The eight vital areas to include in your annual checkup:
Mark-to-Market Opportunities
Has the local market changed? Ask a real estate professional to compare prevailing office rents in your market and line that up against your current economics. If effective rents in your area have fallen, then it may be possible to restructure the lease so it’s closer to market rate or use it as a bargaining tool in negotiating other terms. Since market trends often vary significantly by submarket, be sure to ask for a breakdown of effective rents by submarket, which is often more instructive than a blended average.
Space Utilization
Since you signed your lease, has your firm grown or downsized? Take a look at how well you are using your space. Many law firms have embraced cost-saving measures such as outsourcing administrative services, pooling paralegal support in lower-cost locations and asking attorneys to accept smaller, more uniform office sizes. Some firms have implemented flex-space office design, moving lawyers who don’t need to be in the office five days a week into shared office space. As a law firm, a wide-open work space may not suit you as privacy needs will prevail. But many firms have practice areas, e.g. insurance defense litigation, that keep lawyers out of the office more than in it. For certain groups, hoteling may offer adequate accommodations at a reduced cost structure. Depending on market conditions, you could negotiate to give some space back to the landlord, sublease it or bring in an affiliated firm on favorable terms.
Image Fit
Do the office style and location still suit your business model? It might be time for a change if your people’s commuting patterns have changed, or if the primary neighborhoods where your client base and future clients are located have shifted. Are you located where your future talent wants to work? Are the amenities near your office competitive, and does the office project the right image? It might be worth exploring how well your office space supports your firm’s business objectives.
Pass-Through Expense Audit
How well does your lease protect you from unexpected operating expense increases? Landlords typically try to protect themselves from absorbing any costs they can pass along to tenants, from tax increases to building improvements. A tenant-favorable lease often includes exclusions from operating expenses, but very frequently a landlord is not observing those lease provisions when determining your share of operating expenses. A qualified auditor can determine if you are being charged fairly for pass-through expenses.
Rights and Prerogatives
Does your lease include the right to early termination, expansion or contraction? Even if you don’t foresee the need to expand or contract, often a landlord will find value in a tenant’s decision not to exercise a prerogative. These terms can serve as leverage in negotiating some other benefit that has greater value to your firm. Also, don’t assume that your rights are fixed as they are described in the lease; often, it’s possible to restructure the timing, size or economic terms of your rights, depending on overall dynamics of your building.
Identity and Signage
How visible is your law firm’s name on the building signage? If another tenant has recently vacated, signage on the building or on a street-side monument might become available. Often, this kind of visibility is tied to the percentage of the building you occupy. Unless you are leasing a full floor or more, it might make sense to consider moving to a smaller, well-located building if this type of visibility can enhance your firm’s prestige. Internal signage can be just as important, so review your lease terms to see if improvements can be made there.
Benchmarking
Do you know how your cost structure compares to your firm’s competitors’? The legal sector is increasingly competitive, and your real estate costs directly impact the rate structure you can offer to your clients. An experienced real estate broker can often give you surprisingly detailed and specific information about what competing law firms are paying.
Landlord Changes
Landlords often ask in office leases for the right to examine a tenant’s financials during a lease term, claiming it’s necessary because they want to "get ahead of any problems." Tenants rarely think, though, about scrutinizing their landlord’s financial position, which can change dramatically during the life of a lease. Keeping informed of your landlord’s financial posture may help you stay ahead of any issues that may negatively affect your building and its upkeep. Further, understanding if they are losing a major tenant in your building or if occupancy levels in their overall portfolio dip may help you gauge the importance of your tenancy to them. Gathering this information can shed light on the balance of power between you and your landlord, and staying up to date on this will help you know when your leverage is peaking.
Ultimately, your firm’s office lease can be a heavy burden or strategic tool. The regular practice of evaluating your lease can help make your firm leaner, more agile and better able to compete in an increasingly competitive legal market.