Casey Hiers welcomes special guest Eric Pook, President of Cirrus Consulting Group, to discuss how COVID has changed the office leasing landscape. For practice owners, who are currently leasing their space, this episode is a must-listen.
Announcer:
Hello, everyone. Welcome to The Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances and business practices. To help you become the millionaire dentist you deserve to be. Please be advised, we do speak with an honest tongue and may not be safe for work.
Casey Hiers:
Hello and welcome. This is Casey Hiers back at it on The Millionaire Dentist Podcast. Today, we have a very special guest, Eric Pook, who is the president of Cirrus Consulting Group, is joining us today. Eric, how you doing?
Eric Pook:
I am excellent, Casey. Thanks for having me.
Casey Hiers:
Absolutely. Glad you were able to make some time. Let's just jump in. Eric, tell our listeners what Cirrus Consulting Group does, and who looks to you all for help?
Eric Pook:
Yeah. Thanks, Casey. A little bit about Cirrus, we've got a deep history, 26 years in the business. We are very unique, being a healthcare tenant advisory company, the only one of our kind in North America. Bunch of dentists were focused on getting together with some real estate experts to help formulate and to help protect principally dentists in the negotiation or renegotiations with their landlord. And we've now, 26 going into our 27th year in the business, become a great household name in dentistry, specifically for helping clients.
Casey Hiers:
How has COVID affected dental leases for practice owners? And I guess how, or what, if anything, has changed or become magnified now with COVID?
Eric Pook:
COVID has, in my opinion, been ... I'm a very glass half-full guy, as you know, over the years. And it seems like yesterday we were on the floor of the Yankee and shaking hands-
Casey Hiers:
Thousands of people, yeah.
Eric Pook:
But I don't know when we're going to see that anytime soon. But what I think was interesting going back after the last time I saw you, which was as COVID hit and the lockdowns happened, instantly a lot of the practices obviously laid off staff, applied for government incentives with PPP and otherwise. And then suddenly the number one hit to overhead became the rent. And then suddenly, this mass search for lease documents, and what did we sign, and how long ago was that, and what file folder is that in?
Eric Pook:
And most dentists, as they reached out to us, said that they'd really never even read it before and had to dust it off as COVID happened to see, do we have to pay if we're shut down? All these sort of what ifs that they never thought would happen suddenly happened. So definitely at a high level COVID has, in my opinion, created one of the best times to be a dental tenant, where now throughout the country, depending on the location, but in many cases, there's a rise of vacancies, right? A lot of the restaurants, a lot of the smaller businesses that are no longer open, and now a lot of landlords are seeing an increase in vacancies.
Eric Pook:
The value of a dental tenant has always been high. Now, landlords across the country are realizing that as shelter-in-place orders are happening back in California or otherwise, the one reliable tenant that for the most part has remained open, especially more recently, is the dentist. That's a high level. And then we've also seen a lot of concerns and a lot of mistakes that some doctors made through the process going into COVID that are certainly, in some cases, are still outstanding.
Casey Hiers:
I want to jump in for our listeners, Eric, and I want them to understand what traps are out there that practice owners can get into with regards to their office lease. On the surface, signing a lease, too many practice owners just do it in good faith and learn the hard way. I really want you to share different examples of how there is some dangerous exposure to these practice owners, how signing this lease can really come back to haunt you if you don't have the right folks helping you or looking at the fine print.
Eric Pook:
The traps, I think, we can break them down into twofold. One is sort of through COVID and sort of, shall I say, post-COVID. So, a couple of the core traps, let's look back into sort of March and April. Part of the issues there were as COVID happened, and as many operatories and clinics were reopening, alterations. And the alteration section within the lease became pretty important because many doctors were coming in, making changes, bringing in contractors, cordoning off or isolating some of the operatories, which was impacting airflow and otherwise, and therefore making changes in the practice without the landlord's consent. And what many of your clients may not realize is that even to make minor cosmetic changes, most landlords will require that they give written consent prior to those changes.
Eric Pook:
Some clinics missed payments or delayed payments as March, April, May of 2020 ramped up. In some cases, the landlord or the landlord broker, or some representative, via text said, "Hey, no problems, Casey, Dr. Hiers. No problems. Just wait. Just send me what you can or pay me what you can when you can," and it was not documented. So, there was no proper rent deferral agreement, there was no proper rent abatement agreement, and nothing was documented. That is definitely something that is a risk down the road, because if it still shows in the landlord's books that you're a payment or two behind, or it was one of these sort of pay me what you can handshake type of deals, that can especially be an issue, not only with the current landlord, but also if the landlord changes hands.
