As companies return to the office, many execs are faced with the daunting task of determining what if any changes to make to their office attendance strategy:  

  1. What is our permanent remote work policy?
  2. How do we motivate employees to come into the office?
  3. Should we move to unassigned seating?
  4. Will we need to redesign for a more collaborative workplace?
  5. How should these decisions impact existing real estate obligations and projects?

Your initial reaction may not be the best.  Consider that according to PwC, over half of your staff prefer a relaxed remote work policy with office attendance only two days per week AND you will be competing for labor with firms that have a Hybrid Workforce Strategy that will both expand their labor pool and appeal to those that prefer remote.

More than half of the 106 CFO’s of firms over $50MM in the  latest FL Institute of CFO’s survey have either hired remote staff or are considering it:

This is smart because it builds flexibility and resiliency.  

It will also affect the design of the corporate office.  Office space historically has never quite been a commodity that could be occupied with indifference to layout, location or quality.  Think of the difference between a law firm and a call center as two examples of the extreme ends of a design spectrum.  

That being said, you could probably take any AmLaw firm HQ and place any other AmLaw firm in that space and they could make it work without much functional disadvantage.  However, in the middle of that design spectrum is a near equal mix of private offices or meeting rooms and open cubicle areas that could be easily adapted by financial, accounting, insurance, marketing, or other professional service firms.

That’s going to change.  There is no “One Size Fits All”.  

Like compound interest, the answers to each of those questions will build upon each other to create a unique office profile that will fit that particular company’s corporate identity and functional objectives.

It is possible to:

  • Have a remote work policy that maximizes both productivity and staff satisfaction.
  • Create an exciting workplace that staff enjoy and want to utilize.
  • Provide an open seating strategy that allows staff freedom to move around based on functional need.
  • Design areas that anticipate increased collaboration and encourage interaction.
  • Take action to integrate these strategies into existing offices and projects underway.

For those of you eying that 16% “Other” response, only 6% are not hiring remote.  The others generally qualified remote hiring based on compliance or tax issues and a few mentioned that they have retained existing staff that have now moved out of state.

If your firm wants to make the transition and you’d like to see the Hybrid Work Strategy framework that we use to walk companies through the critical considerations, just ping me at wb@avocatgroup.com.

If your business is industrial distribution, Amazon is either your biggest customer or your biggest competitor.  

If it’s the former, congratulations on having a great year in 2020.  If it’s the latter, you might feel like you’re playing hide and seek in the jungle with Navy Seal Team 6 using live ammo.  You could survive, but not without a very smart strategy. 

Distribution has just three cost categories:

  1. Real Estate
  2. Labor
  3. Transportation

We put Real Estate first because the decisions that you make there can impact the other two categories significantly.

First and foremost, you need to focus on facility efficiency to reduce labor costs.  

Rule #1:  Maximize the cube.  You rent space by the square foot and use it by the cubic foot.  

The cost of 30’ clear space, on average, runs only 8-9% more than 24’ clear space and you get 33% more cubic storage volume.  Amazon’s standard is either 36’ or 40’ clear, so they have done this math.  You had better do it too.

Rule #2:  Leverage fulfillment systems, conveyors, and robotics to reduce labor costs.  Amazon, Walmart, and the other large distributors are utilizing automated storage and retrieval systems (ASRS) that reduce labor costs by more than 50% and speed delivery by providing uninterrupted 24×365 processing.  You business likely can’t afford a Ferrari-equivalent system, but you better get off the bicycle and start considering a car if you want to keep up.

Rule #3:  Location, Location, Location.  One of the most overlooked opportunities for distribution businesses is to re-evaluate placement of legacy locations.  Smart geographic placement is not about where staff live, it is about where your customers live and both time and costs to reach them.  Autonomous trucking is going to turn this strategy upside down, because companies will no longer be limited by the 11 Hour Interstate Driving Rule.  Amazon is already anticipating this by rapidly focusing on last mile facilities in high population areas that can receive goods from these 24 hour continuous driving rigs and deliver in 1 or 2 hours.  Big news:  By the time your next 5 year lease ends, long distance autonomous trucks will be everywhere.  Will you?

The market is always looking for inefficient processes and opportunities to deliver the same goods or services at lower cost.  If you are providing these goods and services using best practices already, your competitors will look for other low hanging fruit first. Play defense with a Smart Facility Strategy.

Metrics Broken

Companies often tell us that their space use is 180/SQFT (or similar) per person.  Well it almost certainly is not.  And it was not before Covid, either, but their Space Utilization Metric is broken.

