Cutting costs Featured

12:25pm EDT March 28, 2006
Your company’s facility costs are in line, and the status quo is working just fine, right?

Most facility costs are out of sight and out of mind. It is estimated that Corporate America forfeits multiple billions of dollars in unnecessary facility-related expenditures each year. Here are some simple rules that can dramatically reduce what is the second-largest expense for most companies.

  •  Know what’s at stake. By understanding how landlords allocate costs and by taking the right steps to minimize or eliminate these costs, companies can save big. In Orange County, the average office user spends approximately $7,000 per employee per year for office space. A well-managed real estate process led by a seasoned tenant specialist can easily save $2,000 per employee — and for companies with 50 employees or more, the savings can run well into the hundreds of thousands (sometimes millions) of dollars over the term of a lease.

  •  Know what the company is up against. The commercial real estate industry is a multitrillion-dollar industry run by highly sophisticated developers, pension fund managers, insurance companies and real estate investment trusts (REITs). There are literally hundreds of terms, conditions, factors and circumstances that impact corporate facility costs. To believe that a landlord is going to offer a tenant the most favorable lease terms and concessions without well-managed competition is simply a fantasy.

  •  Take the right steps. There are fundamental steps that every company should take in order to minimize or eliminate unnecessary costs, even if you intend to remain in your current facility when the lease expires.

    First, outline the company’s business goals and objectives. While not always possible, executives should do their best to realistically forecast potential growth in terms of employee count.

    Second, interview and retain the very best commercial real estate professional who specializes in representing tenants, not landlords. A qualified tenant representative brings dedicated advocacy to the negotiation and will save both time and money while securing concessions not otherwise realized through direct negotiations.

    Third, work with the representative to develop a real estate strategy that supports the company’s business needs over the next three to five years. Remember that there are strategies and extraordinary opportunities to reduce costs even if you remain in your current facility upon your lease expiration.

    Finally, establish a time line, space program and construction budget. Most tenant-focused real estate firms have in-house project managers who are masters at leading companies through this process.

  •  Use the “X” factor. Every company’s greatest weapon against paying more than necessary comes from the results achieved by only the most highly skilled tenant representatives. Remember that real estate representation is not a commodity. Much like the legal profession — where the choice of attorney will dramatically impact a client’s financial outcome — results achieved by selecting an extraordinary tenant specialist will contribute more to a company’s ability to maximize savings and realize landlord concessions than any other real estate-related decision you could make.

    Be sure your real estate specialist works with a company that does not represent landlords. He or she should have supreme ability, quantifiable results, years of experience and a passion for negotiating superior transactions on behalf of tenants.

    Also remember that brokerage fees are imbedded in the real estate transaction. Failure to access these fees often doubles the commission to the landlord and/or landlord’s broker.

  •  Be proactive, not reactive. Get started long in advance of the lease expiration, and hire the very best tenant representative you can find. Doing so should result in total savings from 10 percent to as much as 30 percent more than what would have otherwise been realized.

    Be objective and critical in your evaluations. Be sure your real estate advocate is focused on the less obvious lease terms where costs are or could be a factor and not merely on the obvious large-ticket items such as rental rates and tenant improvement allowances.

  •  Plan ahead. It is crucial to start the real estate planning process early if you want to maximize facility savings. Fortune 100 companies mandate early communication with their estate advisers because they know that doing so will keep them from paying hundreds of thousands and even millions more than necessary. It also provides for significantly greater options, should future growth be their objective.

    Starting the real estate planning process early also increases your tenant representative’s ability to structure and implement the right transaction while maximizing landlord concessions. Companies with 30 to 100 employees should start 12 to 18 months in advance, while companies with 100 employees or more should start talking at least 18 to 24 months in advance of their lease expiration.

KEN WARD is president and partner of Cresa Partners Orange County. Reach him at (949) 706-6600 or kward@cresapartners.com.