Animal Health Solutions

31 Q1 2023 | Animal Health Solutions Dr. Sommer is a late-career veterinarian running a successful animal hospital in Dayton, Ohio THE Problem As a busy veterinarian, Dr. Sommer had not been keeping track of critical dates in his lease agreement such as the lease expiry date, which was fast approaching. The doctor was invited to attend a continuing education webinar on the topic of "Negotiating or Renegotiating the Terms and Rent in the Veterinary Office Lease" hosted by Cirrus Consulting Group, leaders in veterinary office lease negotiations. At the webinar, the doctor learned about the importance of beginning the lease renewal process 18-24 months in advance of the expiry date to bring the landlord to the table with enough leverage and time to secure the best deal. The doctor also learned about many of the inherent risks in lease agreements and was shocked to learn that many of these pitfalls existed in his current lease. With the negotiation clock ticking, the doctor retained Cirrus to review his current lease agreement and negotiate the terms of his renewal. THE Challenge The doctor communicated to Cirrus that as a late-career veterinarian, he was looking for lease terms that would appeal to future buyers and enable him to transition profitably and smoothly without being indebted to the practice afterwards. Additionally, the doctor believed that the new property management company that was hired to manage the shopping center was overcharging for rent and Common Area Maintenance expenses, so this was something he also wanted to address in the negotiations. Besides peace of mind, Dr. Sommer was looking for his new lease to provide the following: • Fair and affordable rental rates • Practice protection and security • Stability • Flexibility towards a smooth eventual practice sale and exit from animal health and • "Options to renew" for future buyers THE Solution Cirrus conducted a thorough practice needs analysis and reviewed the lease for critical dates and problematic language. Together, Cirrus and the doctor created a lease negotiation strategy that achieved several key wins: • Negotiated rental rates for the 3,200 sq. ft. unit at $3/ft. lower than market rates, including other tenants in the same shopping center. This equates to a rental savings of $800/month, a total annual savings in year-1 of $9,600, and a grand total of $125,000 in savings over the 10-year lease term. • Negotiated annual rental escalations down from 3% to 2.5% for years 1-5, and down to 2% for years 6-10. These reductions will save the practice an additional $12,000 over the 10-year lease term. • Included language that Dr. Sommer may assign the lease to a future buyer and ensured that the doctor keeps 100% of his practice sale proceeds. In many cases, the landlord is entitled to 50% or more of the proceeds of a practice sale. For example, if the practice is sold for $350,000, the landlord would be entitled to $175,000 (50%) of the sale price for consideration. • Removed the landlord's right to obtain yearly financial statements, including balance sheets, profit and loss statements, and any other reports normally generated as part of the doctor's financial statements. • Amended the "surrender" language to state that Dr. Sommer will not need to revert his space back to its original vanilla shell upon exit, and that all trade fixtures, veterinary equipment, and personal property will remain his at the end of his tenancy. This clause would allow Dr. Sommer to retain or sell the equipment, an invested value of over $500,000. Join Our Upcoming Webinar Secrets from the Other Side – What landlords won't tell you about lease negotiations. Date: February 27, 2023 Time: 8pm EST About the author Eric Pook is the President of Cirrus Consulting Group, North America's preeminent commercial real estate and office lease negotiation firm for veterinarians. You can contact Cirrus at 1.800.459.3413, info@cirrusconsultinggroup.com or cirrusconsultinggroup.com.

• Cover