They may have laid out their space at 180/SQFT per seat, but their staff level is very likely something less than 100% capacity, and the staff’s utilization is certainly far less than 100% of 8-6 M-F availability.  Again, let’s presume all of our discussion is Post-Covid, whatever that might mean to your business.

Using the example above, let’s suppose the following:

  1. Space is laid out at 180 SQFT/seat
  2. Employees are 82% of full capacity for the seats available
  3. Utilization at any given time is 60% given staff at client sites, traveling, at lunch or other meetings, home sick or working remote.

Before you discount #3 as being too low, I’ll tell you that before Covid many large Fortune 500 companies who did this exercise found that utilization ran close to 50%.  What it will look like in the future, now that everyone knows how to work remotely, is to be determined.

Let’s do the math:  180 SQFT / .82 staff / .60 utilization = 365 SQFT per person

The actual number is often more than double what most execs expect.  Being a CFO, these numbers drive me a little bit crazy.  [As I write this, from the office, my company is currently at 3,364 SQFT per person.  Given, it is the week between Christmas and New Year, but it still makes me wince.]

So here’s how to fix it:  You need to monitor utilization.  There are a number of ways to do that with office proximity sensors, seat sensors, phone apps, and entry card readers.  I recommend anonymous entry/exit door sensors that give you a count of staff in the space at any given time.  Then look at peaks (Monday mid-morning) and valleys (Friday afternoon) and use a business day average to understand how much space you need for your next office lease.

Note:  Your next office lease does not necessarily need to start after your current lease expiration date.  Your landlord, given some incentive of course, might be motivated to tear up that existing lease in favor of a new one now.

 

In three separate incidents that I’ve witnessed, move out condition has become an important and major financial negotiation.  Two of the cases involved clients moving out of a property and debate over the “reasonable wear and tear” condition of the premises on vacating.  The other issue was over a proposed new lease with a rider describing the required condition that the space must be returned – in essence describing most of the preparation that a landlord would typically do to prepare a space for a new tenant.

The underlying issue here is not about the tenant’s treatment of the space, it is about the landlord’s increasing financial pressure to preserve precious cash.

In both of the “move out” circumstances above, the tenants planned and budgeted to:

  • remove all trash from the premises and leave broom clean
  • make sure that the heating, cooling, plumbing, and electrical were in safe and proper working order, and
  • properly repair and restore any unfinished construction left by the removal of their trade fixtures.

After doing so and vacating the premises, both received demand letters from the landlords to perform additional work such as: 

  • power wash warehouse floors and VCT tile,
  • paint walls that had been painted any color other than white,
  • remove improvements that were performed by the landlord for the tenant’s benefit prior to the tenant taking occupancy,
  • replace an HVAC unit that was in “poor condition” (although working), and
  • clean cobwebs from the joists of a 24′ clear warehouse

Notable is that both leases required maintaining the premises in good condition, “excepting reasonable wear and tear”.  In one circumstance the tenant was in the space for ten years, in the other eighteen – so these are not new buildings.  What is “reasonable wear and tear” after eighteen years?  While you’d think that a landlord would be happy to have had such a good paying tenant for such a long run and no vacancy, in this case the landlord is threatening legal action if the tenant doesn’t meet the landlord’s (undefined in the lease) opinion of “reasonable” wear and tear.

The third case is perhaps a pro-active landlord’s way of protecting themselves from such an issue, by creating an addendum that gets inserted as Exhibit D to a lease that describes similar conditions as those above including “Replace or restore any chipped or cracked Formica on cabinetry or countertops”.  At the end of a ten year lease?  You’ve got to be kidding, right?  Didn’t the tenant pay for that cabinetry with their improvement allowance?

The cases described here are not about the tenant damaging the property or not fulfilling reasonable obligations.  The issue is that some landlords are looking for every way to squeeze tenants, and money to simply freshen up and prepare a space for the next tenant is not a cost that they can pass through in operating expenses or amortize in the next tenant’s improvement allowance.  And, perhaps, it is also something that they can easily get passed over in the initial lease negotiations.

How to protect yourself?  Notify your landlord of your intended actions prior to vacating the space.  Do a walk through of the space with the property manager to note any damage or repairs required 30 days prior to vacating and make sure you each sign, date, and keep a copy.  On new leases, be very careful as to what you agree to regarding the return condition of the premises.  Companies are usually so focused on getting into a space that exiting conditions are not often a pressing concern.

That still may not be enough to protect you from an unethical or desperate landlord, although it will certainly help.

“We’ve proven we can operate with no footprint. That tells you an enormous amount about where people need to be physically.” – James Gorman, CEO, Morgan Stanley

——————-

So your firm has realized that it can work differently than in the past. What’s the right process to reduce your footprint? Here’s a plan to follow.

