A look at net leases
Weighing your long-term options
By Lawton W. Howell, Sr

When the “jury was still out” on your business’s survival, you probably didn’t want to enter into any long-term contracts. But if you’ve survived (and hopefully thrived) for at least five years, now might be a good time to take a serious look at your long-term real estate requirements to insure location continuity for patients, future growth, and expense control.

One long-term option is ownership; another is leasing.

Long-term leases are typically for three years (recommended: five- to seven-year terms with two renewal extensions). Some long-term leases have fixed terms. Others are called net leases, which allocate some or all of the property’s operating expenses to the tenant. Typically, a net lease comes in one of three variations:

• A single net lease. The terms include the basic monthly lease payment, plus a limited number of operating expense items, such as property insurance or taxes, for example. The key distinction is that some variable financial obligation other than a fixed-lease payment is required of the tenant.

• A double net lease. With this type of lease, you pay a monthly lease payment, plus all operating expenses except exterior maintenance, such as the roof.

• A triple net lease. With this type of lease, you pay everything — a monthly lease payment, plus all operating expenses, including all of the maintenance.

The more “net” obligations you incur, the lower the fixed payment you make.

A GOOD DEAL?

Is a net lease a good deal for you? And if you think it is, what type is best? The only way you can determine that is to compare “apples to apples.” You do this by converting all lease expenses to annual square-footage rates. Here’s how:

1. Find the annual square-footage rent rate. Divide the total annual lease expense by the interior square footage of the space to get the annual square-footage rent rate. Include in this equation everything you would be obligated to pay: the basic annual lease payment, insurance, taxes, etc.

2. Determine maintenance costs. For maintenance, you’ll have to come up with an estimate based on the age of the property and its systems. Contact a local maintenance contractor for bids. Decide if utilities and future inflation increases should be included.

3. Add all annual expenses. This gives you a sum total. The totals level the playing ground of the different types of leases so that you can make “like” comparisons, much the same way the handicap system allows golfers of different skill levels to compete against each other.

In addition to the monthly lease payments, to determine if a long-term lease is right for you, you must also take into consideration (as part of your total costs) insurance, taxes, and maintenance, which hit you with a single big bill. Taxes and insurance are predictable, but maintenance and repairs are not.

You can anticipate covering these costs by establishing a monthly reserve so you have the cash when the annual expenses occur and to cushion the blow when the roof leaks or the air conditioner goes out. An alternative solution is to purchase a maintenance contract to cover this exposure for a fixed premium.

Finally, a lease is not a good deal unless it meets your needs. Negotiate the fine points and have your attorney review the document before you sign on the bottom line.

SIDEBARS:
1) What are the terms of the lease?
2) Obey the ‘rules’ to locate your practice

Lawton W. Howell, Sr., is founder and CEO of WellnessOne Corp. He can be contacted by phone at 877-WELNES1, by e-mail at ceo@wellnessone.net, or through his Web site, www.wellnessone.net.