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Leases

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					Leases
The signing of a lease represents a significant
financial commitment.

Because hiring legal counsel to negotiate a
lease is prohibitively expensive, the
negotiations are conducted by the parties.

Thus it is necessary for the lessee (you) to
understand the terms of the lease offered by
the lessor (landlord).
In optometry, there are two types of leases
that are most commonly employed.


Office leases are long-term agreements for
space in which to practice.

Equipment leases can be used as a substitute
for the purchase of ophthalmic instruments
and equipment.
Office Leases
What are key features of a leased office?

• Visibility—the location is easily observed by
  automotive traffic
• Parking—convenient access to the office,
  including parking, is important
• Accessibility—there should be easy entry to the
  office for handicapped individuals
• Efficient floor plan—with one examination room,
  patients are moved to and from the room; with
  two or more examination rooms, the doctor moves
  between rooms
How much space is needed for an optometry
office?
• Small offices are less than 1,000 square feet
• Moderate offices are 1,000 to 2,500 square feet*
• Large offices are 2,500 to 6,000 (or more) square
  feet

*Moderate sized offices usually include a second
examination room, contact lens area, larger
laboratory, a data collection (workup) room, a
second bathroom, and a private office for the doctor.
What should an office lease cost?

• AOA Economic Surveys indicate that lease cost
  should be between 6% and 7% of gross income
• The most expensive leases are usually in
  commercial properties such as malls
• On a square foot basis, cost varies between
  communities (larger communities cost more), and
  an internet search shows that Birmingham office
  costs range from $9 to $24 per square foot
Office leases are negotiable:

• The terms offered in a lease should be considered
  subject to negotiation—if the lessor exhibits a
  “take it or leave it” attitude, the latter option
  should be chosen
• Professional counsel should be solicited to ensure
  understanding of and to propose modifications to
  the lease
• The lessee has the power to accept or reject the
  lease—and to obtain concessions before signing
 During the period between signing the lease
 and beginning to see patients, the lessee can
 offset the loss of income by:
• Asking the lessor to excuse or reduce rent to lower
  overhead expenditures while alterations are being
  performed on the premises or equipment is being
  delivered and installed
• Negotiating payment by the lessor for all or part of
  the alterations or improvements to the office
• Obtaining a “step-up” lease, in which rent is paid at
  a reduced rate for the first 6 to 12 months and
  gradually increases to the full rate over time
Lease provisions should be carefully read and
fully understood before signing.
• Identification of parties—if a lease is signed by a
  representative of the business organization involved
  (“John O’Dee, as agent for Birmingham Eyecare,
  PC”), it is the organization rather than the
  individual practitioner that is responsible for
  payment
• Property description—important because this is the
  property on which taxes will be levied, insurance
  must be purchased, maintenance will be paid, and
  so forth
A key provision of office leases is the term:

• Term—a long-term lease is preferred if it is
  affordable and the location is desirable; 3 to 5
  years would be considered ideal, 10 years would be
  appropriate only if a location was “perfect”
• Renewal—the option to renew for additional
  periods is a valuable provision for the lessee; the
  rent to be paid during the renewal term should be
  determined on a pre-renewal basis and included in
  the lease
The rent to be paid is one of the most
important lease provisions:
• A net lease implies that the lessee will pay the
  lessor rent that includes the “net” cost of all taxes,
  insurance, or maintenance expenses (i.e., the lessee
  pays these in addition to rent)
• A gross lease implies that the lessor will pay the
  expenses for taxes, insurance, and maintenance
  out of the rent proceeds.
• A negotiated lease should be a compromise
  between these extremes
Terms for “net” leases:

• Most net leases establish a base or fixed rent (often
  called “minimum rent”); to which additional
  amounts are added for operating costs, such as
  taxes, insurance, or common area maintenance
  (e.g., landscaping, janitorial services, elevator
  upkeep, parking lot resurfacing, common area
  lighting)
• “Caps”—maximums on these additional operating
  costs—should be written into the contract, or the
  contract should specify that the total expenses
  reimbursed to the lessor by all lessees will not
  exceed 100% of the actual costs incurred
Rent costs should be analyzed:
• Is the “per square foot” cost in line with what is
  being charged for comparable offices in the
  vicinity?
• The total cost for rent should be in line with
  national norms for optometry practices (6% to 7%
  of gross income).
• The cost-per-square-foot should be applied only to
  the office’s actual floor space and should not
  include a prorated share of the building’s common
  footage, such as halls and lobbies
To determine the affordability of a lease, a
pro forma analysis can be performed:

