If you play an integral role in your company’s real estate decisions, why delay the process when there is so much at stake? Why begin negotiations without clearly defined business objectives so that by the time due diligence is completed, leverage has diminished in relation to a foreseeable lease expiration date?
“Far too often, companies employ a reactive approach to their real estate needs because of the temptation to focus on day-to-day activities or because they find it challenging to identify the right service provider,” says Kevin Mitchell, a vice president at Cresa Partners LLC. “By being pro-active about your facility requirements and beginning the process early, you can ensure that your next lease operates as an asset rather than a liability at a reduced cost.”
Smart Business talked to Mitchell about leveraging your real estate decisions.
When making commercial real estate decisions, what is actually at stake?
A company’s real estate impacts its efficiency, productivity, flexibility, culture, image and ability to recruit and retain employees. To the extent that your business objectives drive your company’s real estate and the two are properly aligned, your lease is an asset. If, on the other hand, your business must adapt to your real estate, your lease is a liability.
Numerous steps can and should be taken, in advance of negotiations, to ensure that your next lease is an asset.
- Define your company’s culture.
- Engage an architect to help establish space standards and conduct a programmatic analysis of your space needs.
- Benchmark your space standards against the rest of your industry.
The savings associated with these exercises often dwarfs the savings associated with even a properly timed negotiation.
Consider an example. Based on your preliminary work with an architect, you determine that you can increase the productivity among a subset of employees by as much as 5 percent by restacking your space. It may cost $300 to $500 per employee to conduct a boxed move, but assuming an average annual salary of $40,000, this exercise and minimal investment can generate a benefit of $2,000 per employee.
What are the benefits of starting early?
Because of the impact that your real estate has on your company’s overall objectives, the decision-making process needs to be initiated prior to the negotiating period, so that you have a more specific understanding of what you need.
Once your business objectives are established and you understand how your real estate can impact them, negotiations can begin. In the context of the negotiation process, the benefit of starting early is leverage.
A good real estate decision requires time for internal investigation and to investigate the market. One of the most common mistakes is that the market due diligence phase is not started early enough. By the time a company is poised to make a decision, its leverage has been compromised and less favorable economic terms result.
In the context of a renewal, the landlord faces significant costs to re-let your space in the event that you move. If you renew your lease, the landlord avoids the costs associated with marketing downtime and a new-tenant improvement allowance. However, this cost reduction will not be reflected in your new lease unless you have maintained your leverage by starting the process early and keeping the threat of moving credible.
Starting early has other benefits. You have time to engage in other leverage-generating activities such as lease auditing. To the extent billings have been miscalculated in the past, there is a strong basis for concessions in the future. You can also use this time to increase competition by enticing additional landlords onto the landscape of your negotiations. When you are poised to strike early, your credibility in the marketplace is bolstered, perhaps enticing other landlords to submit unsolicited offers.
Finally, you can impose your leverage on a broader scope of issues. For example, when you have the ability to integrate the project/construction management side of your facility into the upfront negotiations, you can impose your leverage in the context of the work letter.
While it is easy to become focused on day-to-day tasks and often challenging to identify the right service provider, the decision to start early will have a real profound impact on your next lease.
KEVIN MITCHELL, Esq., is vice president for Cresa Partners LLC. Reach him at (949) 706-6656 or firstname.lastname@example.org.