Eric Pook, President of Cirrus Consulting Group, shares what practice owners need to look for when entering into a new office lease agreement and what they can do to improve their current lease.
Read the audio transcript below:
Dr. Luisa Schuldt (LS): Hi everyone. Welcome to Brush Up, presented by Oral Health Group, the dental podcast where we speak with industry experts to discuss a variety of topics such as technology, finance, and practice management. I’m your host, Dr. Luisa Schuldt, a prosthodontist and periodontist based out of Fonthill, Ontario. Cirrus Consulting Group has negotiated over 13,000 leases in the past 30 years. Today’s guest is Eric Pook, the president of Cirrus, the commercial real estate and office lease negotiation firm for dentists. Eric has been consulting small businesses since the late 90s with an emphasis on revenue creation and cost mitigation. He grew up in a medical entrepreneurial environment and continued that passion by starting or growing businesses throughout North America. Welcome, Eric!
Eric Pook (EP): Thanks, Luisa, and thanks to the Oral Health Group for having us today and sponsoring today’s event.
LS: Well, it’s a real pleasure to have you here, have your expertise available to provide some education to all us dentists very interested in negotiating or even renegotiating leases when it’s time to do so. Before we dive into it though, I would love to hear a little bit more about your background and how it is you started in this area. Your introduction mentioned that you were already in the area of medicine and entrepreneurship. Is this your parents and your own development?
EP: Yeah, it was interesting. My father started a medical clinic, and my mother came in as his office manager back in 1974. And then he ended up selling the clinic in 1994 and went into then remote, different occupational types of medicines across the board. But interestingly, even back in the 70s, thank goodness he had some good legal advice at the time. He was able to record the lease which actually prevented the big medical building in Ottawa from being redeveloped at the time because it was a nice spot and a bustling area of Carling Ave. And it was one of those serendipitous components that, you know, here we are now, almost 50 years later, and now I’m right within the space helping doctors, physicians, vets and dentists negotiate or renegotiate those office leases.
LS: So, you and your family had the opportunity to learn very early on the high value of having a well negotiated lease.
EP: Yeah, I was always taught that the secret to life is to be able to help people. And then coming from that aptitude of care and looking after and the reassurance, my dad always shared as one of his best pieces for bedside manner. Right. And that’s more or less very similar, but he always encouraged me to go to the business side of medicine versus the actual medical, dental, practical side, chair side. In many cases, we’re doing the same type of thing as he would be doing bedside, which is doing nothing more than giving that peace of mind, helping to take that big weight – of what the liabilities and financial costs and dealing with difficult landlords – off of the doctor shoulders. And our mantra has always been in mission to be able to help those doctors who help us every day, right, and to keep doctors being doctors and allow us to handle all of that sort of landlord advisory and back and forth as much as possible, to do what you, as a collective group, do well. And allow us to handle all of that sort of heavy lifting in the background, if you will. So yeah, right from early stages, the location really was the foundation of the business and it either created a rock-solid concrete foundation to build the practice upon or crumbling shell that could cost, you know, hundreds of thousands of dollars down the line if not done correctly.
LS: Over the last few podcasts, we’ve had the really great opportunity to talk to people who are not dentists but are really involved in what we do. And I just love hearing from you that the opportunity to serve, even when you’re not in the patient care portion of dentistry, is a part of what all of us do. What would be your number one bit of advice or first few steps you believe that dentists should take when they’re looking over a lease that they’re about ready to sign? That first big step in opening or relocating a dental office.
