What Is Occupancy Cost, and How Do You Calculate It for a Practice?

Occupancy cost is the share of a practice's yearly collections that goes toward its building — rent or mortgage plus the facility costs that come with the space. You calculate it by dividing the practice's total annual facility cost by its total annual collections, then expressing the result as a percentage. For dental and medical practices, an occupancy cost in the range of 5 to 8 percent of collections is generally considered healthy.

The sections below define what counts as a facility cost, walk through the calculation with an example, explain why the percentage matters more than the raw dollar figure, and cover what it means when the number runs high.

What is occupancy cost?

Occupancy cost answers a simple question: of every dollar the practice collects, how many cents go toward the space it operates in?

It is expressed as a percentage rather than a dollar amount because a percentage lets you compare practices and buildings of different sizes on the same footing. A $90,000-a-year rent means one thing for a practice collecting $900,000 and something very different for a practice collecting $1.8 million. The percentage captures that difference; the raw number does not.

The term comes from commercial real estate, but for a practice owner it is best understood as a measure of whether the building is sized and priced to fit the business inside it.

What counts as a facility cost?

The numerator in the calculation — total annual facility cost — includes the costs of occupying the space, not the costs of running the practice. Depending on how the lease or ownership is structured, that generally means:

• Base rent (if leasing) or mortgage principal and interest (if owning)
• Property taxes
• Building insurance
• Utilities — electric, gas, water, and trash for the space
• Common area maintenance, where it applies
• Repairs and maintenance tied to the building itself — the structure and systems, not trade fixtures or medical and dental equipment

It does not include clinical supplies, staff, equipment, or other costs of operating the practice. The point is to isolate what the space costs, so it can be measured against what the practice earns.

How these costs reach the tenant varies by the type of lease and property. In some leases the tenant pays them directly; in others they arrive bundled as common area maintenance (CAM) in a condo, as pass-through charges in a triple net lease — often written "NNN," where the tenant pays property taxes, insurance, and maintenance on top of base rent — or built into a single full-service rent. The labels differ, but for the purpose of occupancy cost the test is the same: if it is a cost of occupying the space, it counts, wherever the lease puts it. Costs that arrive as "CAM" or "NNN" charges rather than "rent" are easy to leave out, and leaving them out understates the true number.

How do you calculate occupancy cost?

The formula is:

Occupancy cost = annual facility cost ÷ annual collections

Collections means the total revenue the practice actually brings in over the year — the money received, not billed.

As an example, take a practice collecting $900,000 a year. To sit in the healthy 5 to 8 percent range, its total annual facility cost would need to fall between $45,000 and $72,000 — that is 5 percent and 8 percent of $900,000. If that practice occupies a 3,000-square-foot building, the implied rent works out to roughly $15 to $24 per square foot per year, which supports a market-rate lease in most secondary markets.

Run your own numbers the same way: add up the year's facility costs, divide by the year's collections, and read the result as a percentage. Using two or three years of figures rather than a single year smooths out any unusual year and gives a truer picture.

Why does the percentage matter more than the dollar amount?

The dollar figure tells you what the building costs. The percentage tells you whether the practice can carry it.

A practice can comfortably support a higher rent if its collections are strong; the same rent can be a strain on a practice collecting less. That is why occupancy cost is the more useful measure when deciding how much building a practice can afford, what rent is sustainable, or whether a purchase makes sense at a given price. It ties the cost of the space directly to the practice's ability to pay for it.

It also matters at sale. When a practice changes hands, the rent the building carries is measured against the practice's collections — and an occupancy cost that sits in a healthy range tends to make the real estate easier to finance and less likely to complicate the transaction. A facility cost that is high relative to collections can become a point of negotiation.

What does it mean if occupancy cost is too high?

When occupancy cost climbs above the healthy band, it generally signals one of two things: the rent is higher than the practice can comfortably support, or the practice's collections have not kept pace with its facility cost. As the ratio rises past roughly 8 to 10 percent, it tends to draw more scrutiny — particularly from a lender or a buyer underwriting a purchase, who will look at whether the practice's revenue genuinely supports the building's cost.

A high number is not automatically a problem to be solved by cutting the rent. It is a flag to look at the whole picture together — the rent, the collections, the building's value, and the practice's direction — because those pieces interact. Rent that looks high against today's collections may be reasonable for a practice that is growing into the space, and a number that looks fine today can drift as collections change. The ratio is a starting point for that fuller look, not a verdict on its own.

What does it mean if occupancy cost is low?

A low occupancy cost — well below the healthy band — is not necessarily a sign of efficiency. For an owner who set their own rent years ago, or who never formally set it at all, a low number often just means the rent has drifted below market. That can quietly hold down what the building is worth, because a building's value is built on the rent it produces. It can also mean there is room to bring the rent toward market without straining the practice — useful to know before a lease is written or a building is sold or leased to a practice buyer.

The short version

Occupancy cost is annual facility cost divided by annual collections, read as a percentage, with 5 to 8 percent generally considered healthy for dental and medical practices. It matters because it ties the cost of the building to the practice's ability to pay for it — and because the same number that tells you whether a building is affordable today also shapes how the real estate is viewed when the practice eventually changes hands.

NextSite Consulting is an independent, fee-based real estate advisory firm for dental and medical practice owners. We help owners understand how their facility cost fits the practice and what it means for the building's value. We work on a flat-fee basis. This article is general information, not tax, legal, or financial advice.