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hen leasing office space, physicians should determine the effective lease rate (ELR) for each building they are considering before making a selection. The ELR is based on a number of factors, including building quality, building location, basic form of lease agreement, rent escalators and add-on factors in the lease, tenant improvement allowance, method of square footage measurement, quality of building management, and other variables. The ELR enables prospective physician tenants to accurately compare lease rates being quoted by building owners and to make leasing decisions based on objective criteria.
Key words: Leasing office space; medical office buildings; triple-net leases; full service leases; tenant improvement allowances; building management
Most physicians at some point in their career face the decision of leasing office space for their practice. Often they seek counsel in this regard from real estate professionals, accountants, or attorneys who may or may not be familiar with the wide range of variables affecting these decisions. Probably more often than not, they simply make the decision on their own based on a limited assessment and comparison of alternatives.
This article is intended to provide physicians with a basic understanding of medical office building leases. It discusses the key variables physicians should consider when comparing one office building lease with another in a defined geographic area, thus providing assurances they will get maximum benefit from their rent dollars.
BUILDING VALUE ADJUSTMENTS
All medical office buildings are not the same. The best quality buildings, sometimes referred to as type "A" buildings, are constructed of better quality materials and have more amenities, e.g., coffee shops, gift shops, etc., than other buildings. Type A buildings are typically midor high-rise facilities. Lesser quality buildings, sometimes referred to as Type B or Type C buildings, are typically one- or two-story buildings that were relatively inexpensive to build and have few if any amenities. Obviously, Type A buildings cost and offer more and can therefore justify higher lease rates.
BUILDING LOCATION ADJUSTMENTS
Medical office buildings that are integrated with hospitals or comprehensive diagnostic centers usually command higher rents than buildings that are not. This is because they enable physicians to be more efficient in the use of their time. In a hospital setting, for example, physicians can rotate from their office, to...