Lease Smarter: Strategies to Optimize Your Lease Renewal Process

Colin Carr: The landlords have you locked into a lease. They’re going to assume you don’t know what you’re doing. You don’t have time to go to market. You haven’t hired a broker. So the chances of you overpaying by $200,000, $300,000 on a lease, that’s a whole different story.

Bethany Fishbein: Hi, I am Bethany Fishbein, CEO of The Power Practice, host of The Power Hour Optometry podcast. And as we get nearer to the end of the year, starting to talk about the top topics on people’s minds, we’ve talked about spending money. Today, hopefully the conversation will guide us into saving some money. My guest today is Colin Carr. He is the founder of Carr Realty. Thank you so much for being here and being willing to have this conversation.

Colin Carr: Absolutely. Thanks for having me.

Bethany Fishbein: My pleasure. So Colin, the area that I wanted to talk about specifically is lease renewals. I don’t know if that’s an exciting one for you, if that’s… It’s as exciting as talking about getting a new lease or a new property, but it certainly feels like it comes up more frequently. This is something you deal with all the time, right?

Colin Carr: Absolutely. I love the topic of lease renewals. Lease renewals are the most prevalent or common transaction for optometrists or for any healthcare provider for that matter. And I will say this as well. Lease renewals are the type of transaction where optometrists lose more money than any other transaction. It’s where they leave more money on the table than any other transaction. And then if you want to flip that coin over and hit the positive side, it’s also an area where they can capture a significant amount of savings. I’d say probably more savings than a traditional deal. So there’s a lot that can be won or lost. It’s the most common transaction. And it’s not much of a difference between winning or losing, but it does take a strategy to get there.

Bethany Fishbein: Just to kind of set up a timeline, if you’re in a space that you’re leasing and your intent is to stay in the same space, your desire is to stay in the same space, when should you start having this conversation?

Colin Carr: You want to have the conversation whether you want to stay or you want to leave. It’s the same timeline for a few reasons. So that timeline would be a minimum of 12 months in advance. And if you want to start it a little bit sooner, like 14, 16, 18 months in advance, that’s not too soon. And the reason that the timeline is the same is because you have to enter into the negotiation and the process. Number one, should have representation. Number two, you should know what your other options are, whether you want to stay or not. And then number three, your landlord cannot think or believe that you have no other options or that you are only going to stay.

If you go into the negotiation with that, we can break that down further so we don’t hit too many things at one time. But your landlord cannot think that you have no options or that you’re not willing to move or that you can’t move. Move. And so if you wait to your like a month or two out and then you do it or you go in there without representation or you don’t handle it properly, you are going to lose one or two hundred grand instantly.

Bethany Fishbein: So even if you have a lease that has like a renewal option, so, you know, when you sign it the first time and it gives you five years and then you can sign on for five more years and the terms are already outlined in there, is that still something that you have to be thinking about renegotiating or is that all set in stone at that point?

Colin Carr: OK, so that’s a great point. So let me let me break that down for anyone who maybe is listening and doesn’t understand that. So a lot of leases do have what we call a renewal option. There’s two types of renewal options. There’s one renewal option which says you have the right to renew your lease and that it basically just says that the terms will be negotiated in the future at what they call then market rents or competitive rents for that time. And there’s like parameters as far as how you determine what the lease rate will be. And the landlord usually tells you what it is. And there’s ways of checks and balances.

And then the other type of lease renewal is where there’s set terms saying, hey, you can renew for five years at a starting lease rate of your current rate plus three percent or whatever it is. And it just tells you what the rates are. You can do that. You can exercise that renewal option. The problem is those terms are very rarely as competitive as you could get if you just renegotiated and had a fresh negotiation. And the reason being is that very rarely do you see a renewal option that includes concepts or concessions like free rent or TI, tenant improvement allowance or renovation allowance or money to refresh your space, very rarely do you see it where the rent actually goes down. And it almost always increases above what you’re currently paying. And so there are times it’s not a never. There are times it’s a very small percentage where those terms are going to be great terms or good terms for you. And you can just accept that renewal option, give them notice, and that scenario, you just have to make sure that you do it inside the window. They usually say you can’t do it before a certain date, and you can’t do it after a certain date.

