What Does Medical Office Space Really Cost?

We do not publish a typical rent for medical space here, because any single figure would hide what you need to know. Two suites with the same quoted rate can differ widely once you add the build-out, the expenses passed through to you and the work needed when you leave. Costs also fall at different times: some are monthly, some are large and up front, and some arrive at the end of the lease.

The useful question is what this particular suite will cost in total over the full lease term. Everything below is a line on that worksheet.

Start by finding out what the rent includes. A law firm guide to medical and dental leases describes the two ends of the range. In a triple net lease, the tenant pays a lower base rent and pays expenses separately, which may include utilities, janitorial, maintenance, property taxes and property insurance. In a gross lease, operating expenses are included in the monthly rent. Many leases sit between the two.

• Base rent and annual escalations. Escalations compound, so model every year and not just the first.
• Operating expenses, taxes and insurance, usually charged as a share based on your square footage against the building's leasable area.
• Rentable versus usable area. Ask which the rate applies to, since you may pay for a share of common space.
• Condominium fees, if the suite is in an office condominium.
• Free or reduced rent, which lowers the total cost even if the stated rate stays the same.

Clinical construction is easy to underestimate. Plumbing to rooms, added power, more HVAC zones, sterilization or lab areas, special doors and shielding all sit on top of ordinary interior work. A healthcare real estate attorney also notes that healthcare tenants usually need specialists for remodeling, instead of the landlord's default contractor.

Landlords may agree to provide an allowance or to design and build the improvements themselves. Some let you choose your own architect and contractor, subject to approval, and others require theirs. The figure that belongs in your budget is the full cost of construction, design, permits and contingency, minus what the landlord actually pays.

An allowance is not free money. It may be built into your rent, it may be limited to certain items, and it often has rules about timing. Read the work letter closely, and do not assume equipment or cabling is covered.

Equipment has its own costs beyond the purchase price. Imaging, for example, may bring shielding, a dedicated electrical supply, structural review and state regulatory steps. Rules for radiation-producing equipment vary by state, and a New York real estate article on medical leases notes that insurers may impose requirements as well.

Also budget for the cost of moving any existing equipment, IT and phone systems, furniture and signs. Federal tax credits and deductions can offset some ADA-related costs: ADA.gov notes these are available to private businesses subject to IRS rules, and points to IRS Form 8826. Ask your CPA whether you qualify before you count on one.

Some costs are small each month and become significant over a full lease term. These are the ones most likely to be left out of a first budget.

• Utilities. Medical tenants often use more than standard office tenants because of exam room sinks and equipment such as x-ray machines. A landlord may want to meter separately, and a cap set for a typical tenant may not be enough for you.
• After-hours HVAC. In a larger building, ask whether heating and cooling run during evenings and weekends, and what the charge is if they do not. The same question should be asked about emergency access.
• HVAC repair and replacement. Find out who pays. A dental attorney writing in Dental Economics notes that tenants may be asked to carry a maintenance contract and often try to keep replacement with the landlord.
• Medical waste. It cannot be combined with ordinary trash, and it is regulated mainly by states, so storage and pickup requirements vary. In Illinois, for example, the state EPA says potentially infectious medical waste must be treated and can be transported only by a licensed hauler. Get a vendor quote for your location.
• Cleaning. Clinical cleaning may go beyond the building's standard janitorial service, which may leave you to contract separately.
• Insurance. Your liability coverage may need endorsements tied to your equipment, and the landlord may need to be named as an additional insured.

Surrender and restoration language can create a large bill years after you sign. Some clauses require returning the space to its original shell, which can mean demolition and construction. A real estate article on medical leases suggests that a tenant try to provide at signing that it need not remove lead shielding or other special installations, while noting that landlords will often want to keep that decision open.

Restoration also affects the practice's value, because a future buyer inherits the obligation. The time to deal with it is before you sign, while you still have leverage, and a suite whose next tenant could reuse the improvements is a good reason to ask for relief.

Once you have the categories, comparing options is a matter of filling in the same form for each one.

1. Get a written proposal from each landlord showing rate, escalations, expense estimates, allowance, free rent and term.
2. Ask for the last few years of actual operating expenses, not just this year's estimate.
3. Get a contractor's estimate based on a test-fit of your plan in that suite.
4. Add equipment, moving, waste, after-hours HVAC and any specialty services from vendor quotes.
5. Estimate restoration from the lease language, with your contractor's input.
6. Total everything over the full term for each suite and compare the totals with your CPA.

TAG works only for tenants and buyers, and we help practices lay competing proposals out on this kind of total-cost basis, so a lower quoted rate cannot hide a higher overall cost.