Eric Pook:
Another interesting component, looking backwards, speaking of traps, Casey, is that request for financials. This was a really interesting strategy that many mom-and-pop and national landlords would do is that most, obviously dentists included, would ask for help because they're shut down and because they're looking for assistance. Many landlords basically as a strategy said, "Okay, great. But please send me your last two years of financials and tax returns, and your firstborn, just in exchange of deferring a month's rent." And of course, many doctors said, "Well, that's ridiculous and I'm just not going to send it." And they went away. Smart for the landlords because in many cases they saw 20, 30, 40, 50% of the people asking for help just go away.
Eric Pook:
However, right, in many doctor's leases, they might not be aware, but there is a clause that at any time the landlord can ask for those financials. And if the doctor fails to provide those within whatever, 15, 30 day period, then that also could have some unintended consequences and put them in default or worse.
Casey Hiers:
I've heard a little bit of this before, but I want our listeners to understand the implications of this. Let's just do a hypothetical. Let's say practice owner, back end of the career, you've signed leases, just sort of signed them in good faith, and you've marched on. And you're getting ready to retire, sell the practice and all of that. What is something that a bad lease could have in it for a practice owner at the end of their career that could potentially wreck or delay retirement because they didn't look at the fine print, didn't have the right people looking at it, and they've unintentionally put themselves in a bad position?
Eric Pook:
Yeah. Especially for doctors contemplating transitioning and selling, let it be to an associate, to a DSO, putting it on the open market, the lease, and many unfortunately don't realize until it's too late, how important it is to the sale of the practice. In short, it can impact 100% of the practice sale proceeds, and let me explain why. The lease, right, and the sale and the agreement of purchase and sale is typically conditional to financing and the assignment of the lease. Basically, the transferring and the lease from Dr. Vendor, who's selling the clinic to Dr. Buyer who's acquiring, there has to be the assignment of that lease from one to the other.
Eric Pook:
Now, ask yourself if, right, if to the buyer, if your keys didn't work, if you no longer had access to that location, what would the impact be to the value of your practice? If you are, for example, in a month-to-month lease, you might think, "Well, hey, that's great. Gosh, Casey, this is fantastic. You know, I'm winding down my career. I really don't want to commit to any longer term, but a month-to-month." So, that might seem beneficial. But again, if you're looking at it through the eyes of the buyer, what's the most valuable component of the sale? Well, if you distill it right down, it is the value of the continuity and predictability of the revenue of the production that the buyer is going to come in and that those revenue taps are still going to turn on when they walk in, first thing Monday morning.
Eric Pook:
The assignment clause, the landlord, in most cases, you cannot sell your clinic without assigning the lease and having the landlord giving you that written approval. In many cases, upon that, they can condition the approval. They might want a 20% or 30% increase in rent just to allow you to sell your clinic. Some other things to consider is that the continuing liability, some doctors have signed their leases personally, or in their name personally, or have given something called a personal guarantee, which in essence means that in the event of any dispute or issues, the landlord can go after you personally. And what most don't realize is that upon the sale or assignment of that lease, upon retirement, right, that doctor can still and will remain continually liable.
Casey Hiers:
Yeah, I know there's a lot of verbiage in these agreements that do not bode well for the practice owner, and I've been shocked over the years to see some of that verbiage, and it can really crush a practice. It can crush a practice owner at a very vulnerable time. Now, you had mentioned commercial lease space. With everything going on right now, the leverage or desire for a landlord to have a practice-owning dentist in their space may be at an all-time high. What can a practice owner who may be trapped in a bad lease do to remedy it? Is there anything given the current landscape that they can do if they have maybe haphazardly signed something, realized that there's some poor verbiage in there that opens them up to some negative things? Can a dentist, are they in a position now to renegotiate or do something of that nature?
Eric Pook:
So to answer your question, yes. Right? The first approach is to realize how much leverage you have now as a dental tenant. As many businesses are still somewhat or partially opened or otherwise, the dentist can never work from home, so there is an incredible amount of leverage. So the landlords, what we're seeing throughout the country right now, from Anchorage to Honolulu to Key West and everything in between, they're taking two approaches. One, out of desperation, they have to cover their own expenses, and therefore what they're doing is going the low road or the high road, however you want to see it. They're basically saying, "Look, we can't. The rents are too low. We're not making ends meet. We've got a lot of vacancies and unfortunately you're the doctor, you can probably afford it, so here's your sizable increase." So that's the unfortunate first reality, which of course there's leverage and strategies that can help improve that situation.