You usually got to do it within like six to nine months or no later than this. If that’s the case, that’s great. But in the vast majority of scenarios, I’d say like the 90 to 95% scenario, you can do better by renegotiating the lease, but you can get a lower lease rate, you can get money to renovate your space, you can get free rents, even on a lease renewal. And so what most people do is they just accept that renewal option, and they leave like 100, $200,000 on the table. They take a lease rate that’s above market by a couple of dollars per square foot, and they don’t know the difference. They think, well, I’ve been paying this the last couple of years. It seems like it’s fair. It works for me. But they don’t realize that if the space were to go vacant and they were to move out, the landlord would typically be leasing that at a several dollar per square foot reduction.

And so if you take a lower lease rate by a couple dollars a square foot, if you take two, three, four, five months of free rent,  sign up for a new five, seven, or 10-year lease, if you take the money that you could have received to renovate the space that the landlord would give a new tenant, if they renew the lease, it adds up to $100,000, $200,000 like that. And so that’s where a lot of people just assume, I’m just going to accept the renewal option or sign it, or they don’t know what they’re doing, and they leave a ton of money on the table, and they end up overpaying. And that’s where the opportunity lies, and that’s where it’s also loss as well.

Bethany Fishbein: So how do you know? If you should do that, you said, okay, if it’s a great rate, it’s already really competitive, below market value, then you would just re-sign for the option. But we’re optometrists, is it looking at comparable properties? How do we even know?

Colin Carr: So that’s a great question. So not to use a cheesy analogy or something like that, but it’s like, how do you know if you need glasses? You go in and you have a test on, or you have tests on, and there’s very specific things you can do to tell. I mean, you probably know that already because you’re seeing things that are blurry or things aren’t working the way you want to. But let’s just say that there’s no way of knowing that until you go to the optometrist. They’re going to sit down with them, and they’re going to say, tell me what you see here. What do you see here? Let me look here. Let me blow on this. Let me put… I mean, you go through this process, and then they say, hey, look, yes, you’re nearsighted, you’re farsighted, you need this. And then they just make it very clear to you, and then they give you a game plan.

It’s the same thing in real estate. If you’re just guessing, this would be like the equivalent of me being like, yeah, I think this is my prescription, and you just go to Walgreens and grab something off the counter or the shelf. Yeah, that’ll probably work. You would say, hey, that’s probably not a good game plan. If we’re just guessing if it’s a good lease rate, or we think it works or whatever, it’s honestly, it’s the same thing. So the way that you know that is you hire an expert or professional that specializes in healthcare real estate, they will look at your current lease, and they will do a market analysis for you. And they’ll review your lease, they’ll review the additional costs that are getting passed through your lease, like the operating expenses, the reconciliations, additional charges.

And then they will go to market and they will say, listen, if you wanted to own real estate, you’ve got two options or four options or no options. If you wanted to relocate to a comparable property within a two, three mile radius, you’ve got four options that are in retail spaces, two that are in office. And they basically just do an evaluation for you. And then they can look at your current terms, and they can say you’re four or $5 a square foot above market. Or if your space were to go vacant, the landlord would be charging the next person the same rate, or they’d be charging them more, or they’d be charging them way less. And so they give you the data and the information to say, this is a good deal. This is a bad deal. This is an average deal. And then they can help point you in the direction of what you could capitalize on or capture.

