MDNews - San Antonio

October 2011

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++++++++++++++++++++ OFFICE SPACE +++ +++ ++++++++++++++++++++ + + 'Apples to Apples' When Shopping for Medical Offi ce Space Comparing By Elize Pruske, CCIM TO EAT AN APPLE a day for good health remains wise advice. Equally good counsel, for physicians, is to make a true "apples- to-apples" comparison when shopping for medical office space. Physicians should be familiar with a few lease fundamentals to help them evaluate the array of options available — because these will directly affect their total out-of-pocket costs. Basic Lease Structure There a many different kinds of lease structures, but for the purpose of com- parison, the two most common types of medical offi ce leases found in multiten- ant medical offi ce buildings (MOBs) are full-service gross leases with a base year and triple-net leases. Full-service gross leases with a base year: The tenant pays a base rental rate that typically escalates by a set amount or percentage each year — along with the ten- ant's pro rata share of increases in operating expenses over a specifi ed base year (usually the year the lease commences) — thereby paying only the incremental increases in operating expenses in the years subsequent to the base year. Triple-net lease: The tenant pays a base rental rate that typically escalates by a set amount or percentage each year, along with all the tenant's pro rata share of operating expenses. This type of lease is routinely found in newer MOB developments, although there are a few older buildings that have converted to this type of lease structure. To get a grasp of why this is signifi cant, take the following example: "Big Apple" MOB is quoting an annual base rate of $26 per rentable square foot (RSF) full-service gross with a 2011 base year (FSG/BY), and "Red Apple" MOB is quoting an annual base rate of $16 triple net per RSF. In addition, let us assume the operating expenses (taxes, insurance, utilities, janitorial, repairs and mainte- nance, elevator, security and life safety, landscaping, property management fees, etc.) are running approximately the same amount at both projects — $10 per RSF per year. At fi rst glance, one may think the Big Apple MOB is much more expensive with a base rate of $26; however, with an FSG/ BY lease, the majority of the operating expenses are built into the base rate, and the tenant does not pay operating expense increases during the 2011 base year. Note: If operating expenses are estimated to increase 5% per annum, then not until 2012 would the tenant begin to pay the incremental annual increase in operating expenses of 50 cents per RSF over the

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