By Bill White
You spent months negotiating your office lease. Your broker (hopefully) put in blood, sweat, and tears to get you a great deal. Everyone has now signed on the dotted line, and now you can put the ship on autopilot and cruise through the term of your lease, right?
Not really. In this post I will share 5 reasons why it is important to review your lease regularly—at least once a year, and preferably more. As “Occupancy costs” (rent, rent related expenses, parking, etc…) are typically the 2nd largest expense on a company’s profit and loss, it is an item that needs to be reviewed regularly. Accordingly, I recommend establishing an ad-hoc committee comprised of your broker and key personnel within your company that meets regularly to evaluate the following:
Operating Expense Pass-throughs: A typical lease contains several expense items that are “passed through” to tenants such as real estate taxes, repairs and maintenance, and certain building overhead expenses for which a tenant is responsible for it’s pro-rata share. As operating expenses can make up as much as 50% of your rent (assuming a full service gross lease) these pass-throughs can significantly increase your actual monthly rent expense. It is critical to ensure that “non-qualified” expenses (or exclusions) are not being passed through errantly. For a more in-depth look at operating expense pass-throughs please see my previous blog entitled: “Operating Expenses: Mind Your P’s and Q’s.”
Changing Market Conditions: The market may have been over-heated when you entered into your lease, and now a few years later, the market has may have softened. A qualified broker is the best person to discuss your lease and your options under this scenario. Over the years, White Space Advisors has helped many clients take advantage of key strategies that have saved them thousands of dollars in rent during market downturns, without moving.
Changing Needs of your Firm/Company: It is important to assess the suitability of your office space regularly. Does it still meet your plans for growth, or has your business grown faster than expected? Has an unexpected downturn reduced your need for square footage? There are many things that can be done to address the changing needs of your firm. For example. A client of White Space Advisors once called and wanted to meet and discuss expanding their offices. After reviewing the situation, I recommended we meet with an architect to look into strategies to maximize the space they already had. During the 2 hour meeting that followed, we were able to make room for 15 additional employees by reconfiguring workstations, reducing the size of an underutilized conference room, and moving non-essential storage off-site. This approach saved my client hundreds of thousands of dollars (compared to expanding) over the remaining term of their lease.
Landlord’s Performance: Lease negotiations are oftentimes like courtship: Everyone is on their best behavior and many promises are made. It follows that if the lease negotiation period is like courtship, the first six months to a year of a new lease is like the honeymoon. Brimming with excitement about securing his new tenant (you) your landlord and his management team are responsive to all your needs and may even send you an occasional fruit basket! However, as the relationship continues, complacency can set it and things aren’t getting done with the same urgency as before. An annual review is a good time to take a look at how the promises of courtship are standing up a few years later.
Physical Space Considerations: The quality of a business’s physical office space can certainly impact the success of a business. Is the space suitable for success? Of course you would not knowingly sign a lease unless you, your broker, your space planner can all say a resounding “yes” to all these questions. However, you really cannot fully understand how the physical space affects your business until you have actually occupied the space for a while. Despite the best planning, tenants may realize that a space doesn’t work as well as they had anticipated. The remedy may not even involve moving, but in a space reconfiguration. It is much better to make an honest assessment and discuss your options with your broker if you find yourself in a space that does not optimize the success of your company.