Now, if they look at your terms, and they say, listen, you’re paying, let’s just use numbers, you’re paying $25 a square foot, and they’re marketing new space at 30 a square foot, because the market’s gone up significantly. And your renewal option’s at 25.50. Like they’ll tell you take that deal all day long. But again, that’s not going to happen probably more than 5% of the time. Typically, they look at it and they say, you’re paying 25 a square foot, you should be paying 22 a square foot. And if we do a renewal, we can get you money to renovate your space, we can get you, you know, maybe 50 to 80,000 to renovate, we can get you three, four months of free rent. So that might be another 20 $30,000 in free rent, we can renegotiate your annual increases down from 4% down to three.

And then they put it together for you and just say, hey, this is what I think we can accomplish. But we’ve got to have a game plan and a strategy versus just, you know, begging or bartering or bluffing. And so they start to point in the direction as far as here’s the game plan, here’s how we should go about doing it. You still make all the decisions, but they just give you information for what you want to do.

Bethany Fishbein: Even if you have no intention of moving or no interest like you want to stay in your current space, everything’s working, you like it just the way it is, you should still go through this exercise. Because if you want to stay in your current space, you want to pay less for that rather than paying more.

Colin Carr: Absolutely. I mean, this would be the equivalent of someone saying, I want to buy a house. And so great, that’s the priority. But what if someone’s offering you a 10% interest rate, and you could be getting one at six and a half percent, you’d say, well, of course, I’m going to figure that out. Of course, I’m going to shop that and there’s no way I’m going to pay 10% if I could pay six and a half percent. That’s what’s going on in a lot of these lease renewals, the decisions made, I’d like to stay in my space. And then they just sign off on this 10% equivalent interest rate. And they just get hammered on, you know, missing out on all these other savings and costs.

So knowing you want to stay or you’d prefer to stay, that’s great. There’s nothing wrong with that whatsoever. But you still have to go to the market to see how your current terms compare to other options. What would other landlords be willing to do for you if you were to relocate? And then if you don’t have that information, number one, you can’t measure your current deal, like you can’t stack it up against other deals, you don’t know where it ranks or how it compares. But then the second part is, you don’t have any leverage.

If your landlord gives you a proposal at $30 a square foot, and you say, well, I don’t want to pay that, would you go 28? They’re going to say, based upon what, like, why would I lower my lease rate? And if you can’t say, well, because I have three other options that I’ve already negotiated with. And these guys are each at 24 and ones at 25. And they’re going to give me this much money to build out. If you can’t come to the table with like factual information, then you’re going to be in a really tough place. And so again, it’s not much different than if you were to go buy like a brand new vehicle and let’s say it costs $70,000, probably going to go look at more than one to make sure that you couldn’t find it for 60. You probably don’t just walk in and just pull the trigger at the very first place, you probably do some due diligence.

It’s the same thing here. And again, I’m kind of dumbing it down to these pretty basic analogies, but nobody would just sign off on a 10% interest rate without knowing if that was a good or bad rate. People are signing off on these lease terms all the time, and they have no clue how it compares to the market. All that they have for information is what they’ve been paying, or what they’ve been getting charged. But that’s a really bad way to look at it because a lot of healthcare providers did not get the best terms possible when they signed the first lease, the last lease, or they inherited a lease and they bought a practice. And maybe they’ve renewed it once or twice. And they’re going off of what I’ve been paying or they’ll say, oh, you know, your rent should be a certain ratio of your gross production.

Sure. But what if it falls inside of the ratio that’s acceptable, but you’re still overpaying by $25,000 a year? Like, you want to overpay by a quarter million over 10 years? Do you want to lose $100,000 in concessions? Who cares about the ratio if you could save $200,000?

Bethany Fishbein: I have a bunch of questions and all of them I kind of want to qualify with. I hope this doesn’t sound dumb, but… but then you already said you dumbed this down. So now I feel a little questionable asking those and I’m, laughing if my husband is listening, because we bought a car recently. And I totally do exactly what you said people would never do. I’m like, yeah, sounds good. And that’s it.