Less than 10% of the firms that we’ve polled believe they can operate with absolutely no office space, so likely you’ll still have an office presence, albeit a reduced one.

Since nobody is a post-Covid19 office space design expert, we’re going to go past the philosophical discussion of the future of office space, and jump into a pragmatic approach for executives who suspect they can now get by with less space. We’ll help you answer these questions:

  • How much less?
  • What kind of savings might we realize?
  • When can or should we do it?
  • How do we maintain culture, brand, and staff satisfaction?
  • What steps do we need to take to make it happen?

Remember this is post-Covid19. Don’t confuse social distancing and immediate precautions with eventual we-all-have-the-vaccine future requirements. Many of the large landlords and the brokerage firms that represent them are trying to contend that the reduced demand for space will be offset by distancing. Wrong. One requirement is a short term precaution, the other is long term and permanent.

To understand the process we use a framework known as E.S.C.A.P.E.

E = Evaluate

Since most businesses lease their space, we’ll presume an office lease, although the method is very similar for owned properties. Culture and political issues aside, there are three categories that you must consider to understand what is financially feasible. Start by reviewing:

  1. Lease Contract Obligations
  2. Space and Floor Plan
  3. Anticipated New Requirements

Let’s break it down:

Lease Contract Obligations

  • Term – Short or long term remaining?
  • Rate – Are you at or below market rate?
  • Language – Do you have sublease rights that are not overly restrictive? Any rights to terminate?

If less than 2 years, you’re probably best to either ride it out until expiration or renegotiate early with your existing landlord. If longer, you need an exit strategy. The two year timing is an average and will vary based on size and complexity of infrastructure.

To vacate long term space, the most obvious solution is to sublet all or part of the space. Subleases generally provide less flexibility than direct space with a landlord, so rates need to be discounted accordingly. Hopefully, you have rights to sublease that allow you to price it attractively, market it, and lease to obvious users such as neighboring tenants.

Space and Floor Plan

  • Condition – Is the space “move in ready” for another user?
  • Separability – Could you divide it easily into two or more spaces?
  • Demising Costs – Is dividing as simple as constructing a wall or do you have restroom, electrical, HVAC and fire code issues that need considered?
  • Alternate Users – Do you have any growing neighbors or related-company occupants who can take part or all of the space?

You’re trying to understand construction cost feasibility. A neighbor might simply open up a wall and capture part of your space, and related companies may not require formal demising to share space and could possibly assume the remaining lease.

New Business Requirements

  • Existing Space – Do you anticipate that you could operate out of part of the existing space comfortably?
  • Existing Building – Would relocating within the existing building be a reasonable option?

You likely don’t know yet exactly how much space you’ll ultimately need, and that’s OK. You just need a conceptual understanding to decide if keeping part of the space would be a good solution. If you physically can, it often is, due to minimized disruption. A relocation within the building allows you to renegotiate with your existing landlord, who has the ability to substitute a more suitable space immediately.

There are more than a dozen potential solutions, although six that are most common:

  • Divide and Sublease Excess
  • Sublease/Substitute and Relocate
  • Downsize Blend and Extend
  • Early Termination
  • Early Buyout and Relocate
  • Wait It Out and Relocate

Before you draw any conclusions, you need to make sure that you fully understand the impact that Work From Home will have on your business operations, consider the impact on company culture, and get both input and buy-in from your staff. Read about the next stage on how to Survey Your Staff in our upcoming post. #PostPandemicOffice

By Ed Harris
(Editors Note:  Ed Harris is VP of Commercial Tenant Services, a NYC-based auditing firm that specializes in corporate lease review. We hope you enjoy this guest article.)

Few areas hold as much impact on capital outlay as real estate and leasehold expenses. Ensuring that your company is not overpaying is integral to fiscal management.

