7 Crucial Considerations When Renting Out Space to Others

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If you see clients in person in your practice, office rent or mortgage is one of your largest business expenses. If the space is large enough, subleasing or renting out to others is a great way to offset a big part of that cost. When my wife Risa’s practice reached full-time, she rented a 5-office suite and subleased several offices (with the landlord’s permission). In time, we bought and built out our own suite, renting space to six therapists. Several of them have now been with Risa for over nine years, moving with us when we established our own suite. The following are the most important lessons we’ve learned over the years on how to get the best renters, and how to keep them. Whether you’re considering becoming a landlord or renting space in someone else’s suite, this post is for you.

A therapist in private practice who like us owns a suite that can accommodate several others asked me for advice on what terms she should spell out in her leases. Understandably, she was concerned about getting bitten by something she doesn’t know. As she put it, “I want to trust all involved, but don’t want to be naïve about what could go wrong.” Here are the 7 crucial considerations that I shared with her.

Crucial Consideration #1: Cultural Fit

You spend a significant chunk of your life in your office. When you bring the right person in to share that space, it can be a dream. Bring in the wrong person, and it can turn into a nightmare. What determines whether it’s dream-time or a horror show? In large part it’s how well your personalities, style, and culture mesh. This is why high-tech firms put prospective employees through cultural fit interviews first, and only check the technical credentials of those they figure will enhance rather than break their teams.

We learned this lesson when Risa brought in her first sublessees. Most worked out from amazingly to passably well. Unfortunately, a few turned out very differently. One of the latter asked Risa to provide lids for the coffee cups in the waiting area. Risa declined. The coffee was there for clients waiting for their session or parents waiting for their kids’ sessions to conclude, not as a free to-go café.

This therapist responded that having clients enter her office with an uncovered cup of hot coffee is a clinical issue (!). Maybe she was afraid a client would toss hot coffee in her face? Things went from weird to problematical when she started sending her clients to turn down the volume of the music in the suite, change the thermostat setting, etc. Ultimately, Risa had to invite her to leave the suite, releasing her early from her sublease.

Crucial Consideration #2: Clinical Fit

Many companies include a non-compete clause in employment contracts. In therapy group practices, this protects the employer from having to compete with an associate leaving the practice and opening an office across the road or even across the hallway. Why then would you bring such competitors as renters or sublessees into your own suite?! It simply isn’t a good basis for a harmonious environment.

Instead, assemble a group of therapists offering complementary services. One might be a marriage and family therapist, another may work with teens, a third may offer sex therapy services, while a fourth offers individual therapy. In this scenario, each clinician serves as a referral source for the others, while also referring clients to the others for services s/he doesn’t provide.

Crucial Consideration #3: Organizational Fit

If the clinicians in the suite each have their own solo practice, contract with shared independent-contractor providers. For example, few solo therapists can afford a full-time receptionist, but most would benefit from having one answering the phones and greeting clients.

The solution – find someone qualified who is willing to serve as receptionist for all the therapy practices in the suite. Then, each practice signs a contract with the receptionist’s small company. Since the receptionist is providing services to multiple independent businesses, an audit would almost have to accept that she is in fact in business and not an employee. Similarly, contract with a shared billing specialist, bookkeeper, marketer, cleaning service, etc.

If the prospective renters (or sublessees) are willing to share these outsourced solutions, everyone ends up enjoying them while only paying their fair share.

Crucial Consideration #4: Decide in Haste, Repent at Leisure

Filling a space with good renters takes time. How much time depends on the local market and how high you set your rent. Never let anxiety to fill a spot overrule your intuition that someone may be trouble. As exemplified by that sublessee my wife had to deal with, you could end up dreading each time you go to your own office.

Our own top priority is to have the right people in our suite, so we're willing to let it take a couple of years or more. Once we have the right people, they stick with us for many years. Seen in that light, and with rent on the high side for our market (our space is Class A+, in a good location, with high-end finishes), waiting just makes sense.

For example, a prospective renter recently told us she’d like to start renting one of our offices in four months. She appears to be a great fit, so we’re willing to wait. If another compatible prospect came along tomorrow, we’d give the first one the right of first refusal, possibly asking her to share our loss by starting to rent earlier than four months later. If she wants the space enough to pay for it for a short while before she actually needs it, great. If not, we’d go with the new person.

We’re fortunate enough to be able to afford to carry our business mortgage even with a couple of our offices empty a few days a week. This allows us to wait for the right person to come along, rather than rushing to fill rental space with people who might be a poor fit. If you don't have such flexibility, start with somewhat-below-market rent, but stay picky about who you take in. If you hurry the process and end up with the wrong person, they are likely to leave after the first lease ends, either because they don't like being there or because you don't want to renew their lease.

