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 firstname.lastname@example.org.
According to Jay Freedman, a partner with the law firm of Newmeyer & Dillion, there are several ways business owners can protect themselves. Common options include general liability insurance, performance or surety bonds and indemnity agreements. Freedman says the key is to know which one is right for the particular business and situation. He also warns that many people sign indemnity agreements (which relieve one party of fault) without realizing it.
Smart Business spoke with Freedman about the importance of paying attention to details and how business owners and other parties can avoid facing costly risks.
What is risk transfer, and what are the general methods a business can use to transfer risk?
Risk transfer is simply a business taking whatever risk it may potentially face, such as a loss of profits caused by an equipment failure, and trying to transfer that risk to someone else. The most common options are first-party and third-party insurance, and there are indemnity agreements and defense agreements.
How does an indemnity/defense agreement work?
Indemnity agreements require one party to bear a risk that might normally be born by another party. A typical situation could be if you’re a commercial landlord and someone slips and falls on your property. As the owner, you can require the tenant to indemnify you for those accidents as a part of the lease.
They are fairly common in many instances and for various businesses, and they can be in the fine print or in the boilerplate on the back side of a standard purchase order. Business owners have to be aware that they exist and read documents carefully before signing and agreeing to them. Like anything else, the devil’s in the details.
There are also defense provisions, which mean not only would someone be required to indemnify another party, but they could be required to cover the cost of the defense as well if a lawsuit is filed. The indemnity obligation is typically after the fact, and is usually a reimbursement. The party that is entitled to indemnity seeks reimbursement for money already paid out. On the other hand, the defense provision is typically prospective. It acts from the beginning of the dispute, and if properly worded in the agreement, can require an immediate defense. So, the party entitled to the defense isn’t out-of-pocket at all.
What are the different types of indemnity agreements?
In California, there have been three types of indemnity agreements. Under a Type 1 agreement, our hypothetical commercial landlord, for example, could take part in whatever causes harm to a tenant or customer and can still receive indemnity. The landlord, although negligent, can still transfer risks.
Under a Type 2 agreement, the party seeking indemnity can be passively negligent. The landlord could fail to notice something which later causes harm and still receive indemnity.
Under a Type 3 agreement, if the landlord is negligent at all, actively or passively, the landlord is not entitled to any indemnity.
What are some factors courts will consider in these types of disputes?
The courts want to determine both parties’ intent at the time that the contract was signed. The Type 1, Type 2 and Type 3 classifications are generic terms used by the courts to label the indemnity provisions after they’ve determined the parties’ intent. The courts will look at the language of the agreement, the respective bargaining strengths of the parties, their business sophistication and whether or not the particular interpretation, such as a Type 1 versus a Type 3, was commercially reasonable when the contract was signed.
Nonetheless, California has a strong policy of holding people responsible for contracts they enter into, even if they haven’t read a particular provision. So if a business owner enters into an indemnity agreement without necessarily realizing it, he or she could be bound.
How can business owners protect themselves from facing risks?
First, they have to look at what their risks are. Different businesses have distinctive risks at all levels. They have to look at all the possible ways they can be affected by issues in and out of their control. Second, they should sit down and determine if they can transfer those risks to another party. Finally, they need to make sure that the contracts they’re signing have the right indemnity language to meet the business owner’s goals.
JAY FREEDMAN is a partner in the Newport Beach office of Newmeyer & Dillion and concentrates on complex construction and business litigation. Reach him at email@example.com or (949) 854-7000.