  1. Significant Jumps in Operating Expenses / Additional Rent
    Performing a simple trend analysis of your year-to-year operating expense obligation is a must. And while inflationary and market forces generally create an escalating building operating expense profile, when you see a marked jump in expenses issued to you, a red flag should rise. Causes of significant jumps might include new and potentially lease impermissible capital projects, new expense categories not reflected in your base year, new contracts or vendor changes and/or related party issues, and newly increased or above standard services which are not reflected in your base year.
  2. Change in Property Ownership / Property Manager
    A change in property ownership or property management should always trigger a lease audit. Property management changes create a very real risk of affecting accounting category integrity which is integral to an apples-to-apples comparison to your base year level. Management fee levels and composition, related party vendors, and changing service levels are also common building operating expense issues when a building changing ownership or management. Another potential trap fall in a building transaction is the tenant estoppel which, if not carefully worded, has the potential to sign away rights or leverage. Finally, once a building changes hand, future audit finds and recoveries may become complicated should overcharges be identified in years under previous ownership.
  3. Building Undergoing Capital Improvements or Renovations
    If you are walking into your building and notice construction – audit your landlord. Renovations and capital projects may be subject to your lease operating expenses exclusions, and every project should be audited for permissibility under your lease. And while you are most likely obligated to reimburse the landlord for a true building operating cost, you probably are not obligated to reimburse your landlord for increasing the value of his/her building if it does not reduce building operating costs in the future. And if your building had undergone renovations and/or capital improvements in past and unaudited years, it may not be too late. Those costs were most likely amortized across future years, and there may still be an opportunity for avoid ongoing expenses if they prove to be impermissible per your lease exclusions.
  4. Your Lease is Commencing / Expiring
    Perhaps the most valuable times to have a lease audit performed are at the commencement and expiration of your lease. If you occupy under a base year lease, the valuation of your base year will have material impact on your leasehold expenses throughout the term of the lease. It is in your direct interest to both validate all charges in Year One, and to validate expense levels so as to not undervalue your base year. Likewise, lease audits should always be performed as a standard practice at any lease expiration. Not only might you lose rights to recoup any overcharges after vacating the premises (audit windows), you may lose significant leverages after your move. Lease audits and the potential uncovering of over- or mischarges may also have a material impact on any lease renewal negotiations and construction of lease amendment/renewal language.
  5. Sizable Shifts in Building Occupancy Levels
    Accounting for accurate building occupancy levels is integral to an accurate gross up methodology and can have enormous implications to your operating expenses obligation. This can be significantly magnified vis-à-vis fixed versus variable occupancy-level driven expenses should the vacancy rate in your building be sizable. And of course it directly benefits the fiscally conscious tenant to ensure that occupancy shifts are accurately reflected within a given expense period.
  6. No or Limited Backup Supplied to Annual Reconciliation Statements
    Just as you would not accept your credit card statements if they did not itemize your charges, accepting an annual reconciliation on face value is fiscally unwise. Yearend reconciliations can carry significant and lease term long financial impact – particularly if your lease terms include caps or index-driven escalators. And any failure to timely challenge a landlord’s computations and/or inclusions may forfeit your rights thereafter per potential audit windows as discussed above. Accepting a rudimentary reconciliation, even one broken down to expenses per billing category is to trust your company’s finances to an outside party with a vested interest in maximizing its profits. Whenever an annual reconciliation crosses your real estate department’s desk without sufficient back up to verify expenses and calculations, a lease audit should automatically be triggered.
  7. Building or Landlord is in Financial Straits
    While it might not always be obvious, it is in a tenant’s best interests to periodically inquire into a building and its owner’s financial wellbeing. These are difficult financial times, and few sectors have been hit as hard as commercial real estate. Commercial Tenant Services (CTS) has uncovered multiple examples of landlords in difficult financial straits materially overcharging their tenants. And while we would never suggest that such a situation directly underlies the overcharge in any specific example, the coinciding of the two – a landlord in financial distress and overcharges to its tenants – can be a recurring theme.

It is important to remember that auditing your landlord issued expenses is your right. It is sound fiscal practice and required compliance protocol in many of the most efficiently run companies in the North American markets. Lease audit has become commonplace, and chances are your landlord has been audited by its tenants many times before your inquiry. Nowadays, landlords expect to be lease audited and have generally already prepared for your call.

Edward Harris is the co-founder of Commercial Tenant Services and has over twenty-five years of real estate finance and lease audit experience. Mr. Harris holds degrees in physics and engineering from Columbia University, and an MBA joint degree in Real Estate Finance and Operations Research from the Graduate School of Business at Columbia University.

The role of office space to accomplish daily work has changed forever.  That is one thing of which we can be certain. It is undeniable that for most companies, we have learned through field testing that staff can work remotely for some period of time with no loss in productivity and remote work can offer attractive personal benefits to the staff.

Return on Investment (ROI) is a measurement of the value that is achieved from the results of any investment. It is most often calculated based on a Cash Return / Cash Investment formula, although there are other objectives of investments such as goals for sustainability, staff satisfaction and retention, diversity, community service and goodwill.

Office space will play an important role for the vast majority of many companies for years to come. There is no denying that corporate offices provide advantages besides simply housing staff: culture, brand statement, identity. They are also a necessity for staff that do not have good work from home settings, such as those with small children at home or inferior connectivity.  It just probably will not continue to have the same “everyone in the office from 9 to 5 Monday – Friday” role that has become a rote habit for most of us.