Crucial Consideration #5: Technical/Logistical Arrangements

If everyone in the suite shares common spaces such as waiting area, kitchenette, conference/group room, etc., make sure your leases/subleases clearly spell out who gets to use what space, when, how, and how often.

If rent covers utilities, waiting room supplies, printer paper and ink, etc., make sure you set clear boundaries. This could be in the lease, in a printed Office Policies flyer, or verbally – whatever works best for you and your renters. For example, how many pages printed on the office suite printer is acceptable? For us, it’s not a strict number of pages per day, but rather being reasonable – printing a few pages a day or a few dozen a week is fine, but printing hundreds of pages at once keeps the printer busy for hours when others may be waiting for a two-page form to come out. If repeated frequently, this would increase supplies cost significantly (paper and ink cost a few pennies a page, but if you multiply that by 500 pages every week your costs increase by over $100/month!).

If a renter wants to use the conference/group room on a regular basis, decide in advance whether that’s acceptable given your needs and those of your other renters. If it’s workable, decide how much to charge for this use. You could can charge by the hour, by the day, or even as a percentage increase of the office rent. The best solution depends on the frequency and length of use vs. other demand. You may decide not to charge at all if the renter only needs it for half a day every few months, especially if you can coordinate so it’s at a time when nobody else needs the room.

Crucial Consideration #6: Useful Lease Provisions

A clause that allows you to move a daily renter to a different but equivalent office can be super useful. For example, say you have a renter in office A on Tuesdays and that office has Fridays available, while Office B is free on Tuesdays but not on Fridays. If a new prospect comes looking for space on Tuesdays and Fridays, you could move the Tuesday renter from office A to B, allowing the new renter to be in office A both days.

To protect yourself, require renters to name your company as an added insured on their liability policies. If a client comes to see one of your renters and trips in the rented office, he could sue you as the owner of the space even if you have no control over what’s in the room. In this situation, you’d be protected by the renter’s liability policy and won’t need to file a claim on your policy.

Allowing renters to sublease their space is a thorny issue. If you don’t work in the suite, your main concern is that the sublessee not be too obnoxious to your other renters. However, if you do work there, having someone constantly frown at you and/or ignore you can be a real downer. The simplest way to avoid this is to prohibit subleasing. This has the added benefit of avoiding competition over renters within your own suite. If a current renter finds someone who could be a good fit, make it a win-win by giving her a discount on a month’s rent once the new renter moves in. If you decide to allow renters to sublease, make sure it’s clear that you have final say about who comes in, and interview each candidate sublessee.

Crucial Consideration #7: Setting the Term and the Rent

Rent has to cover all your relevant expenses, including  mortgage payment (or your own rent if you sublease space to others), utilities, music streaming, snow removal, waiting-room supplies (e.g., coffee, tea, creamer, water, cups, napkins), as well as office supplies and equipment (e.g., periodic printer replacement, paper, ink, envelopes, etc.).

If your space is Class A or A+ in a prime location with great finishes, you can charge premium rent. Conversely, if your space is an older Class B or C in a less-desirable location, expect to get paid less. Some therapists baulk at high rent even for the nicest space in the best area. These people may not be a good cultural fit for your space, so don’t reduce prices unless nobody else is biting and even then, only for people you think will enhance your experience.

Leases for entire suites are often multi-year ones with automatic rent increases each year, but single offices usually have one-year contracts with fixed rent. If you plan to increase rent on renewal, discuss it with your renters in advance. People hate to be blindsided, and a surprise bump in rent may lead to their leaving after a single term, even if the increase is one they’d accept if they could plan for it. In such early discussions, explain how you calculate the size of the increase. Do you tie rent to your own rent? To the consumer price index? To the local rental market? If it’s the last, expect your renter to ask for a reduction in rent if the market softens.

Over the past several years, we chose not to increase rent for current renters when they renew. Our mortgage rate is fixed, other costs haven’t increases significantly, and we want to keep the people we know and like.

Deciding whether to buy an office suite, rent one with the ability to sublease space, or rent a smaller space can be as simple as following my flowchart, but figuring out the financial details such as how much to pay, how much to charge, how much interest is acceptable, etc., is a complex, number-intensive (and for many, overwhelming) exercise. As part of my coaching service, I help therapists by simplifying the complex numbers picture, removing the overwhelm so the correct decision becomes clear.  

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