Is Office Rent Killing Your lowest Line? A Guide to Minimizing Facilities Cost

Free Limited Power Of Attorney Form - Is Office Rent Killing Your lowest Line? A Guide to Minimizing Facilities Cost

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For law firms of all sizes, next to payroll, the singular largest item on the monthly equilibrium sheet is normally office rent. Even while the broader economy slows, an unprecedented consolidation of ownership of market space by an ever smaller pool of landlords and the unceasing 'flipping' of office buildings by many Reit's has resulted in drastically increased office rents, annual rent increases, operating expenses, and parking costs.

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In this environment many firms are feeling increasingly pinched by the cost of their office facilities. The most productive way to minimize and operate these costs is to adopt a thorough facilities strategy which identifies your firm's needs, maximizes negotiating leverage with your landlord, and results in a lease document with tenant friendly requisite terms. The following provides a brief framework for the law firm requisite or administrator seeking to minimize facilities costs.

A. First Step: invent a Facilities Plan
A common refrain among legal organizations of all sizes is that those expensed with development facilities decisions simply don't have the time to focus on the firm's office needs. Managing partners have law practices to run and office managers have a myriad of other menagerial functions to fulfill. However, devising and implementing a straightforward facilities plan 12-24 months before lease expiration can save most firms admittedly tens of thousands of dollars over a typical lease term.

There are a myriad of considerations that go in to a facilities plan. However, the key components that should all the time be included are:

1) Size: Is the gift premise equipped to accommodate the increase (or shrinkage) the firm anticipates during the next lease term?
2) Efficiency: Does our gift premise make good use of the space the firm is paying for? Could it be reconfigured to make best use of the ready space? Do the ready relocation options lay out efficiently?
3) Budget: What sort of budget does the firm reasonably expect to able to devote to facilities during the upcoming lease term? Is that budget reasonable in light of the current landlord's demands and the ready relocation options?
4) Location: Directly linked to budget is the issue of location. The cost of office space within a singular submarket varies widely depending on the exact location, date of construction, and prestige the assorted buildings. Could the firm get best space for the same money by inspecting other submarkets? Would sharp inconvenience staff? Will the firm be less marketable to clients if it moves to a different submarket or quality of building?

After considered inspecting these factors, the firm should draft a brief memorandum memorializing the plan. While the firm's needs may convert during the renewal/relocation process, the written plan will serve as a guide to remind the firm's administrators of thorough strategy, ensure that the partners share a common comprehension of strategy, and help the firm's broker effectively perform its goals.

B. Second Step: Simultaneous Lease Negotiations With any Landlords
Attorneys, especially those whom have attained the rank of managing partner, are generally skilled negotiators. Despite that skill, in negotiations with current/prospective landlords, many fail to fully leverage the power their tenancy affords, because they do not gift a credible risk that if the landlord does not acquiesce to the firm's demands, the firm will take its tenancy (and attendant income) elsewhere.

The significance of presenting a credible risk of flight cannot be underestimated. If even the most skilled negotiator were to enter arbitration without conducting preliminary research, propounding discovery, or reading the case file, he or she would have a very diminutive chance of resolving the dispute on favorable terms. If opposing counsel knew that this hypothetical adversary had not done its homework, success would be even more unlikely, because this unprepared litigant does not pose a credible threat to prevail on the merits of the fundamental dispute. Much like this unprepared litigant, the tenant who negotiates without presenting a credible threat of flight to its landlord fails to practice the full leverage its tenancy affords.

Obviously, in order to gift a credible threat of flight, the tenant must never assure the landlord that it is captive in its current location, or that it has its 'heart set' on a relocation site. In addition, the following two steps are advised:

1) Begin Negotiations 12 Months (or more) Before Expiration: Many firms which have not recently moved are surprised by the amount of time requisite to occupy relocation space. The process of finding favorable space, negotiating financial terms, producing an accepted lease document, obtaining construction bids and permits, construction out the space to the firm's specifications, cabling, and ultimately physically moving, can take upwards of nine months, even with reasonable diligence from all parties involved. Landlords know this - they are engaged with relocating tenants on a daily basis. Accordingly, when the tenant waits until 3 months (or less) before expiration to begin negotiating with their current and prospective landlords, from a negotiating perspective, they have hamstrung themselves. At the 3 month juncture, the firm's current landlord knows that if the tenant admittedly intends to move it will likely be forced into a precious holdover while its relocation space is built out, and the new landlord knows that each day it delays in negotiations makes the tenant's holdover situation more untenable. Accordingly, in order to maximize leverage, it is requisite that the legal tenant begin negotiations on relocation space far in strengthen of expiration of its existing lease.

2) Retain a Skilled Broker: market real estate brokers are often viewed with skepticism by the legal community. One common critique is that since attorneys negotiate for a living and have the legal touch requisite to read lease documents, there is very diminutive value added to the transaction by the involvement of brokers. To be fair, much of this skepticism is well deserved. Because brokers are not diminutive by the same rules pertaining to conflicts of interest as attorneys, duplicate dealing abounds, and many brokers appear more implicated with swiftly closing deals than tough negotiation on behalf of their clients. However, choosing a broker with the permissible touch and training can contribute any requisite negotiating tools. A good broker will:

i. Survey the Market: One of the fundamental functions a broker performs is to inspect the shop and fill in the firm on favorable relocation opportunities. A good broker will not simply print off vacancies from a database-he/she will independently verify their availability, and ensure that all spaces presented to the client are either presently mighty to the firm's needs or could be modified to fit the requirement. Even if the firm has no intention of relocating, this shop inspect is fundamental to sound lease negotiation because the availabilities the broker provides will give the firm a believable and independently verifiable basis from which it can threaten to relocate if the existing landlord does not negotiate in good faith.