Check out this chart from a poll of over 100 CFO’s from companies with greater than $50 Million in annual revenue. Approximately 75% said that going forward, staff will likely be working from home at least one day per week. Just under 10% said that staff can WFH 5 days/week.

 

Office space is an asset, a tool that a company can use to achieve objectives. Imagine seats in an office used the way an airline utilizes airplanes. A plane provides the highest ROI when it is in continual use and fully occupied. If the planes on that airline’s daily route are consistently only half full, they will likely not provide enough ROI, especially as compared to full flights operated by competitors. The airline needs to reduce the amount of flights flying that route, and that will reduce the number of airplanes that it needs.

So it is with office space. If the seats in the office are consistently half full, they will not provide the ROI that they had in the past, especially as compared to more efficient offices operated by competitors.

It is the CFO’s job to maximize ROI. The solution is to rethink how the company uses office space. It is a complex process, although there is a simple methodology to get it done. We’ll discuss it in our next post: Evaluating Your Future Office

In case you missed it, the previous post was: Where Do We Go From Here?

#PostPandemicOffice

We want to hear from you: How will Work From Home change how your firm uses office space? 

 

There was a time when some people believed that it was physically impossible to run a mile in less than four minutes. Not just difficult, impossible.  After Roger Bannister did it, within a year, three runners broke the four-minute barrier in a single race. Since then, more than a thousand runners have conquered a barrier that had once been considered impossible.

Likewise, many companies thought they could never have their people operate from home, let alone use “hoteling” and not have a fixed and expensive dedicated place such as private offices for staff to work and be productive.  It would be impossible.

If the lightbulb hasn’t quite come on just yet, in just a very short time, most will realize that is just not true.  They will find productivity and management work-arounds. Those who have not initiated a video conference before will learn how quickly.  Some will acquire better monitors or scanners for home use. Nearly every office worker who is able to work remote will enjoy the immediate benefits of “no commute”.  I doubt if anyone will question the ability to operate this way again. And office space requirements are going to change forever.   

Especially if this quarantine lasts for many months, as it very well might, working from home will actually become a habit and the norm rather than the exception.

Long term, some businesses will realize that they can operate without any physical offices.  Most, I think at least until the older generation retires, will simply have a “place” where people can go in to have meetings and collaborate occasionally, and for those with small kids or inefficient work-from-home setups to go.

This may seem an unusual view from someone who works for a company that assists hundreds of corporate users to lease or buy office space.  However, we realized long ago that our business is not to lease as much office space as possible. That belongs to companies that represent building owners who have space to lease.  Our business is “Workplace Strategy” and is generally about helping firms to lease the least amount of space that will most effectively accommodate their business functions.

We also know from having gone through a half dozen or more economic downturns and/or office market collapses that whatever real estate a business had prior to the “event” is probably not the real estate that they will need immediately after it.  Some will need more, most will need less, and almost all of them will find improved efficiency in a redesign of how they currently use space.

It is well known that the average office square footage used per staff member has been shrinking  for almost two decades. It is why almost every urban and suburban office area has experienced parking shortages.  The densification of office space plans further accelerated after the last market crash of 2007 as companies looked to minimize real estate expenses.

It is about to happen again.  The upheaval of the economic system will cause an overall reduced demand for space.  But more significantly, the normalization of productivity via remote work will have an even greater long-term impact.  We won’t all wonder if we can operate remote effectively, we’ll know that we can from experience.  

In the same way that you don’t expect your local Starbucks to have a table reserved 24/7/365 for your exclusive use, even if you happen to frequent it every day, many workers will opt to work from home more often so will not require or expect a particular office or even a desk to be available 24/7/365 for their occasional use.

Will the commercial office market collapse?  Let’s put that in perspective: Any collapse in demand and rates will be temporary and part of a recurring cycle.  Economic downturns reduce demand for space, and this time the market will feel a double-whammy as work-from-home becomes a standard operating procedure for nearly everyone.  It is a little early to make predictions with certainty but, if history can be relied upon, commercial office market rate trends will generally follow the stock market with a 12-18 month lag.

Certainly there will be an old school mentality among some workers who will not be persuaded.  However many more will likely not only adopt but welcome a new work methodology. Companies will still want, at least for now, a private place for their staff to work and collaborate and even occasionally meet with clients.

But how companies use office space  is never going to be quite the same again.

