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Don’t Leave Money on the Table

Hughes Marino New York
How many products or hours of service does your company sell to retain $1.00 in net income? Instead of selling more products or hours of service, think about ways to reduce occupancy costs. Major expenses that companies incur are payroll, research and development, insurance, marketing, and real estate. Payroll, insurance, and research and development are difficult to justify cutting. What about cutting real estate costs? Every dollar saved in occupancy costs drops right to the bottom line. It’s that simple. Interestingly enough, real estate is not a highly focused priority within most organizations. Companies that do not focus on occupancy costs usually leave large amounts of money on the table. Here are three strategies companies can deploy to ensure they extract the most out of every corporate real estate transaction:

1. Lease Renewal

There’s no question that lease renewals are the most profitable for every landlord. Each year real estate owners build into their financial models debt service, property taxes, operating costs, leasing commissions, tenant improvement costs, and vacancy. Should a tenant renew its lease, the amount of tenant improvement dollars the landlord will fund are typically far less when compared to a replacement tenant. In addition to less capital outlay for a renewing tenant, the landlord also has zero down time. The point of indifference for the landlord can be from 26% to 30% below their “asking” or market rental rate. For example, a 15,000 square foot office tenant averaging $2.60 per square foot per month in rent can be walking away from $600,000 in savings over a five year lease term. In order to capture most of these savings and come close to the landlord’s point of indifference when negotiating a lease renewal, tenants must have an effective strategy that produces leverage. No leverage, no savings.

2. Blend and Extend

Paying above market in rent? An early lease re-structure can be a prudent way to uncover substantial savings. But why would a landlord want to reduce a tenant’s rent during the middle of the lease term? If the landlord believes the tenant will vacate upon lease termination, the occupant has a fair shot. Before strategizing on the many different leverage tactics to deploy this cost savings strategy, take a look at the following criteria that must be met: 1) Less than ½ of the lease term must be remaining; 2) The greater the gap between a tenant’s current rent compared to market rates, the better; 3) Creditworthiness is king; 4) The tenant desires to stay in the building; and 5) The tenant is in need of expansion space. (The more criteria tenants can fulfill, the better chance at a rental reduction-not all criteria have to be met.) When implementing this strategy, it is also vital to understand the landlord’s long terms goals with the property. For example, real estate investment trusts (REIT) are often opposed to this tactic because they are based on quarterly earnings, which may be substantially affected through this structure.

3. Efficient Space

When evaluating different buildings, understand that it is unlikely to occupy the exact square footage one requires. Each building has different load factors, floor plates, common areas, angles, and architectural features. All of which impact the inefficiency of the space. Sure the floor layout may look nice, but is the occupant paying for wasted space? A company requiring 20,000 square feet of space, at $2.60 per square foot per month in rent will save $300,000 over a five year lease term by leasing 10% less space. Before spending hours in the car with a real estate professional touring buildings, spend the extra time up front space programming using general occupancy standards. Then, analyze each building’s floor plate and layout for efficiencies.

During tough times most businesses look to save money by cutting payroll, reducing marketing and slicing other costs to increase profitability. Take a step back and analyze the real estate for ways to have this liability boost profitability. After all, for most, it is the second or third largest fixed expense after payroll.

Scot Ginsburg is a senior vice president of Hughes Marino, an award-winning commercial real estate company specializing in tenant representation and building purchases with offices across the nation. Contact Scot at 1-844-662-6635 or scot.ginsburg@hughesmarino.com to learn more.

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