EP: Yeah, we get this all the time, and we really are screaming from the rooftop, though doctors are aware of…First of all, they are the best tenants on the planet, right? You have some of the highest build out costs, as you know from your own clinic, you’ve got some of the lowest default rates, well less than 1%, so it’s likely that the doctor isn’t there. Yet a restaurant, it’s well over 90%; they’re not there after a 10-year term. Plus, you’re COVID proof, you can never work from home, regardless of what your staff tells you, Luisa. And, you know, you’re always bringing high-quality foot traffic. So, from the landlord’s perspective, you are the best tenant, but usually either A) they don’t know because they haven’t worked with the dental tenant themselves or know the fact that they’re in the same location for 26 1/2 years. Or B) there’s that sort of local broker or otherwise that really.. Oh, you know, you better sign here, the landlord’s representative. Because doctors are still graduating through dental school, as you have in 2000, and without any real business of dentistry training. I’m not too sure how much you had through yours but we’re still seeing it today that doctors are graduating, they’re an associate for a year or two, they drive around their local neighborhood on the weekend, as we just had, and suddenly they’re calling the number on the side of the form, and then they’re suddenly signing this binding agreement on the trunk of a brokers car without really understanding what they’re signing, understanding what’s really reasonable and not, and to help get a fair shake. So, to answer your question in terms of what can doctors do is, first of all, know how great they are as a tenant. Number two, never get stuck into that “you better sign here,” you know, and “oh, it’s just a standard form lease.” We have over 26,000 leases that we’ve reviewed, and I can tell you there’s not a single two that are alike. So, the ability to just know – it’s almost like walking into a car dealership and saying, oh, well, you know, it’s MSRP doctor and that’s what you pay and that’s what it is. And just sign here and have a nice day. Yet in many cases, we’re spending, and our team is spending 30, 40, 50 hours with some of these and a variety of different landlords to help make sure that that lease has dental-specific language. And that the doctor is able to get the best potential deal because of the fact that they are such a great tenant, and they deserve a proper lease to ensure they can offer that continuity of care to their patients.
LS: You were mentioning already just how great a role you can potentially have or someone like you can have in taking that weight off of our shoulders. There are so many other things involved with moving or opening a practice, the reconstruction, the building, the equipment staffing. What would the biggest advantage be of involving someone such as yourself to support us?
EP: So, I’m a big advocate for mental health and, certainly, stress mitigation. And what we find all too often, and I’m doing a big course on this in in Las Vegas as part of Henry Schein Thrive Live coming up in a in a couple of weeks, but I do this concept based on Dale Carnegie’s How to Stop Worrying and Start Living. And what it really boils down to…First of all, Luisa, nobody has certainly pat you on the back to being a practice owner, right, with associates. And going through this very difficult time over the past three or four years, you certainly deserve one. So, it’s been brutal in many cases, right? The pandemic, interest rates, and just the business of dentistry has gotten harder and harder and harder. So, in terms of how we take the stress off…First of all, it’s knowing that… Dr. Kal Khaled is one of our clients. He came to our national kickoff and he’s used us multiple times. And his great mantra always wrung through to me very well, which was: look, things that you do once or twice or three times a year, do yourself. Ones that you do once or twice or three times a year, outsource it to an expert because how much is your time worth chairside, Luisa, to work on your business? Quite frankly, the efficiency of Scott, who has been with us negotiating dental deals for 21 years, versus the doctor doing it for their first time to try to be just, I don’t know, self-sufficient or otherwise. The ability of knowing that peace of mind that you’re paying an entity to treat it as if it was their own practice with their own money and to say, look, this is reasonable, Luisa, or, you know what, the landlord with the demolition clauses, relocation clauses, etcetera. If you’re not aware of it, Tier Three, for example, will decrease your eventual practice price by over $350 per square foot, just because of either A) lack of term, B) a Demolition clause or C) a relocation clause. Because the banks now will not issue a long-term loan, 12 years or otherwise, for that potential buyer. So, these are the sorts of things…We just helped a doctor recently in Toronto and he sort of referred to it as a ticking time bomb. He signed a 15-year term with some broker and, unfortunately, without realizing it there was a demo clause that kicks in with just as little as six months worth of notice. And now he’s struggling to get it sold because of the fact that the landlord can just, you know, pull the rug out from under that buyer at any time. Tough to get $1.9 million for your practice if, in the end, the likelihood that that doctor might have that rug pulled out from under him. Major issue. So how do we help is we, first of all, improve the financials as well as making the doctor aware of what they’ve already signed for or are about to sign for. And then, more importantly, talking about the different ranges of how, right? If you’ve signed the lease personally, it doesn’t have to be forever, here’s some different step downs to limit that personal or spousal life ability. Here’s other steps to reduce the requirements to return it to pre dental condition. So, if nothing else, you’re now an active participant in what the lease is, you’re aware of exactly what your obligations are to the landlord and vice versa, and now it becomes a much more empowerment conversation to know that you’re not feeling like you’re on this teeter totter, where the landlord’s down at the bottom and you’re up here with your legs dangling, feeling completely out of your element. So those are some of the main ways that we try to give that peace of mind. We help take this whole sort of dance, carefully choreographed game of chess, off of the doctor’s shoulders because far better to be chairside 9-5 than dealing with some landlord who’s pushing you into doing it.