 

Your company signed a lease for office or perhaps warehouse space a few years ago and you’re now somewhere in the middle of the term.  You can relax for a few more years, right? Wrong. Not if you want to make sure that you are staying ahead of the game. Here are three things that you should do right now:

 

  • Know the Market – Where are market terms relative to your current rate and terms?  Find out availability and current rates for both your existing building and competitive alternate spaces.
  • Why this Matters:  You want to be proactive and informed should you need to either expand or contract.  You might discover the opportunity to renegotiate now for either more or less space, or otherwise improve your terms as an early incentive from the Landlord for you to renew.  And you won’t be surprised when lease renewal or relocation time comes along.

 

  • Audit your Current Lease – Are your negotiated Operating Expense exclusions or caps on increases being correctly calculated?  Are you paying the correct proportionate share of expenses? Your lease is likely a complex 40 pages or more and there is not a word there by mistake – it is all there to protect the Landlord.  
  • Why this Matters:  Don’t rely on the Landlord’s bookkeeper to apply your negotiated terms or assure that you are not being overcharged.  Now is also the time to consider how your terms compare to current market terms. 

 

  • Reassess your Requirements – Is your space as efficient as it could be? Know how your neighbors and industry peers compare and are building out their space.  See how strategies like hoteling or coworking layouts might work for you.
  • Why this Matters:  You need to understand how much you might save or better serve your objectives with an ideal layout. Most companies use space differently now that they did 5 years ago.  Attracting workers and leveraging their talents often requires more collaboration, requires less admin, filing, and library area, and replaces drywall with glass partitions to allow more light.  Now is the time to start considering how your space could be better used in the future and start discussing with your staff.

Avoid negative surprises at the end of your lease, or discover that you’ve been incorrectly charged for years when it might be more difficult to correct or collect.

You don’t wait until you are ill to go to the doctor for a checkup (hopefully).  Don’t wait until your lease expiration is upon you to do a Lease Checkup. Stay informed and on top of market terms.

 

The City of London realized, shortly after WWII that they would need a new airport, now known as Heathrow.   The job of determining the location was entrusted to Alfred Critchley, a successful businessman.

Consider the many criteria that must be considered when choosing the location for a major airport: Transportation access, proximity to the population, geotechnical suitability, environmental impact, utility infrastructure, land acquisition costs, many others. Read more

.

Almost all options are written with the assumption that rates will climb forever upwards.  That just doesn’t always happen, and even when it does rents may not keep the steady pace of the 3% (or whatever) specified increase compounded over the lease term.  Some options are literally not worth the paper they we’re written on.  However, there is another reason why exercising an option may not be your best strategy.

Here’s why: Read more

 

 

One of the great embarrassments to the FL Economic Development folks, who try to lure businesses to relocate to sunny Florida, is that we are the only state to apply sales tax to commercial real estate leases.  (Note that some other states have excise or gross receipts tax that may count revenue from leases, but no others have a specific sales tax.) 

Fortunately, there is a method for businesses to get a 100% absolute dollar for dollar tax credit:  Simply make a charitable donation to the FL Tax Credit Scholarship program. Companies can set up a monthly contribution that is equal to the tax (5.7% of commercial rents including OpEx paid directly to the Landlord).  These are collected by a qualified administrator which you can access from this link: Step Up for Students

It’s a simple concept, with a powerful impact:  Each $125,000 in annual lease obligation produces a sales tax obligation of $7,125 – enough to fund one full scholarship for a low-income child.

So while there is no real option to avoid the expenditure, it is a win-win positive charitable impact by directing the tax  toward K-12 private school tuition for low income kids. It also helps your firm to make a positive impact on the local community.  And who knows? The kids you educate today just might be your future workforce.

Step Up for Students is the Florida Institute of CFO’s (fiCFO) Statewide Charity of Choice and they administer the program. They’ll also help to educate your landlord(s) to make the setup as easy as possible. The process is really quite easy.  Here’s the link to get started.

The state imposes a cap on the statewide contributions, so the earlier that you register your intent, the better your chances of being approved.  You can stop or back out of future contributions at any time. It is a no-risk, no-cost way to benefit under-privileged kids and make a positive impact on your local community.  Go do some good.

 

If you expect to get a fair and competitive rental rate and terms on your renewal, you need to start early and have a process.

Your Landlord is a professional. They probably have also hired an expensive real estate leasing company and have a $500/hour commercial real estate attorney. This is serious business.

Even if you have what is considered a small lease for a short 3 year term, you are with near certainty making a 6 figure business obligation. If you have 50+ employees, you’re more likely to make a 7 figure obligation and perhaps larger. You’d better take it as seriously as if your company was involved in a lawsuit of that size.