Colin Carr: Let me tell you why that analogy, maybe isn’t even the best one is because the other dealerships are all tracking the dealerships, they know what they have to be at to be competitive. So there’s a little bit more of a check and balance there. There’s no check and balance with the landlord. The landlords have you locked into a lease, they’re going to assume you don’t know what you’re doing, you don’t have time to go to market, you haven’t hired a broker. So the car one, the chances of you overpaying by 10,000 on a car could happen, but it’s probably pretty minimal. The chances of you overpaying by 200, 300,000 on a lease, that’s a whole different story.

The landlords do know what other landlords are charging because they’re paying attention to their competition. But they assume that you have no access to that. And that’s the difference is you can Google right now Ford F-150 and dealerships and you can pull up every dealership within the city that you live in. You can search landlords, but it’s very hard to tell what people are paying for their existing lease. And so that’s where you find yourself in a place where it is very hard to check and balance landlords if you don’t go to market and have an expert.

Bethany Fishbein: Thank you. Might have saved my marriage there. You hear that, Jonathan? The reason though behind it is similar. For me, it’s about time. I’m with you 100%. I want to save $100,000, $200,000. When you started talking about you’ve already negotiated with multiple other landlords, in my head I’m thinking, oh my gosh, do I have to go through all that? Do I have have to go see spaces that I have no intention of moving into. How much of an investment in time is it to truly know what’s out there? Again, even if you think you don’t want it, but you need to know it to get what you do want, which is to pay less for the space that you’re in?

Colin Carr: Yeah, that’s a great question. And that’s a very common question too. Let me break this thing down a little bit. Let me give a qualifying statement. According to our numbers, we represent thousands of healthcare providers per year. We have over 4,500 clients that we’re doing work for coast to coast. So we have a pretty good grasp around what’s happening nationally and in different places. So one out of three healthcare providers that say, I don’t want to relocate. I just want to stay. Once they see other options in the market, change their mind.

Bethany Fishbein: One out of three?

Colin Carr: One out of three. Because what they find out is they find out that they can own commercial real estate and they didn’t know they could. They might find out that they could get into a brand new building or a better building or space. And it might be only a slight premium or upgrade from what they’re currently paying, or they can afford to justify the move. And so sometimes you just get into a rut and you think you’re in the right place. And all of a sudden you get out there and see other properties, other buildings, and you start saying, you know what? My practice would grow in this location compared to this, or it’s worth it to me to have a better environment or better-neighboring tenants or a better landlord. Or if I could actually buy my own building or my own condo or space, build it out, have a brand new space, and then I can afford to move to another space. Brand new space, brand new finishes. And the effective cost of owning might be the same or only a slight premium above renting. And every month, my net worth builds by a couple thousand per month because I’m paying on principle. Just like when you own a home, that gets really compelling.

So again, the agent or the broker’s job that you hire is not to sell you on what to do. It’s just to give you options and then tell you what they think makes the most sense. Just like the optician’s job is not to tell you which color frames to choose. They’re going to give you options to look at and tell you the pros and cons and help you and then you ultimately decide, but there’s more than one option in most scenarios. And so there’s different ways to look at properties. If you’re wide open, then yeah, then let your agent go to market. They do all the due diligence. And then they’ll take you on an hour-and-a-half, two-hour tour. They’ll show you your top five day properties. And then you invest literally an hour and a half, two hours. And then you’re going to finish that tour. And you’re going to say, I don’t want to move. I love my location. It’s better than all these.

Or you might say, you know what? I’m open now. And so it was worth an hour and a half, two hours to make that decision. No one’s asking you to invest 50 hours into a transaction and become a commercial estate expert. But is it worth spending an hour and a half, two hours of your time and maybe another half an hour to interview a broker or two or to find someone? So maybe you’re a couple of hours into it. But at the end of the day, if that guarantees or ensures that you have the right strategy, the right process and put you in the best position to win. And by winning, I mean saving as much money as possible. That’s a really good return on your time. And then if you do find properties you like, you pursue them. But your broker or agent is the one who’s submitting the offers. It’s non-binding. You’re not drafting contracts.

