Looking For Office Space: Round 1

Starting off, I wanted an office near O’Connor Hospital, which had the most Korean primary care physicians on staff. Ideally, I also wanted to be in the same building as a few Korean primary care doctors, and with no other ophthalmologists. I also wanted to be near Santa Clara, where there most Korean businesses and communities exist. Another thing I wanted was easy access to freeways and public transportation. Easy visibility from major streets would have been a plus as well.  Lastly, I wanted a former optometrist’s or ophthalmologist’s office so that I could save money on tenant improvements, and negotiate better rental rates.

I started my office space hunt in July, right after residency had ended. I flew to San Jose for about 10 days. Initially, I gave myself 1.5 months to find a place, negotiate a lease, and sign the lease. How naive I was. I wasn’t even close (Note: Howie got it done in six weeks!). I hear that on average, it takes 4 to 8 months to find a place.  So, it’s never too early to start looking. As ophthalmologists, we’re used to getting things done fairly quickly. You will definitely need to readjust your pace in not only the commercial leasing market, but also the entire business world. The whole world runs between 9 AM and 4 PM, Monday through Thursday. Don’t count on anything being done after 4 P.M. or on Friday.

Anyway, I initially spoke with my agent over the phone, and talked to her about my practice aspirations, space requirements, and desired location. She compiled a list for me, and we arranged a meeting to visit a few potential spaces. Prior to the meeting, she forwarded me the brochures and floor plans of the six properties that we would be viewing. I researched these places on Loopnet. Out of all the properties, the space I thought I was most likely going to lease was a 1,600 sf space that was half a mile from O’Connor Hospital. This space was previously occupied by a retired ophthalmologist, and there were two Korean primary care doctors in the same building!  Turns out that this space was to be perfect only in my head. When I actually saw this place, it totally blew.

Although I was looking for a 1,600 sf office, most spaces are not built to my desired efficiency. Hence, I had to consider spaces as large as 2000 sf. Of the six units, I first narrowed it down to three, and ended up putting in an offer for two. It’s quite normal to put in an offer on more than one property.  None of these offers or letters of intent (LOI) are legally binding, and you can walk away at any stage of negotiations.  It’s only when you sign the actual lease that you’re in for the long run.

 

Property One

The first property I liked had 1,900 rentable sf. It was a single story building with four units just across the street from O’Connor. The other three spaces were occupied by a pediatrician, dentist, and acupuncturist. None would be much of a referral source for me. The space was a blast from the past with pink and vomit green wallpaper. I felt like I was in an episode of the Brady Bunch. However, you should never be put off by the cosmetic appearance of the space. You need to have the vision to look beyond it since most things can be altered. There was definitely plenty of space here. I could outfit 4 exam lanes and a minor procedure room. The waiting area was spacious as well. There was one bathroom, which needed to be updated to ADA standards. ADA bathrooms upgrades cost around $15,000 to accommodate for wheel chair access. The asking was $2.50/sf full service. The landlord was a developer who would foot the entire bill for tenant improvements.  The one caveat was that the landlord was planning to demolish this building in 5 years to build a new professional building. I would have first right to any space in that new building when that happened. However, I would have to temporarily move my practice elsewhere. That was the deal breaker for me. I didn’t want to lose revenue or confuse my patients because of a temporary relocation. The main reason I was looking for a larger space in the first place was so that I wouldn’t have to move if my practice grew large. If I were to be relocating in 5 years anyway, there was no reason for me to pay rent on a huge space, of which I would be using less than half of it in the first few years.

 

Property Two

This property was located in a large professional building, also just across the street from O’Connor. There were probably 30 different practices in this building, including one multiphysician family practice group.  The building was relatively new and quite nice. It was a three story building with a pharmacy on the first floor.  There was one other ophthalmologist in this building.  This space had 1,870 rentable sf. It was on the third floor right in front of the elevators. The space itself was awesome. The waiting area was huge with plenty of natural light. There were enough rooms for 3 exam lanes, 1 minor procedure room, a work station, and 1 laser room.  The bathroom inside met ADA requirements. For my purposes, this place was almost ready to move in. I probably only needed to change the carpet and repaint the walls. I was very happy with the floorplan. This property was also owned by a developer, and I wouldn’t be responsible for tenant improvements either. However, the asking was $2.85/sf triple net. The triple net would cost an additional $0.85/sf, and utilities would be another $0.40/sf or so. Essentially, I would be paying $4.10/sf or over $7,500 a month! Remember, everything is negotiable. I met with the landlord, and asked him for a lower rent since I would be requiring minimal tenant improvements. We negotiated the monthly rent down to $2.35/sf. He said that he couldn’t go any lower because O’Connor was partial owner of the building, and doing so would be in violation of Stark laws. So, I got it down to $3.60/sf, but that was still $6,700 a month. It was too expensive. I had originally budgeted my monthly rent at $5,000 a month or something like $2.50/sf triple net for a 1600 sf space. I was going to hold off on this place and to make it my absolute last resort.

 

Property Three

Initially, I wasn’t super impressed, but this space really grew on me, and I eventually placed an offer. This property was listed as 2,650 sf, which was way too much space for me.  However, I realized that if I could split the space, I would be able to make great use of 1,900 sf of it. This is actually a pretty common practice. Just because a space is listed at a certain square footage doesn’t mean you are required to rent the whole space. Once again, everything is negotiable. With 1,900 sf, I would have enough rooms for 3 exam lanes, one huge diagnostics/minor procedure room, and an awesome dilating area. The bathroom was already ADA certified as well. This building was a little farther away from O’Connor, being 1.5 miles away. It was owned by a cardiologist, who used the only other office space in the building. Nearby was an MRI center and a neurologist. Although this place was farther from the hospital, it was less than a quarter mile away from 2 major freeway exits, and was also right off a major street with two large shopping malls. Definitely, a lot of traffic flowed through this area. Also, the more I thought about it, the less important I thought it was to be near other physicians. I knew who my target referral sources were, and they would be a niche group coming from all over the area, regardless of my location. Although it would be nice to have primary care practices next door referring me patients, they probably would not be my main referral source. The asking was $2.10/sf modified gross, where I would be responsible for only utilities and janitorial services. This place was going to need some tenant improvements.  This property was previously a contractor’s office, so it wasn’t really set up to function as a medical office. Only one lane and the diagnostics/minor procedure room had plumbing for sinks. The other 2 rooms were going to need plumbing installed. Thankfully, these rooms were near the bathroom, from which plumbing could be extended. Unfortunately, the floor was concrete, meaning that installing piping would require jackhammering, which would be more costly. Also, some rooms needed drywalling demolished and repartitioned. Since the owner was a single physician, most likely he wouldn’t have the funds to contribute to large tenant improvements. I would probably have to fork over some cash for the renovations.  Nevertheless, I really thought I could make a great floorplan with this space, and I wanted to move in!

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