2017-078 Clinic LeaseDate: October 27, 2017 Report No. 2017-078
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INFORMAL STAFF REPORT
TO MAYOR AND CITY COUNCIL
SUBJECT:
Provide the City Council with information regarding the status of the City’s lease with Medical
City Denton (formerly Denton Regional Medical Center) for the Employee Health Center
(“clinic”).
EXECUTIVE SUMMARY:
The City opened the clinic in December of 2011 in office space provided by Denton Regional
Medical Center (now Medical City Denton) in the professional building attached to the hospital.
Denton Regional Medical Center (DRMC) offered this space to the City at a cost of $1.00 per
year, all inclusive. In August of 2017, the City was notified by Medical City Denton (MCD) that
they could no longer offer this lease rate to the City and would need to begin charging the City a
“market” rate.
After initially proposing a $24.50 (all inclusive) per square foot rate, MCD settled on a lease rate
of $23.00 (all inclusive) per square foot. Based on the 2,832 leasable square footage of the clinic,
the annual lease rate will be $65,136.
BACKGROUND:
DRMC approached the City in 2011 when they learned we were going to open the clinic. They
offered the space that the clinic currently occupies for a rate of $1 per year. At that time, the City
had a strong relationship with DRMC through their now defunct Occupational Medicine
program, and through their involvement with our wellness activities, including the annual
Benefits & Wellness Fair. DRMC also recognized the patient referral potential from the clinic to
specialists and other ancillary services within the professional building and the hospital.
However, when Hospital Corporation of American (HCA) rebranded all of its North Texas
facilities, including DRMC, under the Medical City Healthcare name, they re-evaluated many of
their leasing arrangements. Ironically, because the clinic is a “referral source” of patients into the
HCA health system, they could no longer offer that rate to us, as it could be construed as an
inducement to steer care to HCA physicians and facilities.
DISCUSSION:
Once MCD agreed to the $23.00 per square foot rate, staff began the process of evaluating the
leased office space market to determine if the rate being offered was competitive. Staff reviewed
89 listings in Denton for office lease space through LoopNet, a mobile and online real estate
marketplace that connects tenants and investors to commercial real estate available for sale and
lease. Staff evaluated both medical office spaces and non-medical office spaces and eliminated
Date: October 27, 2017 Report No. 2017-078
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spaces that were much larger, and much smaller, than the current 2,832 square feet the clinic
occupies. Staff also eliminated spaces that were clearly industrial in nature.
Based on this filter, approximately 37 spaces, in 30 different facilities, were used for comparison
and are summarized in the attached spreadsheet. The spreadsheet further delineates the spaces by
the “Class” of the building they occupy.
Class A buildings are the ones that represent the highest quality buildings in their market. They
are generally the best looking buildings with the best construction and possess high quality
building infrastructure. Class A buildings also are well-located, have good access, and are
professionally managed. As a result, they attract the highest quality tenants and also command
the highest rent. Nineteen (19) of the facilities were identified as Class A buildings.
Class B buildings are the next notch down. Class B buildings are generally a little older but still
have good quality management and tenants. Value-added investors often target these buildings as
investments since well-located Class B buildings can be returned to their Class A glory through
renovation such as facade and common area improvements. Class B buildings should generally
not be functionally obsolete and should be well maintained. Ten (10) of the facilities were
identified as Class B buildings.
Finally, Class C buildings are the lowest classification of office buildings. These are older
buildings (usually more than 20 years old) that are located in less desirable areas and are in need
of extensive renovation. Architecturally, these buildings are the least desirable, and building
infrastructure and technology is outdated. As a result, Class C buildings have the lowest rental
rates, take the longest time to lease, and are often targeted as re-development opportunities.
Only one (1) of the facilities was identified as a Class C building.
Most lease rates are quoted on a “NNN” basis, or “Triple Net” which means in addition to the
base price per square foot, the tenant is responsible for paying all real estate taxes, building
insurance, and maintenance costs (the three "nets") on the property.