LS: I think it’s very funny that you mentioned the spousal responsibility because this decision and all the things involved, it’s sounding an awful lot like a marriage. It can go really well and help your life, and in this case, your professional life, develop in a nice, smooth way that can reduce your cost on a monthly basis and improve the value of your practice. A poor lease will have the absolute opposite effect.
EP: It’s a key point, right? Let it be premarital or marital, etcetera. Til death do you part. Funny you mentioned that. The lease in 99% of leases across the country will actually be binding to your successors and heirs. Most doctors don’t realize because, look, you are the sole breadwinner, heaven forbid anything happens to you, right. That is a major liability that then goes on to your estate and we’ve seen devastating examples. One North of the GTA, a doctor who had built out a beautiful 6-operatory practice, three weeks prior to the grand opening had died of a massive heart attack, right? So now fully built out clinic – no doctor, no patients. Luisa, how much is that practice worth?
LS: Yeah, unfortunately, that’s a big responsibility to leave to your family, significant other, people around you.
EP: Correct. So, then what happened? The landlord went back to the spouse and said, Mrs. Smith, you’re responsible for the roughly $9000 a month, increasing at 4% per year for the remaining 9 1/2 years on the lease. So, from an education to all the listeners, it is so important, again, dental specific language, to make sure that there’s language such as a dental specific death and disability clause, right? If something happens, you might not be disabled, but if you slice your finger, Luisa, on the gate on the way out or slammed it in the car door or something like that, heaven forbid. It now suddenly creates this whole other issue because you are one of the main revenue sources for the practice. So, the more we can do today to alleviate that spouse from that liability, it makes sense. But the landlord has to know, hey, I’m generating 98% of the revenue here and if something happens to me, I can’t have that fall into my heirs indefinitely. And even if that lease continues to renew, most doctors don’t realize they’re still in the contract.
LS: Thank you so much for bringing up already, you know, really valuable pitfalls there. So, you mentioned the demolition, you’ve mentioned death and disability. What are some other big pitfalls? You mentioned renewal options. You want to dive into that one a little bit more or another?
