How to Minimize Occupancy Costs
Real Estate or the cost of office space is typically a companies second or third largest expenditure. Minimizing your occupancy costs drop straight to the bottom line. Here are twelve cost saving tips to consider before you start the process of deciding on your office location.
- Start the process early: The longer you have to evaluate options and structure the transaction is to the tenant’s benefit. I see tenants way too often, even after counseled otherwise, wait too long before they start the process. For the smallest tenants, you should allocate a minimum of six months, most tenants should start 12-18 months prior to lease expiration, and the largest corporate space users should begin evaluation 2 to 3 years before expiration of their current lease.
- Don’t lease more space than you need: Space requirements are not often static. What you have today may no longer be your optimal size. Before you ever evaluate any buildings either for relocation or renewal, you should go through a complete space programming exercise with an architect/space planner to identify your optimal space size and configuration. All square feet are not created equal from building to building. Loss factors for common areas and public spaces, bay depths and floor plate configurations can all impact how much rentable space you require from building to building. Each building should be evaluated with a base-line already established as your optimal size and layout.
- You have to bring competition into the dynamic of the negotiation: One mistake tenants often make, especially in renewals, is not creating aggressive competition from various buildings in the marketplace. Building owners who acknowledge they are in stiff competition for your tenancy will be the most aggressive. Savvy and experienced landlords also know on average tenants renew 70% of the time, so it is critical for your current landlord to perceive you can and will relocate, even if renewal is your primary objective. Landlords recognize with proper representation you will be thoroughly evaluating the marketplace. The commercial brokerage industry is a small community and building leasing agents talk to each other, without a competitive negotiation you will fail to achieve the best terms.
- Determine what are the most important concessions in the long run?: Of course the rental rate is important, but the whole concession package (i.e. build-out allowance, abated rent or parking, relocation / moving allowance, etc.) must be evaluated and factored into your financial decision, including the timing of cash flows. For start-ups or growing companies an escalating rent schedule with lower rent payments in the early term of the lease can be important for capital allocation.
- Pay careful attention to the construction costs and build-out allowances: Not paying careful attention to design issues as they relate to build-out costs, pricing space plans before signing a lease and failing to solicit competitive construction bids, is where many tenants leave money on the table.
- Pay careful attention to the operating expense escalation provision and cap operating expenses: A poorly negotiated operating expense and “pass-thru” provisions in the lease can cost you serious money over the term of the lease. Specific definitions of building operating expenses including exclusions, audit rights and if attainable, a cap on controllable operating expenses by the Landlord should be obtained.
- Give the renewal option its proper attention: Renewal options don’t always seem that important to tenants when signing a lease, there is often too much of an attitude of “I will worry about that when the time comes”. Paying special attention to the renewal option particularly the definition of fair market value, arbitration mechanisms, notice periods for exercising the option and holdover rent penalties can save a lot of headache and money.
- Compare options on an “apples to apples” basis: What appears on the surface as the best economic package is not always the case after a detailed evaluation of all cost factors. Comparing total occupancy costs on an “apples to apples basis” is a must to make the best financial decision.
- The sublease provision may not seem important now, but it could be later: Business conditions may dictate subletting a portion or all of your space. A poorly negotiated sublease provision can hamper the marketability of your space on a sublease basis.
- Build some flexibility into the lease if possible: Expansion, space reduction and cancellation options when attainable are critical for building flexibility into your lease agreement. Most lease agreements are long term (3-10) years, business conditions are rarely static, the ability to right size your lease or cancel all together can even in some cases save your business or prevent costly moves and inconvenient expansion scenarios.
- Plan for worst case or un-likely scenarios: Extended interruption of building services, building condemnation. It is important to mitigated your risk in the lease agreement for when these occurrences may arise.
- Retain qualified representation and utilize your own third party consultants not the Landlord’s: Negotiating directly with the Landlord’s agent, utilizing the building’s architect may seem like obvious mistakes. The Landlord’s agent has fiduciary responsibility to the Landlord. The Landlord’s architect is only designing your space for the Landlord’s particular building, and the Landlord’s contractor may not be the most competitive from a construction standpoint. Your own integrated team of qualified broker, architect and contractor should be assembled to assist you, a team that has your interests as the first priority.