Is Office Rent Killing Your Bottom Line? Tips for Negotiating a Better Lease
Next to payroll, the single largest item on a law firm’s monthly balance sheet is usually office rent. And now, even while the broader economy slows, there’s an unprecedented consolidation of commercial space ownership by an ever-smaller pool of landlords, along with an unceasing flipping of office buildings by many REITs. The result is drastically increased rents, operating expenses and parking costs. In this environment strong negotiation by law firm tenants is essential. Here are maxims to observe.
Develop a Facilities Plan
Understanding your facilities needs and whether your present space meets them is critical to framing your strategy. Consequently, every firm needs to have a plan detailing its current and foreseeable requirements at least 12 months in advance of its office lease expiring. At a minimum, the plan needs to address these areas:
▪ Size. Is the present facility equipped to accommodate the growth, or shrinkage, that the firm anticipates during the next lease term?
▪ Efficiency. Does the facility make good use of the space the firm is paying for? Or could it be reconfigured to lay out more efficiently?
▪ Budget. What sort of budget can the firm reasonably expect to devote to its facilities during the upcoming lease term? Is that budget reasonable in light of the current landlord’s demands and the available relocation options?
▪ Location. Could the firm get better space for the same money in other submarkets? Would moving cause commute problems or otherwise inconvenience the lawyers and staff? And here’s a big question: Would the firm be less marketable to clients if it moved to a different submarket or quality of building?
Put Time on Your Side
Lawyers, especially those who’ve -attained the management ranks, are generally skilled negotiators. Yet in dealing with landlords, many don’t fully leverage the power that the firm’s tenancy affords. The main stumbling block is failing to present a credible risk that if the landlord doesn’t acquiesce to the firm’s demands, the firm can—and will—take its rent money elsewhere.
Usually this is because firms don’t begin negotiations on potential relocation space far enough in advance. The process of finding and negotiating space, producing an acceptable lease document, obtaining construction bids and permits, building out to the firm’s specifications, wiring and cabling, and finally physically moving in can take upwards of nine months. Landlords are well aware of this. So to maximize leverage, begin negotiating with both current and prospective landlords 12 (or more) months before the expiration of your current lease. If you wait until just before it expires, the landlord will know that your back is against the wall time-wise and you’re hamstrung.
Select a Skilled Broker
The legal community often views commercial real estate brokers with skepticism. To be fair, much of that skepticism is deserved, given that brokers aren’t limited by the same conflict-of-interest rules as attorneys, double-dealing abounds, and many brokers appear more concerned with quickly closing deals than with negotiating the optimum terms for their clients. To select a reliable broker, check into credentials, training and experience. Ask whether the broker’s firm represents landlords in the area, since that presents a conflict of interest. Also, does the broker have experience working with other law firms? And is the broker currently working with other firms with space needs that might compete with your requirements? In addition, a good broker should agree to provide you with several essential negotiating tools:
▪ One of a broker’s fundamental functions is to survey the market and inform on relocation opportunities. Those availabilities provide an independently verifiable basis from which the firm can threaten to relocate if the existing landlord doesn’t negotiate in good faith.
▪ The broker should advise you about the conditions in your current and prospective submarkets, helping to determine whether a particular landlord’s demands are common or extraordinary.
▪ Maximizing leverage requires simultaneous negotiation with several prospective landlords. A good broker will streamline this by managing negotiations for each location, reporting to firm management with concise summaries and financial analyses that enable informed decisions. Of course, all lease negotiations must be conducted with the firm’s knowledge and consent. You should ensure that the broker’s agency agreement expressly delineates the scope of the broker’s authority.
Negotiate a Tenant-Friendly Lease
Today’s typical office lease is extremely complex, and as such interpretation of particular provisions is beyond the scope of this article. These, however, are most likely to affect facilities costs: operating expense inclusions and exclusions; Proposition 13 protection (rarely given); and subleasing and assignment rights. To ensure that these and other provisions are as cost-effective as possible, work closely with a broker, and where appropriate, seek outside legal counsel to ensure that each provision is defined in a “tenant-friendly” manner. That outcome, of course, will be far more likely if you took proper steps along the way to maximize your leverage in all negotiations with your landlord.
About the Author
Luke Raimondo is an attorney and broker with Travers Realty Corporation, where he specializes in finding and negotiating space for law firms of all sizes.