EP: Sure. Yeah, Luisa, you mentioned your situation. With becoming important, now back to that marriage analogy you gave is again, what does that exit look like? And just like any entrepreneurial event, you want to be preparing for the exit, there’s no point going into a business unless you know what the clear exit looks like. So similarly for a lease, the questions we normally ask are again, doctor, what’s your long-term plan? What is your exit strategy look like? Do you want to sell to an associate? Do you want to sell it on the open market? Do you want to potentially sell the two or three locations to a smaller group or DSO, etcetera? These are the questions that yourself and many of your peers are contemplating. So, part of the components here now are how do we help to prepare ourselves for that exit? And typically…I’m doing an upcoming course with Tier Three recently and Dr. Sheikh and one of the big dental study groups here in Toronto…and part of that analogy is here’s a 10-year road map to preparing for sale. And the doctors are sharing their tales of woe, what I wish I knew prior to selling, here’s how I should have purified my assets to mitigate taxes, here’s how I could have and should have structured my lease a little differently, so I didn’t have to be continually liable post sale. So, when we look at clauses, the assignment clause and land mines can be a big issue. And there’s so many doctors that are reluctant to get a practice valuation because, oh, then they’re going to know I’m going to be selling, it’s going to get out there and my staff is going to find out. And it’s a nervousness. So, it’s an epidemic, I would almost call it, that doctors are just unaware of how important that lease is to their eventual sale. So, speaking of renewal provisions, for a lot of doctors, we’re suggesting don’t exercise your option. Meaning that most doctors say, oh, I’ve got a 20-year term. Well, in actuality it’s probably a 10-year plus two 5-year options. The issue there though, if you keep just exercising those 5-year options, you’re now running out of space. And like my three- or six-year-old, they love the Pirates of the Caribbean and the pirates and walking the gangplanks and what not, Luisa. But the challenge there is every five years you renew, you’re walking closer and closer to the edge. And heaven forbid anything happened or you wanted to sell or transfer, the doctors – not a bad thing – but we’re inherently selfish. We’re thinking about ourselves and the lease from our own perspective. And some doctors think about well, hey, if I’m going to sell in 10 years, I only want 10-years-worth of term. That thought process, especially for a half-million, one-million, two-million-dollar practice, really is wrong. Now every situation is unique, but our usual guidance is don’t just exercise that 5-year option. Better negotiate a new 5-, maybe even a 10-year with two 5-year options. And think about it from your buyer’s perspective, right? Luisa, what is the buyer going to want for your clinic? And their bank, more importantly, is going to want as long of a term as lease with as many options as possible. And landlords care about term and rent. So, Luisa, when they look at a doctor, they’ll say, okay, great, how long are they committing for? And what are they committing for at what rate? So, the ability to dangle that term and rent in exchange for a longer-term lease ,helps to hit the reset button and definitely get some significant improvements, potentially both on the financials as well as all the business clauses as well.
LS: I’m sure some of our listeners are hearing all your advice and saying, “I wish I knew this sooner” and looking at their own leases and saying, “what could we have done better?” What happens if you already signed a poor lease? Do you have any options? Or advice for people who are maybe coming up on some of those renewal opportunities?
EP: The first is yes, have it reviewed. Even if you just renewed a new 5-year option, Luisa, it is a perfect opportunity just to be aware of what’s in it, right, what do market rents look like today. If you’ve just renewed and there’s another five years, well, look, there’s no magic wand to be able to magically reassess. But I would say, Luisa, for your clinic or any others, if you’re contemplating any sort of renovations, if you’re contemplating an expansion, potentially if there’s something in it for the landlord, then we’ve done lots of situations where they might have been midterm, but it made sense to look at a new lease. But the first one is just have it reviewed, understand what’s in your lease, understand the key dates. The amount of times doctors think they’ve got 10 years left yet no, they have an option. And, unfortunately, there can be upwards of 12 months notice. So, for all your listeners, the two things to put in the phone are when does your lease expire? And then when does your option to renew deadline have to be? When do you have to give written notice via certified mail and carrier pigeon on the third Friday, when Mercury is aligned with Venus type of thing. Because if not, those two remaining 5-year options, Luisa, become null and void. So, the big piece is just knowing what those critical dates are. If looking at it, a lease looks like me reading a book of advanced endodontic procedure, then certainly have a firm like ours look at it. So at least go through the key components and make sure that you’ve got a good plan. Our typical strategy is two years prior to the actual lease expiry date is the best time to maximize your leverage. Why? Because Luisa, the Golden Horseshoe right now, for you to wake up and look across the street and say wow, I’d love to move across the street. As you know, with zoning, permitting, buildouts, delay from A-dec, whatever, right, it can be 18 to 24 months. So, by starting two years out gives a perfect opportunity to start the process. And then ideally it can only get better because if you’ve always got your option as a worst case but leverage the next year and a half to negotiate something better, sign on something new, so it’s long done prior to that stress event where oh, my God, I forgot. Geez, your office manager hands you this form. You’re in between patients. You’re all gowned up and suddenly, oh yeah, the landlord said you have to sign this today or your options expire. And every day, doctors are signing these multimillion-dollar renewal contracts in between patients. So, our big goal is just to help be aware of the timeframe. Start early in advance, maximize your leverage, and that’s the one truth we’ve seen over 30 years in business helping doctors. Is to start as early as possible. The more time, the more leverage. It’s never too late to get help, of course, but certainly the more time, the more leverage.