• Gross income                     $500,000
            less
• Variable expenses (lab)          $165,000 (33%)
• Operating fixed expenses         $150,000 (30%)
• Net income needed                $155,000 (31%)
             total costs           $470,000
• Office lease should not exceed   $30,000 (6%)
Rent increases, if allowed, should be limited:

• If rent can be raised to allow for rises in property
  taxes, maintenance costs, or the cost-of-living
  index, annual increases should be limited to a
  maximum fixed percentage
• Late charges should be clearly stated; the amount
  of any penalty and the date by which the penalty
  would be incurred need to be fully described
To prevent a significant increase in rent at
renewal of the lease:

• if a renewal option is included in the lease, if
  possible the rent increase or rent payment during
  the renewal term should be specified
• the past history of the lessor should be determined
  before signing a lease—for example, has the lessor
  greatly increased rent charges for other lessees at
  renewal of the lease?
“Security” deposits are often required in lease
agreements:

• Payment of 1 or 2 months’ rent may be required
• This payment will earn the lessor interest as long
  as it is held; unless the law requires it, the lessor
  will not offer to pay this interest to the lessee
• The lessee can ask for payment of interest earned
  by the deposit
Tenant mix is an important provision in a
multi-tenant building:

• A clause may be included in the lease, prohibiting
  the lessor from offering leases or subleases to
  competitors (such as other optometrists or
  opticians)
• The lease may also contain a clause preventing the
  lessor from renting to undesirable tenants (e.g.,
  bars, pawn shops, massage parlors)
The option to sub-let or assign the lease to
another lessee is also a desirable provision:

• Most leases do not permit a lessee to sublet the
  leased premises
• A reasonable compromise is to permit the
  premises to be sublet by the lessee, but with the
  agreement and approval of the lessor
• If the individual subletting the premises defaults
  in rent, the original lessee remains responsible for
  payment
A necessary provision involves termination of
the lease under certain circumstances:
• In the case of death or disability, it should be
  possible to terminate the lease when the
  appropriate notice is given (e.g., 90 days)
• If the office space is damaged by fire, water, or
  other casualty, and cannot be restored to service
  within a reasonable period (e.g., 90 days), the
  lessee should be allowed to terminate the lease
• Both lessor and lessee should have the right to
  terminate or cancel the lease should the other
  party significantly default on lease provisions
Maintenance is a key provision of the lease
agreement:
• Maintenance provisions are subject to negotiation,
  and agreements can vary considerably, depending
  on the amount of rent paid and the length of the
  lease term
• A negotiable compromise is for the lessor to be
  responsible for all repairs to the building exterior,
  including roof and exterior glass, as well as
  mechanical systems such as central heating and air
  conditioning, while the tenant is responsible for
  repairs to plumbing, the electrical system, interior
  painting, carpeting, and so forth
Insurance is a necessary provision for both
parties:

• Insurance on the building is normally carried by
  the lessor, who has the burden of rebuilding in the
  case of destruction by fire or other casualty
• The lessee should be adequately insured for the
  replacement of interior leasehold improvements,
  furniture, equipment, and supplies
 A requirement that the lessor provide notice of
 lease violations should be included in the lease:

• Eviction should not be permitted the first time a
  lease provision is violated; written notice of
  violation of a rule should be required, and a
  reasonable opportunity to correct the error should
  be allowed
• The lease should not contain a clause stating that a
  violation renders the lessee responsible for the
  payment of the rent for the balance of the lease
Alterations or improvements to the lease
premises are usually necessary and should be
negotiated:

• Payment for renovations or alterations can be
  substantial
• The lessee may find it necessary to offer to pay a
  higher rent than requested if, in return, the lessor
  agrees to absorb the cost of renovations
• The lessee should try not to accept any clause
  requiring the premises to be restored to their
  original condition; improvements are assets to the
  lessor and should not have to be removed.
Lease agreements usually include an
exculpation clause for the lessor:
• An exculpation clause limits the liability of a lessor
  to the interest in the property itself
• This clause is used to insulate the lessor from legal
  responsibility for certain acts—committed by the
  lessee—that cause injury to persons on the
  premises
• Liability insurance coverage is used by the lessee
  to provide protection against such claims
Other important terms can involve parking
and signage:
• The lease should not require additional costs for
  parking
• Parking privileges available to staff and patients
  should be specified
• Parking should be available during the hours the
  practice is to be open; ideally, there should be 7 to 8
  parking spaces for each professional in a building,
  but if the practitioner and staff do not use the spaces,
  a minimum of 4 to 5 spaces might be adequate
• The lessee should be sure that the lease allows
  customary signs to be erected—both inside and
  outside the building
Office lease negotiations should be prepared
for:
• Tenants of the building should be consulted to determine the
  integrity of a lessor
• The law of supply and demand governs a lessee’s bargaining
  position: bargaining strength depends on how badly a lessee
  wants the space and how much he or she is willing to pay for
  it; if there are other prospective locations and time is not of
  the essence, a lessee is in a better position to bargain
• In low-to-moderate cost premises, the demand for space
  usually exceeds the supply; in more expensive areas, the
  reverse is true
• Being a professional is in a lessee’s favor when bargaining--
  lessors would prefer to have a professional as a tenant, and a
  young professional should not be hesitant to ask for changes
  and concessions
Commercial lease agreements are different:
• the usual lease is 10% of gross monthly income
  (for a $530,000 gross that is $53,000 annually)
• an income report must be submitted to the lessor
  by the 10th of the month, and if it is late a 5%
  penalty is imposed, based on the amount due, and
  also 10% interest until the amount is paid
• the lessor has the right to enter the premises to
  inspect financial records “at any time and for any
  or no reason”
• the lessor can order an audit of the financial
  records, and if an underpayment of 3.5% or more
  is found, the lessee must pay the deficiency and the
  cost of the audit
Very different:
• the office premises have to be accepted “as is”; so
  also must the equipment provided by lessor
• the lessee has to work the hours designated by the
  lessor (48 hours/week, including Saturdays)
• the fees charged for services must be “equal to or
  preferably below” those in the “market area”
• the lease can be terminated on 30 days’ notice
• the lessee cannot sublease the premises (hire
  substitutes) without the approval of the lessor
• the lessee has to purchase malpractice, other
  liability, property and premises insurance
Very, very different:
• the lessor must be reimbursed for any damages paid
  by lessor because of a legal claim or judgment
  (such as from a malpractice case)
• the lessee must waive the right to a jury trial if there
  is a legal dispute involving the lease agreement
• at termination of the lease, the lessee may be required
  to “deliver complete copies of all patient records and
  files…to any licensed optometrist lessor may
  designate”
• the lessee must agree to a non-compete clause at
  termination (1 year, 5 miles from any “competitive
  location”)
• and the clinical space involved is about 450 sq ft
  (which costs over $100 per square foot!)
Equipment Leases
Equipment leases may be preferable to
buying—such as when an optometrist does
not wish to borrow money to purchase the
equipment or chooses to use the capital for
another purpose (e.g., buying a house).

However, leasing ophthalmic equipment is
typically more expensive than buying it.
The usual terms of an equipment lease
arrangement are as follows:
• the practitioner chooses the equipment, the lessor
  provides the money to purchase it
• the lease term is a set number of years (usually 4
  to 5)
• the lease payment is a set amount, paid monthly
• at the end of the term, the equipment is returned
  to the lessor
• or the lessee may purchase the equipment
Advantages of leasing equipment include:

• 100% financing of the equipment
• no down payment
• 100% of the lease cost is tax deductible
• the equipment can be returned to the lessor
  after the lease term is ended
• fluctuating interest rates do not affect the
  monthly payment
Disadvantages of leasing include:

• the cost is greater than purchasing the equipment
• the tax deduction may not be particularly helpful to
  a young practitioner
• to purchase the equipment at the end of the lease
  term, an additional payment must be made (usually
  10% to 15% of fair market value)
• a default in payment obligates the practitioner to
  pay the balance due (acceleration clause)
• insurance must be maintained by the practitioner
• repairs not under warranty must be paid by the
  practitioner
As with other types of leases, it is always best
to consult legal counsel before signing the
contract

Default on lease payments creates the same
legal difficulties as default on a bank loan;
thus, the affordability of a lease arrangement
must be given due consideration
“If you’re looking for a new lease on life—look somewhere else.”

				
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