The Landlord’s asset manager gets his/her bonus based on how much they increase the revenue on your property. The highly paid professionals on their side have to justify their fees. They all work on several hundred leases each year. They are smart professionals.

Don’t expect to do this once every 3 or 5 years and outwit them. Your only chance for success is to create market competition. Accept that you are not a better negotiator than them, but the market is a better negotiator. If you can get other landlords to bid for the future income stream offered by your firm, that market force will apply downward pressure on your rent and improve the other terms.

Let’s suppose that you’ve decided that you don’t need professional representation, or at least have not made a final decision yet, your first and most likely choice is a simple lease renewal, and there is nothing too complex happening such as expansion, downsizing or major reconfiguration.

Before you get started, pause a moment to take in the big picture and assess where you stand. If you are planning to renew, here’s the likely situation: Your existing space is not perfect, but it works for you just fine. You, or your boss, decided “It would cost us a fortune to move” and lacking any other compelling reason, you’ve already decided to renew. You’ve not received a proposal from your landlord, but assuming they are “reasonable”, renewal is a forgone conclusion.

Regarding that thought above, “It would cost us a fortune to move”? A few points:

  • It probably costs a lot less than you think. The physical move is approximately $.50/SQFT + $400 seat for cabling + furniture assembly if you have cubicles + minor IT and phone reprogramming. And a new landlord will, in almost every market in North America, provide a move allowance or free rent that will more than cover that cost.
  • However much it will cost you, it will almost certainly cost your landlord a lot more. Vacancy, marketing, completely rebuilding the space for a new tenant, lost rents while the space is under construction, and free rent as a concession to the new tenant to entice their move equals a very big number.
  • You’re doing your landlord a very big favor by staying. In fact, between 75% and 80% of all tenants renew their leases. So before they even have a conversation with you, they know that the odds are that you’ll renew. Imagine going to Vegas and knowing that you’ll win 4 of every 5 hands of blackjack.

Now imagine that the odds are reversed. The landlord is making a proposal to a company considering 5 possible locations. Their odds are now 20% rather than 80%.

Not so great for them and here is why: A commercial building is not worth it’s replacement cost without a tenant. When they sell, the building is valued on the income stream. And here is a small but very important consideration, so please excuse the all caps.

YOU CONTROL THE INCOME STREAM. YOUR BUSINESS IS THE INCOME STREAM.

You’ve got a lot more power than you probably realize. I know that it seems like the landlord is big and powerful, and that certainly is a nice big building that they own, but you can bet that the bank will come and take it away from them if they don’t keep it full of tenants just like you who pay the mortgage with those income streams. A building is, generally, a commodity. You don’t have to advertise to find people who will accept your rent money, but they have to advertise their space for rent. Think about that.

captive tenant syndrome

In a recent post, Newtons First Law, we discussed how the “house odds” favor landlords since the overwhelming majority of tenants renew their leases.  Why?

Because:

  • It is a hassle to move
  • Evaluating options would require time and effort
  • A move would cause disruption to already stretched staff resources
  • It is expensive to move

Read more

 

 

One of the easiest and most effective ways for a corporation to keep real estate costs low is to regularly perform Market Rate Audits on their leased locations.  Often many companies get caught up in reactionary tasks such as simply handling leases as they come up for expiration, so they never get ahead of the curve with a proactive approach. Read more

commercial lease commencement dates

 

 

A typical commercial office or industrial lease states something to the effect that the “The Commencement Date of the Lease shall be the later of X date or the date that the Landlord delivers the Premises to the Tenant.”  (Note:  If it says the “earlier of X date ….”, your landlord is really giving you a raw deal. Do not ever allow it.)

This Commencement Date language protects you in case the Landlord is late in completing construction and you don’t get possession when planned.  Right?  Wrong.  Here’s why: Read more

Mick Jagger, Net Present Value, and the new FASB IFRS Lease Accounting Rules

 

 

I took this photo of Mick Jagger when I was a photojournalism major at the University of South Florida. It made the cover of a small time music magazine, and I had visions of eventually getting my work on the cover of Rolling Stone. Just like the song.

Around the same time, I took an elective real estate course and showed the photo to my professor. The unimpressed professor said, “If your photos are great, your photojournalism degree won’t matter. And if your photos are bad, your photojournalism degree won’t matter. Why don’t you change it to a finance degree in case the photos don’t work out?” Read more

 

Let’s consider the corporate headquarters of a fast growth service business. Suppose that 1) they have a preference for keeping everyone together in one contiguous space, 2) they desire to strategically minimize cost and risk, and 3) growth rate is a variable based on many factors. What is the smart way to scale facilities? Read more

Driving Business Growth using Smart Real Estate StrategyIf you have a growing service business, you probably used to shop for office space by comparing rental rates. The lowest cost space, of comparable class alternatives, was often the best choice. That’s no longer the case.