LS: If I have two big takeaways from what you’re mentioning today, Eric, we have you need to have a thorough understanding of your lease and really record and stay on top of those dates. Is there anything you see changing in 2024 for people who are just about to open or starting a new practice, anything that’s changed on the market?
EP: Funny you mention that. There has been, and we’re even seeing landlords now…I mean, let’s look at it. Take the dentistry hat off for a second and look at it from the landlord’s perspective. Your own landlord or otherwise. You’ve got mom and pop shops, you’ve got small to mid sized landlords, and then you’ve got the big guys. Look at it for your own home, your own mortgage, right? Suddenly you’re going from 3 percent to 5-6+ percent. If you’re a landlord now, especially a mom and pop that now has one or two different locations, and suddenly your debt service is going up by a thousand, two thousand dollars a month, and you’ve got all of these tenants here locked in long term leases, well, where are you going to get blood out of that stone? So, what we’re seeing now for trends are, first of all, landlords are either doing everything possible to attract dentists to their spaces because they know how rock-solid they are, and heck, they were the only ones through COVID that probably continued to pay their rent on time. Number two is we certainly now see that landlords are now getting wise to the value of the practice sale. So some landlords, that shall remain nameless, are actually now adding in language that specifically states that, Luisa, if you sell your practice for a million dollars, and of which the ROI Corp Tier Three evaluation shows that $200,000 is coming from my, the landlord’s, premises and leasehold improvements, I am now entitled to a percentage of that practice sale proceeds, that literal amount. And the landlord’s now requiring to see an agreement of your purchase and sale. They’re also requiring and, in some cases, we’ll condition the assignment to either increase rents or, more importantly, they’re doing it to even just to transfer the options to a future buyer. I heard recently from one of the big merger and acquisition attorneys, Michael Cutner, who we did a CE course for, he said he had a client that had to pay $100,000 just to transfer the lease even though the doctor had two 5-year options. They were personal to them, so it didn’t allow it to be transferred on to the next doctor. So, imagine, you’ve got the buyer, the seller, the agreements are done, you’re already in for $30,000 worth of legal, and now suddenly the landlord throws this at you. What did the doctor do? Ended up paying that full $100,000 fee because the whole deal was contingent on it. So yeah, the biggest takeaways are just be aware. We’re happy for any of the listeners to do a complementary analysis of it or rental rate or demographic review, but just be aware of what’s hidden in your lease. And then, more importantly, start thoroughly knowing what can be done to fix it long before you get to the point of potentially looking to sell and suddenly realizing at the end of a long, hard-fought career to suddenly now be dealing with the landlord, that could even prevent you from selling your clinic.
LS: Amazing. Over the last few podcasts, we’ve gotten really great legal advice, great advice for people opening or building or renewing their practices, as far as the aesthetics and functionality of it. And this is just one more really great layer of information for us to have. Thank you so much, Eric, for your time and all this really valuable information. Thank you as well to our listeners. Thank you so much for joining us. Be sure to subscribe on Spotify and follow us on social media to be notified every time we post a new episode. Keep brushing up!