Practice Sale Landmines: Leases Part 1 (Above Market Rent Rates)

Leases used to be like the light bill – you just paid them and did not give it much thought.

Not so, these days. In recent years, the terms of an existing lease can significantly drive down the value of a practice. Worst case, the practice can be unsalable!

Blame this on the 2008-2009 recession. Leases entered into before the economy tanked were based on fair market value rent rates that were much higher than current rental rates.

Many of those leases are now coming into the first of the five year renewal terms. Guess what – those renewal terms were based on 2007 prices, not 2013 prices.

And landlords are very aggressive in enforcing the higher prices locked in by the first lease.

Here’s an example from my own firm. We have a seller client with $550,000 annual revenue and $200,000 pretax cash flow. It is a nice practice in a highly desirable Cleveland suburb located in a landmark medical professional building. There are 42 months remaining on his lease.

The problem: My client is paying $32.00 per square foot for his space. The landlord is advertising vacant space in the same building for $21.00 per foot. In this case, the difference between 2007 and the lower 2013 prices is $77,000 over the remaining term of the lease.

Buyers recognize this and immediately calculate a reduced purchase price. How much lower? More than 30%!

What to do? Use an experienced and competent commercial office space broker or attorney to negotiate your lease – especially the renewal term.

Even if you are not planning on selling your practice in the short or mid-term, unforeseen events can make a sale necessary. You don’t want to make it difficult or costly because of a bad lease.

Stephen D. Jordan, CVA
PMAgroup, LLC

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