The cost of labor, including attracting, hiring, compensating and retaining staff is typically between 8 and 12 times the cost of the real estate that houses that staff. So while you certainly don’t want to overpay, in the grand scheme the cost of the real estate is just a fraction of the cost of labor, so perfect placement to attract and retain that talent is far more critical than rate. Read more

With the exponential rise in online sales over the past few years, and an expected additional increase of 54% by 2020 according to Forrester, retailers as a category are hurting. A June 2017 article in the L.A. Times predicted that up to 25% of U.S. malls will close in the next five years.

It is not that people are buying less, it’s that Amazon (mostly) and others are selling more product directly from a warehouse. The game changer that is making this possible is speed. Today’s consumers value speed to such a degree that many are willing to pay in advance for it: take Amazon Prime as an example, where $99 a year buys you a year’s worth of free two-day shipping upgrades on purchases. Read more

The Eight P&L Impacts of a Corporate Lease

 

 

On many CFO and financial executive’s Urgent Issues or Focus List, real estate often doesn’t make the top ten. Why? I think in part it is because the impact of a real estate decision is spread over many categories of the Profit & Loss Statement. (I won’t get into FASB ASC 842 even though it is one of my favorite topics — for now anyway, keeping watching this space for future posts) Read more

How to Screw Up an Acquisition

 

 

Acquisitions often focus on just a handful of items: synergy, talent, perhaps geographic coverage and/or technology, and revenue of course. The investment bankers and attorneys that orchestrate the deal generally do a great job of ferreting out the business issues that need resolved. Except for the real estate. Read more

 

When choosing professional services, there exists an old adage that the largest providers are the safe bets. “Nobody ever got fired for hiring IBM” was the well known saying implying that a large company offered at least the reasonable perception of reduced risk over smaller firms. In regards to technology consulting, those advantages may have been real or simply perceived. When choosing commercial real estate advisors however, often the risk increases significantly as the size of the provider firm increases.

Read more

Most commercial office leases contain a provision that requires the tenant to promptly return an estopple upon request.  What exactly does this bit of legal jargon mean?

It’s actually pretty simple: an estoppel is a common legal document that serves to 1) confirm various aspects of a lease agreement and to ensure that important documents and facts are accurate, 2) affirm that the landlord has met all of his or her obligations and 3) confirm that there are no additional addenda or other modifications to the terms. Read more

FASB-3-1

It seems like every accounting, real estate, and asset tracking software firm has published an article on the new FASB Lease Accounting Standards.  I’ve noticed that they all tend to talk in generalities about the actual mechanics, and none that I’ve found seem to offer suggestions from a corporate user perspective aside from “Get ready!”. Read more

 

When companies acquire or merge with other competing or complementary firms, real estate is, as a part of the transaction, generally a small overall concern. However, we frequently see major risk being absorbed by the acquiring firm with potential for a very negative surprise down the road. Read more

real estate timing

In honor of Back to the Future, let’s talk time travel in commercial lease negotiations…because business decision makers often need it. Many companies wish they could go back and start things sooner or change that one clause in the lease document that they overlooked in haste. Who would have thought that a holdover provision would prove so important in a simple lease renewal? Why does the landlord take so darn long to respond to our counter offers? Maybe we should have just bought a building or built to suit. Unfortunately, options are drying up and Doc Brown’s Flux Capacitor doesn’t exist. Read more

amazon prime logistics

A few months ago, I joined Amazon Prime.  That’s a $79/year program that Amazon developed that gives members free 2 day shipping on Amazon-stocked products (which is most of the stuff that they sell).  For me, having nearly anything I want conveniently delivered anywhere I want in two days is fantastic.  However, the second time I bought from them, I was given a choice:  Free 2 Day Shipping, as I had signed up for, or Free No Rush (5-7 day) Shipping with a $1 credit to their Amazon MP3 Music Store (with most songs priced $1 or less). Read more

multiple real estate locations

 

Any corporation with more than one office/branch/site is large enough to have real estate portfolio objectives. With just a handful of locations, the C-level executives are likely very hands-on in determining the best solution as real estate opportunities or decisions present themselves. Once the number of sites grows to a point where that oversight is delegated though – whether placed under the responsibility of another staff member such as Regional VP’s, Controller, VP of Finance, General Counsel, or a dedicated Director of Real Estate – there are three styles that the management can typically be classified under: Read more