Should You Race For Space?

Should you race for space? Russ Banham of CFO Magazine thinks so. He very eloquently points out in his article entitled Space Race that “the weak commercial real estate market presents opportunities for significant savings.” He engages several experts in the commercial real estate industry to make seven specific recommendations for CFOs to consider when evaluating their corporation’s real estate. His recommendations are below along with my brokerage perspective.

1. Use a commercial real estate broker to leverage the market conditions to your advantage. Banham is quick to say that the information a broker provides is key to negotiating a favorable deal. There is some question however as to whether it makes the most sense to “go direct” when leasing and not use the broker to negotiate the deal. While landlords often tout this option as saving the tenant money because they “save the commission,” a landlord who is represented by a broker is paying the same fee whether the tenant is represented or not. The best thing a tenant can do is cover the bases by choosing a knowledgeable broker to represent their interests. When a broker familiar with market standard clauses isn’t used, landlords can incorporate clauses into leases that earn far more for the landlord than the tenant believes he is “saving” by not using one.
2. If you have three or fewer years remaining on your lease, consider renegotiating. Corporations in this position have landlords looking at the expiration of their lease term. While it’s true that landlords are often willing to take less rent and pay for tenant improvements in order to secure a longer term lease for themselves, tenants must be careful to put themselves in a position of strength when looking for these results. They don’t happen automatically. Good market data, the willingness to leave your current location and a broker who will leverage your position with the landlord against other possible locations for your business in the market all come together to get the best deal for your company. There are other parameters to consider as well.  Call me to discuss your situation and the likelihood of this option working for you.
3. Lock in a long term lease now because rates in most metropolitan cities are significantly down from their peak. Robert Merck, senior managing director and head of New York–based insurer MetLife’s real estate investment department points to this fact. It’s true that rates are down. In the Tri-Valley market here in California’s East Bay Area, Class A rents are down more than 60% from their highest peak and down 30% from what I consider a normalized market.
4. Audit your lease to ensure against “Common Area” gouging. Often leases are signed and filed away, never seeing the light of day until someone gets an inkling that it may be time to renew and goes searching for the document. In the meantime, the landlord has been charging for common area maintenance and may not have provided an accounting of the charges. If this is the case, your corporation could be paying more than the lease actually requires. The effect is compounded as the number of leases grows.  Hiring a professional to review the leases and landlord statements can save your company time and possibly a hefty sum of money as well. One way to keep tabs these costs and potentially avoid this type of overcharging in the future is to consider an industry tool called lease administration software. I will be writing a new post on this subject in the near future. If you’d like more information now, give me a call.
5. Use a tenant friendly measurement standard when agreeing to the square footage in your lease. There are many different standards for measuring and then charging for the amount of square footage covered by a real estate lease. In each of the Requests for Proposal issued on behalf of my clients, I require the tenant space to be measured in accordance with ANSI/BOMA Z65.1-1996, a tenant favorable standard published by the Building Owners and Managers Association. Paul Stevens, President of P. Stevens Associates who conducted the lease audit in Banham’s article recommends the same.
6. Consider evaluating your operating costs if the savings would make an important impact to your bottom line. The Space Race article points to two companies where this was the case. Town Sports International Holdings, a New York–based owner and operator of 160 health clubs along the East Coast, saved $200,000 in 2010 thanks to a thorough audit of its myriad leases. They may save up to $750,000 by the time all lease terms evaluated are finished. CFO, Terry Peterson of Deluxe Corp. ($1.3 billion annual revenues) has pulled out $10 million in annual expenses from his company’s facilities costs by managing their utilities better. In my opinion, these costs can be either found in savings well after a lease is signed or they can be avoided altogether by using a broker who creates a standard process and documentation for your company to follow that takes these issues into account beforehand. This proactive approach to your corporation’s commercial real estate leasing will save the time spent auditing after the fact and the money spent on unwarranted costs in the first place.
7. If you own the building you occupy, consider the implications of a sale/leaseback option. The jury is still out on this recommendation. While it is favorable to sell the building at a nice price and then lease it back from the new owner at a fraction of the cost, this off balance sheet solution may not be around for long. The Federal Accounting Standards Board (FASB) is considering new leasing reporting requirements as we speak. (See Tenant Intelligence Blog Post “Change in Accounting Rules Impacts Commercial Real Estate” for more information.) Leslie Seidman, FASB’s chairman, said late in January that FASB is targeting new standards for leasing by June 30, 2011 with them taking effect after 2013.

While the landscape of commercial real estate continues to change, there are proactive steps that you can take to protect your interests and drive savings and efficiencies within your corporation’s real estate holdings.