What Is A Fair Number To Pay For Rent To A Partner?

Dear Dr. Hayes,

I am currently the managing associate in a practice that is 2.5 years old. The practice is doing fairly well as we are on track for $500K this year with one doctor five days per week.

I am attempting to work thru a partnership proposal made by the two owners of the practice. One particular topic I am trying to ascertain is, what is a fair market rent for the northern Virginia region where we practice?

One of the two practice owners also owns the current space for which we are paying $2,700.00 a month rent to him. The space next to our current office is owned by the other partner with plans to expand into that as we expand in 3-5 years.

I am now trying to figure out what would be a fair number to pay for future rent as we grow. Are rents a function of gross? Is there a formula to use per square feet? Any response would be greatly appreciated.

Sincerely,
Stephen W. Hinkle, OD

Dear Dr. Hinkle, 

I can't tell you what the rental rates are for office space in Northern Virginia should be.

However, you can find that out pretty easily for yourself by calling a rental agent that is familiar with your market. Or, just call a local landlord with similar property. 

What you pay for office space is determined very much like what you pay to buy a house. It's based on location, market conditions and perceived desirability. Do a little homework and you should have a pretty good idea if the prices your future partners expect the practice to pay are in line with your area.

Rates are typically quoted on a square footage basis, plus, plus.  For example, an 1,800 square foot office renting at $20 per square foot would cost $36,000 per year ($20 x 1,800). That is $3,000 for just the rent.

Plus, plus means that, in many cases, the leases are 'triple net'. In this scenario, the tenant also pays taxes and insurance. And don't forget, unless you find something that suits your needs exactly, you might have to pay the cost of remodeling to your specifications.

Rents are not usually a function of gross revenue in office suites. However, many malls and shopping centers DO charge rent based on some percentage of annual revenues. It all depends on the landlord.

Is Your Rent Too High Or Your Gross Too Low?

Create a simple Pro-forma to decide if the projected rental amount fits your practice budget and ties back to your desired level of net income and practice profits.

Most ODs spend 6-8% of annual revenue on total Occupancy Costs.  Based on the numbers you gave me, $27,000/$500,000 = 5.4%, so you seem well in line at this point.

However, you must add back all real estate related expenses such as taxes, insurance and maintenance costs to determine your fully loaded Occupancy Costs.

Put the pencil to it and you should know pretty quickly if your rent is in line for a practice your size.

Regards,
Jerry Hayes, OD

Disclaimer: The information and opinions contained on this site are for discussion purposes only and are NOT intended to serve as legal, accounting or investment advice. ©2009 Jerry Hayes, OD. Not to be reproduced without written permission of the author.