Residentially, you find a property, you draft a contract. If the seller says, yes, you’re in a binding contract. In commercial real estate, you negotiate in what’s called a letter of intent or a request for proposal. It’s non-binding. So commercial real estate, you’re negotiating with three or four landlords simultaneously. If you’re doing it right. Residentially, you submit one offer. And if they say yes, you’re locked. And then I guess the last thing I’d say is, if you say, look, I will bet you every dollar that I have to my name that I’m not moving, I don’t care no matter what you show me, I’m not moving, etc. Your agent can still take you on a digital tour on a tour packet on a Zoom call in 10 minutes. And he can show your options.

And then that way, when they go to the landlord and talk about how you’re looking at other properties or you’re seeing things, that’s a true statement. So they can make it true or they can still educate you in person or over Zoom or whatever it might be email. In that case, if you want to just spend the least amount of time possible, you can do it still in 15 minutes if you want to.

Bethany Fishbein: I know with residential real estate, you’re not paying the realtor until you’ve actually bought a property or actually until you’ve sold a property. So as a looker, you’re not paying a realtor. Is there a financial investment as well at this stage to have somebody do this for you?

Colin Carr: No. And that’s one of the most simplest decisions to hire someone is that you don’t pay the real estate agent as a buyer tenant. If you transact, they will get a portion of the commission that’s set aside for the listing broker, just like residential. If you go to buy a house, your buyer’s agent is working for you and they take half the commission typically from the listing agent. So as a buyer, it’s very rare to pay your broker. It shouldn’t happen in most markets. I guess it could, but it shouldn’t. It’s the same in commercial. You can do it yourself. You can go it alone.

And then what happens in that scenario is the listing broker or the landlord agent, they just get a double commission. So you’re not saving any money by not hiring someone. You’re just making the listing broker twice as happy, if you will. And then at the same point, you just lost representation. You just lost expert advice. You just probably wasted a lot of time that you shouldn’t have wasted. You could have either not done anything and just sat there and waited for stuff to hit your inbox or hit your phone. Or you could have gotten the expert counsel from someone who specializes and could help you capitalize.

Bethany Fishbein: And what about the people who are afraid that by starting this project, they’re not going to be able to get the money they need? They’re going to piss off their landlord who they feel has become a friend at this point. And it’s always taken real good care of me.

Colin Carr: Yeah. I love that question because we get this one all the time. I’m not exaggerating when I tell you this. We work with literally hundreds of clients per year where not only is the landlord someone that they know well, the landlord is also a patient. Think about this one. Landlords become patients of their tenants all the time. And they do it maybe because they truly do appreciate the quality of care provided. But it’s also a very good strategy from the landlord because it’s going to hopefully make that tenant less likely to bring someone in between the relationship. And so landlords become patients all the time. They spend a couple hundred dollars with that doctor, that tenant, and then they overcharge them by thousands or tens of thousands of dollars. So it’s a very common strategy.

Here’s what I’ll tell you. When I hear a doctor tell me the landlord is my friend, I say, no, the landlord is not your friend. The landlord is a cordial business acquaintance of yours. A friend to someone, if you call them and said, hey, can I borrow $5,000? Will you come help me out here? Or would you do this for me? That’s what a friend does. Landlords don’t do anything for tenants unless they’re going to get paid for it. So the landlord is a business relationship. They might be cordial. They might send you a Christmas basket. They might take you golfing once a summer. They might be a patient. That’s not your friend. A friend is somebody who is with you whether you pay them or not. And if you stop being a tenant or they weren’t a patient, you’re never going to see that person again. Again, that’s not a friend.