Other lease rates were quoted on a Modified Gross (MG) basis, which means that the tenant pays
the base rate at the lease’s inception, but in subsequent years, will pay the base rate plus a
proportional share of some of the other costs associated with the property, similar to the NNN
example.
The lease price quoted by MCD is all inclusive, so the City does not have any additional cost for
the NNN. Some listings did not show what the NNN, or the MG, cost would be. Based on the
NNN cost quoted by other facilities, the average appears to be $6.68 per square foot. For
comparison purposes, when a NNN rate, or an MG rate, was not available, $6 was used.
As indicated on the attached spreadsheet, the average cost per square foot for a Class A building
is $25.13. The Class B buildings averages $23.76 per square foot, while the lone Class C
building is $20.00 per square foot.
Date: October 27, 2017 Report No. 2017-078
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Most of these spaces would require some degree of remodel, refurbishment, or finish-out in order
for the space to meet our needs. These costs are variable and the amount of any Tenant
Improvement (TI) funds available from the property owner would depend on the length of the
lease and other factors.
Based on this information, it appears the $23.00 per square foot lease (inclusive) rate proposed
by MCD is competitive with the current Denton market for similar quality office space.
Staff also secured a cost estimate to move the furniture and equipment from the current clinic
space. A representative from Duryea Moving and Storage toured the clinic and provided an
estimate of $2,000 for the move.
MCD had requested that the City advise them of our intent to stay, or move out, by October 15,
2017. Due to the short time-frame, the decision was made to enter into a one-year lease to remain
in the current clinic location. As indicated previously, the annual lease rate would be $65,136
(2,832 leasable square feet x $23.00).
However, since staff identified several facilities that offered potential clinic lease spaces with
rates less than $23.00 per square foot (total lease rate whether NNN, MG or all inclusive), staff
will do further exploration of potential lease spaces before extending the lease with MCD beyond
one year.
CONCLUSION:
The City Manager will execute a one-year lease with a rate of $23.00 (all inclusive) per square
foot so that the clinic can remain in its current location. Staff will continue to evaluate and
explore other potential comparable, cost effective locations for the clinic and present Council
with a longer term lease recommendation no later than next April or May.
STAFF CONTACT:
Scott Payne, Risk Manager
349-7836
Scott.Payne@cit yofdenton.com
Attachment 1 – Potential Clinic Lease Space 2017
Date: October 27, 2017 Report No. 2017-078
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Base NNN/MG Total
Bent Oaks Court - 1206 Bent Oaks Court 2,160 $14.00 $6.00 $20.00 NNN
Wells Fargo Bldg #710 or #720 - 101 Locust 2,981 $25.00 $8.00 $33.00 MG Lease - parking issues in downtown
Provident Place - 2220 San Jacinto Blvd 2,300 $14.00 $8.00 $22.00 NNN
First United Bank Building - 1517 Centre Place - #300 3,020 $19.95 $0.00 $19.95 Full Service Lease
The Offices at Hinkle Park - 1801 Hinkle Street -Bldg 1809 #100 2,244 $19.95 $6.00 $25.95 MG - this would be the price in years 2 and 3
