As a truism, the quality of a medial tenant will have a significant bearing on the process of procurement or assignment of healthcare real estate space. This is especially true when considerations are addressed for a tenant that is renewing, expanding, contracting, or relocating within a medical building.
In each circumstance, the overall design of the facility and potential costs associated will account for whether the leasing process will be simple or challenging, on a relative scale. With this in mind, a healthcare real estate advisor has the ability to influence the process positively due to their unique concentration within health care and commercial real estate.
The Renewal
Upon the majority of renewals, the size and layout of the medical office is not altered and the suite design or reconfiguration is avoided. Other times, tenants will request these or other modifications to their space.
Typically, a broker will request the approval of the landlord to determine how the costs will be distributed and who will be responsible. In some cases, the landlord will have budgeted this expense and can absorb the costs. But, most of the time, they will not. Thus, a certain percentage of the cost will be provided. In other cases, the tenant will be responsible for all modifications.
Rental market conditions should dictate who assumes financial responsibility for alterations. To determine market conditions, a good barometer procure a specialist that is educated on the short term availability and effective price of comparable lease space.
The Expansion
Expansion is typically a costly and difficult undertaking for medical tenants. This, due to the increase in overall space, and consisting of additional construction costs, as well as management and accounting requirements. For a tenant to address an expansion request properly, the expenses need to be determined beforehand to limit the administrative liability associated with the request. Space planners or property advisors are very helpful for this logistic exercise. Again, and similar to renewal, the determination of costs should be based on comparable rental market conditions.
One of the main reasons tenants relocate is because their existing floor plan no longer meets the functional needs of the user. Thus, the requirement of expansion should be addressed prior to conclusion of lease. Running up against deadlines will not expedite or provide leverage for expansionary discussions.
If expansion is required in the midst of tenancy, commonly, the lease term will be extended for additional years. Under this circumstances, the costs will be attached to an amended lease and rate will be blended. Another potential outcome may be the continuation of the existing lease and expansionary space rental separated. The former homogenized term typically will favor the landlord, but is generally accepted in investment real estate.
The Contraction
A healthcare space contraction may become necessary because of several factors. Most commonly, it occurs with reorganization, subsidiary or referral base relocating, financial constraint, or regulatory requirement. While this pressure creates an uneasy position for the tenant, the landlord has the potential to react positively through status review.
If contraction request is made by the tenant during the midst of the lease term, a subletting consideration should be addressed via all parties to the original lease. Alternatively, if the contraction request is made towards the end of tenancy, the tenant’s advisors should be aware of the potential re-use of space, any limitations in plumbing or electrical, and costs associated with construction. An expert opinion for the effective contraction of space should be sought.
The Relocation
Too often a medical tenant will need to expand but the adjoining spaces will be occupied. Within most leases, a relocation clause exists that allows the landlord to, essentially, move a tenant into an alternate space. For expansionary needs, this clause may be utilized effectively by the landlord, while hesitantly by the expansionary tenant. To alleviate tenant concerns, the expansion space may include space planning costs, moving expenses, additional rent, and tenant improvements with above standard features.
Customarily, relocating within the building has challenges, but specialized relocation experts can be of considerable service to a landlord or tenant within medical space. The impact of change, via relocation, within or away from a desirable situation, has unique ramifications to both parties to the lease agreement. Understanding the advantages and disadvantages of relocation within a building will provide confidence when addressing landlord/tenant responsibilities.