So here’s what I would tell you. If it’s done properly with a good agent, they will not disrespect the landlord and they will not put you in jeopardy. They’re going to negotiate factually. And so here’s what it looks like. If you were the client and I called your landlord and I said, I represent you and we’ve gone to market, we have three options to lease, two options to purchase. We’re open to a lease renewal, but it’s not going to be big competitive terms. And then we submit an offer. If that makes the landlord mad, again, that’s not your friend. A friend wants you to get the best deal possible. What friend do you have that would hope that you’d overpay by $200,000 on a lease? That’s not a friend. A friend doesn’t want you to lose $200,000.

That landlord would love to take you for $200,000. Do you see what I’m saying? They’re just factual. If the landlord gets mad that you bring somebody in, it’s because they’re trying to overcharge you. They’re trying to take advantage of you. And if they’re not, they’re going to say, great. There’s no problem with someone else being in the room and we have the conversation or being the go-between. The other part too, I’d tell you, this would be like the landlord being expected to be their own optometrist. You would tell the landlord, well, do you go to an optometrist or do you run your own tests and then you write your own prescriptions? And then you probably shaved down the lenses and frame and fit yourself. You probably do all that yourself, right? Well, no, I go to an optometrist. Well, why would you do that? Because I’m not a site expert. I’m not a vision expert. Well, you’re talking to someone who’s not a real estate expert. You’re a real estate expert because you own real estate.

So again, it’s very easy to put the landlord into a position where the only time they get mad or the only time that they get upset is when they are trying to do something they’re not supposed to do, or they’re trying to charge you more than they’re supposed to charge you. If not, it’s like, hey, I’m an open book. There’s nothing hidden here. Lastly, I’ll say here, sorry for being long-winded on this one, but it’s a fun one for me. I would tell you this, from having personally done this hundreds of times with people in that same scenario, it’s going to work in your favor 99% of the time. It’s very rare that a landlord gets really upset. Sometimes they’ll make a comment or two, but they’re going to do business. Why? Because the landlord knows that if they lose you as a tenant and they have to release the space, it’ll probably cost them a couple hundred thousand dollars more, believe it or not, than just doing your deal.

Because of that space that’s vacant for like, let’s say 12 to 18 months, if they have to then spend a bunch of money to re-tenant finish the space or re-renovate the space, if they’ve got to give a build-out period. Landlords aren’t stupid, typically, and they know what it costs them to do a new deal versus renewal. They want that renewal. They’re not going to jeopardize it.

Bethany Fishbein: When are the other times besides renewal where you have the opportunity to go into a negotiation? You mentioned before, if you’re buying a practice, you could be buying a practice midway through a lease period, or you could be in the middle of a lease period and want to expand maybe into a larger property in your same office park or something like that. What are those other opportunities?

Colin Carr: I would tell you anytime that real estate is part of anything you’re doing, whether it’s a startup, whether it’s an additional location, an acquisition, renewal, it doesn’t matter. If real estate’s involved, get a real estate professional who focuses on healthcare real estate, who’s going to work for you, not the landlord or the seller, no conflicts of interest. Get them involved in a transaction. It’s simple as that. There’s a lot of money on the table on every deal.

If you’re buying a practice, and let’s say there’s eight years left in the lease and you’re going to inherit it, they’re not going to renegotiate the lease for you, but they can still tell you, hey, you’ve got a good lease or an average lease or a bad lease. They can still tell you where it stacks up or how it ranks. If it’s a startup, a lot of money on the table as far as build-out allowances, free build-out period, free rent period upon move-in, annual increases. There’s all these different economic negotiated deal points. Anything with real estate, get a real estate professional who focuses on healthcare real estate. And here’s the deal. At the end of the day, even if not much changes, it gives you peace of mind.

