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Rent Constants: A Fair Approach to Lease Rates for new Addiction Treatment Centers

Leaders of addiction treatment facilities have a choice when wanting to grow.  They can either buy a building, and fashion their program around that.  Or they can build a building customized to facilitate the treatment program.  The funds for the development come from a real estate developer and the bank.  The addiction treatment center executes a long-term lease with the developer to pay for the new building’s use.

The customized approach is called a build to suit (BTS) project, and there are lots of advantages to ensuring that programming is supported by the facility design, and not the other way around.

However, a build-to-suit (BTS) project can also put the addiction treatment finance team and its board in a challenging position. Any organization favors certainty and wants to know what its rent will be. But the rent in a BTS model will be based on the total costs, and that means determining the land costs, supplies, building features, etc. ahead of time. How will the leaders know if the new program is sustainable, if it doesn’t know the lease payments?

That is why we favor the use of the Rent Constant pricing approach to determine the initial annual rent. This relieves much of the inherent tension in a BTS lease. In this structure, we agree on a factor (Rent Constant or sometimes called a Lease Constant) to be multiplied by the total development cost of the project (Rental Base) to determine the initial annual rent. For example, if the Rent Constant is 9% and the Rental Base is $5,000,000, then the initial annual rent would be $450,000.

The Rent Constant is based on multiple factors including credit history, history of operations, accreditation review, long term interest rates, geographic market, type of building, lease term, annual rent escalations, and special lease provisions such as early termination or expansion rights. If these factors are all highly positive, the Rent Constant will be lower. A co-investment by the addiction treatment organization will in many cases reduce the Rent Constant. If the building is specialized, the lease term is short, the provider wants special provisions, or the new program is highly speculative, the Rent Constant will be higher.

The Rental Base will include all budgeted hard and soft costs for the development of the project including land, site improvements, design, building construction, and construction financing. The Rental Base will also include professional fees and contingencies.

The Rent Constant approach is the best approach in an inherently unstable world.  In our experience, it facilitates a collaborative approach where the developer and the provider work together to address pricing and design issues as much and as early as possible.

Whenever the developer and the prospective provider are working closely together, ultimately it cr eates the best solution for everyone.   We would love to build and fund your next building.  Contact us to make it happen!

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