Eric Pook:
But the second is the potential of relocation. And for many doctors that have that Rockefeller glass half-full investing in uncertain times, it does prove to be a very unique opportunity. Meaning that if you've had that 1% itch or contemplating relocating, this and the impact of COVID to the national real estate market, this might be the nudge in the right direction. Put yourself in the landlord's shoes. You've got two or three strip malls. Their vacancies are 5, 10, 15, 20, 30, 50%. And you know, you get a phone call from Cirrus Consulting Group with a dentist who's looking to secure a 10-year term with two five-year options, and build out at $150 or $200 per square foot. Can you imagine the smile and the grin on that landlord's face who's now thinking, "Oh, my God, this is my ticket"?
Eric Pook:
One of the strategies we're using and it's working very well is we'll put our fishing pole in the water and put an offer for perhaps ... and talk to the landlord down the street and see how anxious they are to potentially have an established dentist in the area relocate to that location. And that, in many cases, is enough that the landlord instantly will start to throw out tenant improvement allowance. So, really looking at that potential relocation and just keeping the current landlord honest and saying, "Gosh, I don't want to move if I don't have to, but oh, my God, look what the landlord down the street is willing to do in a newer location, in a nicer building that really appreciates my business."
Casey Hiers:
Give our listeners a feeling of the timeframe. You said something earlier that resonated. A lot of landlords will run out the clock and then they've got you because there's no time for any decisions. Obviously, everybody out there should go dust off their lease agreement and be familiar with it, but talk about the timeframes that practice owners should do what you just said. Maybe look around, get some feelers out there, versus the landlord running out the clock. Dentists are already stressed out enough with providing great dentistry and all of the things they have to do as a business owner. Let's say this slips through the cracks. What is a timeframe? Two years, nine months? What's a good feel for somebody to, if they're going to make a change or potentially leverage in renegotiation, start that process so that they're not trapped by the landlord just running out the clock? And then saying, "Oh, by the way," to your example, "you're going to pay a whole bunch more," and the terms are just very poor?
Eric Pook:
Yeah. It's funny, Casey, thinking back to some of the co-lectures we've done in the past, or working with any of the Four Quadrants clients over the years. I must say the COVID has impacted and basically thrown out the old lease negotiation handbook. It is new and unchartered waters. So, typically, you're right. We would advise most dental tenants that about two years is a good sweet spot, because many landlords know it can be upwards of 18 months to relocate a dental clinic from point A to point B from permits and build-outs and all those, so two years typically was the good amount of time. In some cases now, even a little longer.
Casey Hiers:
Well, I know our listeners are going to appreciate this. I mean, if there's one thing both of us know is dentists, great people, high achievers, really good at dentistry, and they get this bonus job and all this additional responsibility, payroll overhead, anything and everything you can think of down to the lease. And something that maybe should be very straightforward is actually the opposite, and dentists can get themselves in trouble sometimes. Thankfully, there are great groups out there like Cirrus Consulting who can help drive these dentists to eliminate mistakes and make sure they're protected and protect the fruits of their labor. Is there anything I missed that you want our listeners to be aware of or know about what you guys do specifically or Cirrus Consulting?
Eric Pook:
I think the big takeaways is really, hopefully, today as everyone is driving and listening or otherwise, just truly realize how valuable you are as a dental tenant. And just if any of this has rang true that, "Oh, the landlord says he'll never negotiate," or the landlord says, "This is just the standard form lease," and just to sign here and that they're not going to make any change, I would definitely say that it is to everyone's benefit to have the lease professionally reviewed. Don't fall into those traps of just, "Oh, hey, here's your renewal. Sign here, push hard and see what happens," right? It is so important to leverage yourself, the situation, and COVID to get a better deal, because if not now, when?
Eric Pook:
So as a great benefit for, again, all listeners to your podcast, what we're willing to do is, again, appreciation of your time to do it as a complimentary lease review. Our price is 19.95 to do that full analysis, but again, for any listeners of the podcast, if you reference the podcast, we will certainly be able to waive those fees and do that as a complimentary lease review. And we're happy to, again, support the dental community. We're happy to ... Life is difficult enough with all the challenges going on. Hopefully we can take one extra big stress and concern off your plate and to help make sure that you're able to leverage the real value you have in the upcoming negotiation with your landlord.
Casey Hiers:
Excellent. Excellent. Eric, I appreciate you being on here to share some of this and we appreciate your time. Thank you, sir.
Eric Pook:
Perfect. Thank you very much. It's a pleasure. Thanks, Casey.
Announcer:
That's all the time we have today. Thank you to our guest for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice, go on over to fourquadrantsadvisory.com and see why year after year, they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.