Let’s say you’re going to buy a practice. You’re going to buy it no matter what. The rent seems reasonable. You still have someone look at it because they’ll tell you, hey, listen, this is a great lease rate. That gives you tremendous peace of mind over the next eight years. Or they might say, listen, you’re slightly above market, but it’s not a big deal because you want the practice. And in eight years, when we go to renegotiate or seven years, I think we can improve upon it. Again, it gives you a trajectory for the future and what you’re going to do. And so, I think it’s a great lease rate. To me, the economic terms are fantastic, but I’ll tell you, don’t underestimate the peace of mind. Nobody wants to second guess for the next 10 years if they made a good or bad choice.

And again, going back to the concept of you just bought a vehicle, here’s the deal. You can turn around and sell that tomorrow if you want to. If you want to get out, you can get out. When you get into a 10-year lease, you can’t get out. Unless you sell the practice, you’re locked and loaded. You don’t get a redo or a mulligan or a do-over, and you can’t just change it next month. You can’t swap it out. You can’t go to another landlord and swap out your lease. They’re just a lot more on the lines.

Anything with real estate, get somebody involved, and they’re going to help save you time, save you money. They’re going to help you avoid the pitfalls and complications that people get into all the time when they’re not savvy about the process, which most people are not. And then ultimately, they’re going to give you peace of mind.

Bethany Fishbein: You mentioned somebody knowledgeable in healthcare real estate. What’s the importance of a healthcare realtor versus a general realtor, or the person who you really like? They helped you buy your house, and you have an existing relationship. Maybe they’re your grandmother. I know it’s a chance to sell yourself a little bit, but I am curious about the difference.

Colin Carr: So there’s a huge difference between commercial and residential real estate. Both are forms of real estate, but there’s a vast difference. I’ve been doing this now for 20 plus years. I don’t know a single person in residential real estate that is a real player in residential that tries to even touch commercial and vice versa. Can I help buy them a house? Sure. But if I’m going to sell my house, there’s no way I’m listing my house myself. I’m going to hire an expert. I’m going to let them do what they do and save me time, save me money. And they’re going to help get me at the highest value possible.

So it’s similar to if you’re an optometrist, you’re a doctor. Well, you could be a dentist and be a doctor too. But there’s a difference in the type of healthcare you provide. So you get a residential real estate agent, let them be your agent for anything residential, but don’t touch commercial and vice versa. And then when you get into the commercial people, there’s different people that specialize. If I was going to sell an investment property, we’re not your company. We don’t sell investment property. We help represent healthcare providers. If you had a retail strip center, like a Starbucks and Chipotle, and you wanted to lease it out, we’re not your team for that. It’s very specialized. If you want to buy an apartment complex, that’s a different broker than the person helping you to rent an industrial building.

Commercial real estate is ultra specialized. And again, can people get a transaction completed? Absolutely. That’s not the bar you’re trying to clear. Anybody can get a deal done. I used to joke around, or I still do, people say, well, I can call a number on a sign and I can ask them to send me a brochure. And my daughter’s 12 now, but I would tell people when she was five, my daughter knows how to use a phone and she can ask you, send me a brochure or what do you have available? That’s not the bar we’re trying to clear.

So I would tell you, just like in healthcare, there’s a difference between someone putting braces on your teeth and someone pulling a tooth. There’s a difference between someone helping you recover from an injury and someone who’s going to adjust your back. There’s a difference between an optometrist and an ophthalmologist. There’s a difference between an optometrist and an optician. It might sound similar. And to the outside world, what’s the difference? There’s a lot of difference. And so can they help you? Probably. Are they going to cost you 100, 200 grand? Probably.

Bethany Fishbein: This might be the actual dumb question. And maybe I save it towards the end because we can cut it out if we need to. You mentioned buying commercial real estate. And if you’re in a situation where you are your own landlord you own the property and then you have a lease with your own practice to pay rent. Is there some of this process that’s important or necessary for tax purposes where it makes more sense or less sense to have more money into the real estate company or less? Or is that not your area of expertise to answer?

