deciphering your patient’s handwriting on a health history form… confusing, full of surprises, and definitely needs a second look by someone before moving forward. Whether you’re opening your first practice or relocating your thriving operation, understanding the terms of your lease is crucial to avoiding a financial headaches down the road. It’s also one of the largest fixed expenses for your practice so you don’t want to mess this part up. Trust me, they’re not giving you a better deal because you’re representing yourself with no commission… you just assume that.
But no need to fear, this won’t be a boring legal lecture about leases. Especially since I’m not a lawyer but I do have my commercial real estate license. From that lens I’m here to break down the essentials in a way that’s informative and hopefully somewhat entertaining.
Location, Location, Location. The Classic Real Estate Line.
Every dentist dreams of opening their practice in a prime location. Whether it’s a bustling shopping center or a charming standalone building, the right spot could make or break your business. But before you get too dazzled by the perfect corner lot with loads of cars driving by, take a closer look at what you’re actually signing up for.
Ask yourself:
• Is the rent price aligned with market rates for the area? It’s easy to get this data if you just ask a professional.
• What’s the visibility like? Can potential patients see your signage from the road? Can I even put up signage?
• What’s the foot traffic and anchor tenants? Is the surrounding area full of potential customers or competitors?
Also consider future-proofing your location. Sure, it’s great now, but what happens if your landlord decides to lease the adjacent space to another dentist? Suddenly your patients are going somewhere else.
It can only do you good to check city regulations and talk to a broker who specializes in dental leases. They’ll know how to spot red flags and guide you to the right location, plus any commission is usually paid for by the landlord. Please note that is usually the case, but I’ve had a deal before where the landlord told me to go kick rocks.
The Most Confusing Part for Dentists: Gross vs. NNN Leases
Let’s talk about the two most common lease types you’ll encounter:
• Gross Lease: This is the all-inclusive option. Your landlord covers operating expenses like property taxes, insurance, and maintenance. You pay a flat monthly rent. Of all the leases this one is the most predictable for your finances, but is higher when you’re comparing costs since other things are included. Remember there’s no free drinks on an airplane, it was baked into the cost of the ticket.
• Modified Gross Lease: Occasionally you’ll run into this one where some things are covered, but not everything is.
• Triple Net (NNN) Lease: With this setup, you’re responsible for your share of the building’s operating costs compared to the space you’re leasing. That means you’ll pay for property taxes, insurance, and maintenance (sometimes referred to as CAM or common area maintenance), in addition to your base rent. This is the most frequent lease I see in dentistry and also the most confusing for everyone. The rate will look pretty good, but it’s more like you have to add it all up to get a good idea.
While a gross lease might seem like the easier option, don’t count out the NNN lease. Sometimes the lower base rent of a NNN lease balances out those extra costs. Just make sure you account for variables like maintenance fees, especially if the property comes with an unpredictable upkeep bill. Someone’s got to pay for those trees to be trimmed, and it isn’t going to be the landlord.
Build Outs Are Fun, But Can Be Crazy
Dental offices aren’t like regular offices. You’re not just plopping down desks and a water cooler for everyone to talk about last night’s football game. You need spaces for X-ray machines, sterilization stations, operatories, and maybe even that fancy Keurig for the breakroom. That means some dental leases involve build-outs, renovations or customizations to make the space suitable for your practice. Most places don’t have plumbing ready the way you need it if it wasn’t a practice before.
When negotiating your lease, look for these key points:
• Tenant Improvement Allowance: This is money your landlord provides to help with renovations. The bigger the allowance, the less you’ll have to spend out of pocket. Commonly referred to as TI.
• Approval Process: Will your landlord need to sign off on your plans? If so, how long will it take? Always better to ask before starting.
• Ownership of Improvements: Once you make those changes, who owns them? You might invest thousands into creating the perfect office, only to find out it all belongs to the landlord if you ever leave.
Lease Assignment for Sellers: Passing the Torch During a Practice Sale
If you’re planning to sell your dental practice someday, your lease plays a big role in the process. Buyers aren’t just purchasing your equipment and patient charts, they’re also inheriting the space. That’s where the lease assignment comes in.
A lease assignment allows you to transfer your lease to the buyer of your practice, effectively stepping out while they step in. However, not all leases make this process easy.
Here’s what to look for:
• Assignment Clause: Does your lease allow for assignment? Some leases prohibit it outright or require landlord approval. Make sure the clause is clear and includes reasonable conditions. You don’t want to be almost done with a deal and then the landlord kills it.
• Landlord Approval: Most landlords require approval before a lease can be assigned. This is standard, but be wary of clauses that give the landlord too much power. They shouldn’t be able to reject a qualified buyer without good reason.
• Personal Guarantees: Many leases require you to personally guarantee the lease, meaning you’re still on the hook if the new tenant defaults. Negotiate to have your personal guarantee released upon assignment. This isn’t as common but I have been in deals that allow it.
• Timing and Process: Understand how long the landlord has to review the new tenant’s application. Delays can jeopardize your sale, so make sure the process is clearly outlined.
Lease Assignment for Buyers: What to Know Before Signing On
If you’re buying a dental practice, the lease assignment process is just as important for you as it is for the seller. After all, you’re stepping into a legally binding agreement that could impact your business for years.
Here’s what you need to consider as a buyer:
• Review the Lease Terms: The lease you’re inheriting becomes your responsibility. Make sure you’re comfortable with the existing terms, including rent escalation clauses, renewal options, and any hidden fees.
• Landlord Approval: Just as the seller needs landlord approval to assign the lease, you’ll need to provide financial documentation to prove you’re a viable tenant. Be prepared to share details like credit history and business plans.
• Exclusive Use Clauses: Ensure the lease includes an exclusivity clause that prevents another dental office from opening nearby. Without it, your business could face unnecessary competition in the same complex.
• Transition Periods: Work with the seller to establish a clear plan for the transition. Who handles rent payments during the handover? Are there any costs associated with the assignment process? Clarity is key to a smooth transfer.
Commercial leases are a Long Commitment
How long should you commit to a lease? The answer depends on your situation.
• Short-Term Leases: These are great if you’re just starting out or unsure about the location. However, they often come with higher rent prices and fewer perks. A lot of banks require at least 5 years including options, so this really isn’t always an option if you’re buying.
• Long-Term Leases: Committing to a 10- or 15-year lease can lock in lower rates and give you stability, but it’s a big commitment. A lot can change in that timeframe! Also I’ve noticed agents push for these longer terms to clients because they get paid a commission on your entire term. So they think hey I’ll double my commission if they go to 10 years instead of 5 years.
My common recommendation to dentists is a five year lease with renewal options. This gives you the flexibility to reassess your needs while still securing a fair rate.
Inking the Deal
Signing a commercial lease is one of the biggest financial decisions you’ll make as a dentist. But with the right preparation, it doesn’t have to be that overwhelming, particularly if you have someone who has their license representing you. Remember to:
• Research your location.
• Understand the lease terms.
• Negotiate like a pro.
And most importantly, don’t go it alone. Whether you’re selling, buying, or just getting started, enlisting the help of brokers, attorneys, and other experts ensures your lease aligns with your goals and sets your practice up for long-term success.
If you want help with all of this, I work with dentists everyday doing these types of transactions and also have my commercial real estate license. I like to put it in simple language you can understand, sort of how you do for your patients. Feel free to contact me with any questions.
Kyle Womeldorff
480-690-5200
info@dentalbroker.com
Check out the YouTube video I made on this topic at: Commercial Leases Made Simple