The Offices at Hinkle Park - 1801 Hinkle Street -Bldg 1805 #150 2,200 $19.95 $6.00 $25.95 MG - this would be the price in years 2 and 3
Mac Building - 2800 Shoreline Drive - 2nd Floor 2,400 $20.00 $6.00 $26.00 NNN
Mac Building - 2800 Shoreline Drive - 3rd Floor 3,321 $20.00 $6.00 $26.00 NNN - would need complete build out
Renaissance Medical Park - 2503 Scripture Street various $23.00 $6.50 $29.50 NNN - will remodel to meet needs
Office Space - 2401 W. Oak #101 2,400 $23.75 $6.00 $29.75 NNN
East McKinney Professional - 1317 E. McKinney #1317 2,644 $17.00 $6.00 $23.00 NNN - shell only; available 12/2017
East McKinney Professional - 1317 E. McKinney #1403 3,465 $17.00 $6.00 $23.00 NNN - shell only; available 12/2017
Denton Square Business Center - 723 S. I35 #234 2,600 $14.00 $5.50 $19.50 NNN
Denton Square Business Center - 723 S. I35 #236 2,834 $13.00 $5.50 $18.50 NNN
35 Centre - 2667 Scripture Street 2,900 $22.00 $6.00 $28.00 NNN - not available until January 2018
Scripture Doctor's Park - 1614 Scripture 2,753 $19.50 $6.00 $25.50 NNN
J. Kimzey Professional Building 3311 I-35 Frontage Road #100 2,526 $20.00 $6.00 $26.00 NNN
Colorado Medical - 3201 Colorado 2,327 $20.50 $6.00 $26.50 NNN
Med Park - 3321 Colorado Blvd 3,383 $19.00 $6.00 $25.00 NNN
Texas Health Resources - 2900 I35 - Building #1 3,012 $21.00 $9.00 $30.00 NNN
Texas Health Resources - 2900 I35 - Building #6 2,574 $21.75 $0.00 $21.75 Full Service Lease except janitorial
Colorado Medical Center - 3304 Colorado Blvd #205 2,281 $20.00 $6.00 $26.00 NNN
Denton Medical Plaza - 2665 Scripture Street 2,832 $29.19 $0.00 $29.19 Full Service Lease
North Texas Professional Building - 2817 S. Mayhill Road 2,832 $18.00 $5.00 $23.00 NNN
AVERAGE $19.65 $25.13
Sqft Base NNN/MG Total Notes
Office Building - 4201 I35 2200 - 6295 $16.50 $6.00 $22.50 MG - this would be the price in years 2 and 3
Eagle Wheeler Bldg - 733 Ft. Worth Drive 1,500 - 3,000 $16.00 $6.00 $22.00 MG - this would be the price in years 2 and 3
Denton Medical Office (THR) - 2900 I35 - Suite 303 2,719 $21.00 $8.00 $29.00 NNN
Denton Medical Office (THR) - 2900 I35 - Suite 403 3,012 $21.00 $8.00 $29.00 NNN
Scripture Professional Building - 1716 Scripture 2,650 - 7,950 $17.00 $5.50 $22.50 NNN - Would need build out
Renaissance Medical Park - 2509 Scripture Street #200 2,000 $15.00 $5.23 $20.23 NNN
Emery Medical Office Building - 2220 Emery Street 2,950 $20.00 $6.00 $26.00 NNN - framed out only; ready in 90 days
Offices at Wind River - 3201 Teasley Lane #401 2,329 $18.95 $6.00 $24.95 MG - this would be the price in years 2 and 3
Offices at Wind River - 3201 Teasley Lane #600 2,436 $18.95 $6.00 $24.95 MG - this would be the price in years 2 and 3
Denton Development Center - 909 N. Loop 288 - A Wing 3,200 $10.00 $6.00 $16.00 NNN
1208 Bent Oaks Court 3,000 $17.00 $6.00 $23.00 NNN
Texas Health Resources - 209 N. Bonnie Brae - Building #3 2,900 $19.00 $6.00 $25.00 NNN
AVERAGE $17.53 $23.76
Class C Sqft Base NNN/MG Total Notes
Office Property - 615 Dallas Drive 2,400 $14.00 $6.00 $20.00 NNN- would need complete remodel
Medical City - Denton - 3537 S. I35E - #317 2,832 $23.00 $0.00 $23.00 Full Service Lease - Current Location
NNN- Triple Net Lease
MG - Modified Gross Lease
Estimated NNN cost based on the below averages, rounded
down:
Average NNN for Class A - $6.69
Average NNN for Class B - $6.68
Notes
Class A
Class B
Class C
Property Sqft
Attachment 1