Colin Carr: I’m not claiming to be a CPA or an attorney. So I’ll give that disclaimer right there. Everyone should consult with a really good CPA that can help you from a tax strategy, etc. No, the answer is absolutely. So number one, if you own the real estate, you would 100% want to have it in a separate entity. You would never own the real estate in your own personal name or your practice’s name, number one, from a liability standpoint. Number two, if you have a loan from a bank, they’re not going to let you do that typically as well because they know it from a liability standpoint. It also makes it very challenging when you want to sell one asset and not the other. You might say, hey, I’m going to sell the practice, but I’m going to write a 10-year lease with the buyer of the practice and I’m going to let them keep paying me and I’m going to cash flow. The real estate for the next 10 years or pay it off or whatever it might be.

So you always have the real estate in a separate SP, single purpose entity or special purpose entity that owns the real estate. You can name it whatever you want to. And then you will write a lease between that LLC and then the practice. Now, a lot of times the practice still has to guarantee the loan. You as an individual have to guarantee the loan, but the guarantee doesn’t affect the tax side of things. You’re then going to write a lease. It’s got to be a marketable lease, a market lease. If comparable rents $5,000, you try to say that rent for your practice is $45,000, that’s going to probably be a red flag. But no, there’s definitely a tax strategy of getting a higher value for that lease. And that income becomes passive income, which is going to be taxed differently than just your typical wage income is going to be.

And then so there’s things that are going to help you there. When you own real estate, you also get to depreciated too. So residential real estate gets depreciated at 27 and a half years. So the real estate minus the land, commercial real estate get depreciated over 39 years minus the land. But you can also usually get accelerated depreciation or bonus depreciation through concepts like cost segregation studies, etc. So won’t get too technical there. But I would say that the short answer to your short question was, yes, there’s definitely a tax strategy with getting passive income into your LLC from your practice. Your practice writes off the entire payment because the lease payment is 100% deductible.

So in a mortgage, like a residential owner, you don’t write off the principal. You write off the interest, you write off the taxes, but you can’t write off your utility bill. You can’t write off your insurance. It’s just interest and taxes. In commercial, any expense for your business is written off. So higher rent payment to your LLC, you write the whole thing off. Any operating cost, you write it off. And then your LLC pays the mortgage, your net worth goes up every month. And then the additional margin there becomes passive income, which has a different tax associated with it. And then the benefit is you can usually take the depreciation as the owner of the LLC, plus the interest write-offs. And a lot of times you can negate or wipe out any or most of the income or gains. And so basically what that means is you can a lot of times get an income from that property that can be very minimally taxed or could even be tax-free because of all the write-offs and then the depreciation.

Bethany Fishbein: Colin, thank you so much. When we started this, I knew I wanted to talk about renewals and I kind of had a little bit of like is that really enough? And I feel like I could keep asking you questions about renewals for another half hour here, but I appreciate you sharing your wisdom. I appreciate your time. If somebody wants to get in touch with you or somebody from your company, what’s the best way for them to do that?

Colin Carr: Thank you. The best way to get in touch with us is our website and that’s carr.us. So carr.us, upper right-hand corner, you can click to find an agent in your city or your area. If you are the type of person that likes to self-educate, we’ve got a resources tab that has literally hundreds of articles, blogs, videos, FAQs, glossaries. So you don’t have to become an expert, but if you’d like to get self-educated or informed, you can do that. If you want to get a market analysis done, all of our services for the most part are free. But if you want to get a market analysis, even if you’re nine years away from renewing, you can contact us. We’ll get somebody assigned to it, take care of you. And ultimately, we’re just trying to give you information that arms you to make the best decision for your practice. And it’s a really simple business model. Just like an optometrist, you take phenomenal care of a patient, they’re going to come back, they’re going to trust you, they’re going to refer friends and family. We do the same thing. We help our clients save $100,000, $200,000, take care of at a high level. And that’s how our business is built. And it’s a really straightforward model.

Bethany Fishbein: Thank you again. And for more information on our services, please visit our website at powerpractice.com. Thank you so much for listening.