Dentists Gamble on Inflation with Triple Net Dental Leases

Dentists Gamble on Inflation with Triple Net Dental LeasesI’ve been telling you about how my father developed shopping centers in the 1970s and how inflation hurt landlords in the 1980s.

The new landlords learned lessons from their bankrupt predecessors, and redrafted their lease agreements to transfer inflation risks to their tenants through the NNN Lease (“triple net lease”).

When long-term tenant agreements of the 1970s began to expire in the 1990s, the landlords revised the previous gross lease agreements to their current standard NNN Lease form.

The triple net lease incorporates rising rents set to Consumer Price Index (CPI) increases and direct flow through of all operating costs to their tenants along with hefty admin fees.

This will make managing through the next inflationary period considerably more difficult for retailers and other tenants, just as it did for the early mall developers in the 1980’s.

Dental Tenants Now Take the Risk

During the economic boom years of the 2000s, the typical landlord form lease agreement evolved in terms of both their complexity and sophistication, with the bulk of new risks being borne by the tenant.

However, few – if any – dental tenants really understood or appreciated the potential inflationary risks they were being asked to absorb should the economy enter into another inflationary period. For many, it wasn’t even a business consideration, as most dentists had not operated a practice through the period of high inflation of the 1970s and early 1980s, and those that did have since retired.

Further, the dentists could only secure good locations through a highly charged competitive environment, encouraged by the landlords, and often manipulated by the brokerage community.

Brace Yourself for the Coming Storm

The result, in my view, is the creation of conditions now set for the “perfect inflationary storm.”

How many times has a dental tenant heard that this is the landlord’s standard form lease and is not subject to change or modification? In the mid-2000s, it was generally a “take it or leave it” proposition for the dentists, with easy money provided to them by bankers to build new practices, and since patient traffic was strong, in most regions, expansion and the growth of new dental offices was everywhere.

However, little consideration was given to incorporating clauses which would have prevented the offloading of inflationary risk from the landlords to the dentists. The focus was on performance and expanding the practice revenues.

Big Changes Since 2008

Dentists post-2008 were spared the greatest risk from inflation, not by having the type of lease agreements their contemporaries of the 1980s had, but rather, by the most dramatic slowdown in U.S. economic activity since the Great Depression of the 1930s.

Staggering base rents, driven by the brokerage community, combined with dramatic declines in consumer sales activity, were directly culpable for the high bankruptcy rates among America’s dental community. At present, many indicators suggest that a slow economic recovery may be underway.

However, there continues to be skepticism among many economists, who believe the current rebound is unsustainable, driven primarily by massive – but temporary – fiscal stimulus promoted by the Federal Reserve. In the past three years, for example, the Fed has injected more liquidity into the U.S. economy than in the previous 25 years, combined.1

As a result, the Fed’s easy money policies may pose greater threats to the long-term health of the U.S. economy than it solves.

You may want to look at it this way: If you factor in the additional liquidity injected by other major central banks, such as the Bank of Japan (BOJ), the European Central Bank (ECB), and the Reserve Bank of England, there has been more new capital introduced into the world economy since 2008, than in all of the previous years, combined.2

Too Much Money?

Never before in human history has so much money entered the world’s economy so quickly, and certainly never before in American history have we tripled the money supply by 300% in less than 4 years. Like a powerful drug promised to cure a potentially near fatal disease, there will be unpredictable and powerful side effects.

History has illustrated, and many economists tell us, that the downside effects of printing money are often substantial. Nobel Prize-winning economist Milton Friedman, for example, has said that “inflation is always and everywhere a monetary phenomenon.”3

Simply put, inflationary pressures can result as much from the loss of a currency’s purchasing power (cost-push inflation), as it can when the demand for goods and services is constrained by limited supplies (demand-pull inflation).3

By increasing the supply of dollars since 2008, without a corresponding rise in Gross Domestic Product (GDP), you will not be able to stave off inflation, inevitably leading to the loss of the dollar’s purchasing power. Indeed, since 2008, GDP has risen by about 3%, while the money supply has risen by over 300%.4

According to best-selling author and economist David Wiedemer, the real cause of inflation is “increasing money supply beyond what is needed to keep up with economic growth.”3

In the past, raising interest rates was generally seen as the best way to control inflation. However, this can no longer be as effective a deterrent as previously used because the GDP in the United States is 70% consumer-driven. The Fed can temporarily delay inflation with a slow and steady rise in interest rates and claim that some inflation is actually good for the economy but cannot prevent it or control it as easily as in the past.

This is setting up our economy for what could be an inflationary period of time longer and more extensive than ever experienced before. Next week, I’ll tell you more… and how dentists can safeguard their practices during inflationary times.

Bibliography1 St. Louis Federal Reserve2 International Monetary Fund3 Widermer, David (2010) “Aftershock”4 GDP Statistics Guide

About Lewis Gelmon

Lewis Gelmon is a professional lease negotiator, educator advocate for the dental community and lives in San Diego, CA, with over 22 years of experience in the field. He can be reached for questions or comments at or 760-479-9704.

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