ii. Advise on shop Conditions: While most attorneys are excellent negotiators, even the most skilled real estate attorney is normally not apprised of the intricacies of the local real estate market. A broker familiar with the shop will often be aware of vacancies and sublease opportunities that could work for the firm before they arrive on the market, and will be closely familiar with trends in the firm's submarket which may work on landlord decision making. Finally, a good broker can advise the firm on either singular lease terms (such as operating cost inclusions/exclusions) are customary within a singular market. This shop knowledge can be an requisite in forming a sound negotiating strategy.

iii. Save the Firm Time: Maximizing leverage requires simultaneous negotiation with any prospective landlords. Without the involvement of a broker, this negotiation process, when combined with the managing partner's everyday law practice, can prove untenable. A good broker will streamline the lease negotiation process by managing negotiations with both the tenant's current landlord and each relocation alternative, reporting back to the requisite with brief summaries and financial prognosis from which he/she can make informed decisions. Of policy all lease negotiations must be conducted with the firm's express knowledge and consent, and the firm is advised to ensure that the broker's agency agreement expressly delineates the scope of the broker's authority.

The foregoing begs the question-how does the law firm requisite opt a broker with the permissible skills? There are a myriad of considerations involved in this determination, but some of the questions that may be worth request are (1) Does the broker's firm laid out landlords in the area? (This presents a disagreement of interest), (2) Does the broker have touch working with other law firms? (3) Is the broker currently working with other firms with space needs that might compete with this requirement?

For most firms, the most prominent question to ask is "what value is this broker going to add to the transaction"? Unless the prospective broker is willing to truly inspect the shop and leverage the firm's tenancy in simultaneous negotiations with manifold prospective landlords, his/her involvement may be of diminutive utility.

C. Final Step Negotiate Advantageous Lease Terms:
Once the firm has come to an agreement in requisite to stay in its current location or superior and negotiated a relocation site, the parties must then negotiate a mutually accepted lease document. In today's market, the typical office lease is highly complex, and as such interpretation of singular provisions is necessarily beyond the scope of this article. However, those provisions which are most likely to work on a firm's facilities costs on an ongoing basis are as follows:

1) Operating cost Inclusions/Exclusions: In a common 'full service' lease, the tenant is obligated to pay its proportionate of any increased 'operating expenses' which occur after the 'base year' in which the lease commences. If a tenant signs a lease in 2008, the landlord spends on 'operating expenses' in that year, and in 2009 the landlord spends on those same expenses, at the end of 2009 the landlord provides a bill to the tenant for its proportionate share of the increase. Obviously, under this arrangement exactly what types of expenditures constitute 'operating expenses' which may be passed straight through to the tenant must be clearly defined in the lease document. Most tenants would not object to an increase in janitorial cost being passed through, but what about capital improvements? What about the litigation costs incurred by the landlord? The small firm tenant should work closely with its broker, and where applicable obtain outside legal counsel as to either a singular leases' operating cost inclusion and exclusion list is appropriate.

2) Proposition 13 Protection: Under the typical 'full service' lease, the tenant is also obligated to pay a proportionate share of any increases in asset tax incurred after the 'base year' in which the lease is signed. Pursuant to California's Proposition 13, market structures are reassessed each time they are sold, so given the dizzying pace with which market structures have been 'flipped' in new years, this pass-through provision is a source of great consternation for many tenants. Unfortunately, in most California markets, landlords have been highly inflexible in negotiating Prop 13 security for tenants. Nonetheless, this singular pass-through has the quality to drastically impact the tenant's lowest line, and merits faithful scrutiny.

3) Subleasing & Assignment: With a well concept out facilities plan, the hope is that the four walls the firm has negotiated will accommodate its needs throughout the lease term. However, due to unanticipated forces, firms may find themselves with excess space, or may need to strengthen beyond their landlord's quality to accommodate them. Excess space can be a prohibitive expense, and as such it is admittedly imperative that a law firm's lease have a strong sublease/assignment clause which (1) allows the tenant to sublease to any financially strong subtenant tenant with a similar use (2) requires that the landlord's consent to a proposed sublease not be 'unreasonably withheld', and (3) in the very least provides for a split of any profits the tenant receives as a corollary of the sublease.

There are obviously a myriad of other considerations that go into a typical office lease. However, these three provisions typically have the most direct impact on the tenant's lowest line, and as such guarantee extra consideration.

Many firms believe that they simply do not have the time to put together a facilities plan, negotiate months in advance, and considered inspect their lease document. However, consider the following hypothetical:

In early 2008, a typical fifteen attorney firm in a "class A" downtown Los Angeles office construction occupies 6,000 sq/ft of space. In the early 2008 market, straight through direct negotiations with its landlord any months before lease expiration, the firm could reasonably expect to negotiate a 5 year lease at .00 per quadrate foot (annualized), with 4% annual increases in rent.

In contrast, by putting a plan in place, sharp the right professionals, and considered negotiating the lease document, the firm can conservatively expect to shave one dollar off of the lease rate, negotiate an supplementary two months of free rent, and an supplementary in tenant improvements (depending on the landlord). In this hypothetical, over the policy of the five year lease term, having a plan would save the firm ,000 without even inspecting savings in operating expenses and other concessions. Assuming four partners, this equates to ,250 dollars in behalf per partner. inspecting the minimal attorney time commitment required to put a plan in place, this extra in-pocket behalf makes the significance of stepping back and focusing on your firm's facilities clear.

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