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A recent study by business consultant McKinsey &
Company found “a significant number of corporations
fail to control their real estate occupancy costs, though
opportunities for savings abound.” This certainly
could be said of law firms as well.
After personnel expenses, rental expense is the highest
fixed expenditure for most law firms nationwide. As
a result, and because of the importance physical office
space plays in the success of a law firm, it is no wonder
that firms carefully consider their options when making
a leasing decision. While each firm has its own individual
process and selection criteria, there are universal
issues to consider. In the paragraphs that follow are
six common pitfalls to avoid.
- Off the beaten path. Before falling
in love with an off-the-beaten-path location, consider
how that location will affect the everyday lives of
your staff. While the new office might offer a more
appealing financial package, low-cost parking or unobstructed
views, make sure it also offers expedient routes not
only to the courts but also to amenities such as private
lunch clubs, restaurants, and health clubs. Also,
accessibility to public transportation is a must for
retaining staff. If a firm needs to “make up”
for inaccessibility or lack of amenities, it usually
leases more space to install fitness centers, eating
facilities and the like, a decision that might make
the economics not nearly as good as they originally
seemed.
- Undervaluing the corner office incentive.
The myth that attorneys will happily accept universal-sized
or interior offices is just that — a myth. Law
firm culture has traditionally held out a bigger,
better, perimeter office as a reward for hard work.
And given the long hours attorneys work and the intensity
of that work, that just may be a good thing. Further,
the senior associate or young partners whose comrades
are rewarded with larger, perimeter offices might
just opt to join them.
- Miscalculating remodeling costs.
While it may be common to hear that office space can
be built for $45.00-$55.00 per square foot, that is
a budget very difficult for a law firm to meet. Constructing
and furnishing law firm space typically costs closer
to $80-$100 per square foot because of hidden costs
specific to law firms, from sound insulating to supplemental
cooling. Add technology upgrades, high-end finishes
and high-density filing systems, and the costs mount.
Getting your arms around the true costs early allows
you to budget properly.
- Boxing yourself in. Historically,
law firms have been careful about acquiring expansion
rights. Savvy firms provide for contraction as well.
If for some reason a firm needs to downsize, having
that flexibility can be the difference between profitability
and non-profitability. It is not rental costs per
se that can strangle a law firm user; it is rent on
empty space, where attorneys could be billing fees,
that can turn an otherwise profitable firm into a
non-profitable one.
- Underestimating credit-related consequences.
While many leases are non-recourse to the
partners, many also require some level of securitization.
The greater a landlord’s upfront contributions
in a lease transaction, the larger the required letter
of credit or other security becomes. Do not let a
landlord claim that law firms are bad credit risks
by nature. Knowledgeable landlords will consider several
factors in viewing a law firm’s credit, including
diversity of practice, number of offices, age of partners,
succession plan, bank debt and other variables. Moreover,
most landlords will allow a rapid burn-off for a solid
credit law firm. What that means practically is that
many law firms can negotiate for securitization well
below an amount that equals the upfront concessions
of the landlord, and have it disappear early in the
lease term.
- Failing to utilize your real estate advisor
fully. Today’s commercial real estate
advisors offer a wide-ranging scope of services. Use
them. These professionals will free your time for
billable client work. An experienced, skilled real
estate advisor will provide you with a breadth of
services — construction management, by way of
example — that will save valuable time and enormous
dollars.
Nothing can make the leasing process simple and risk-free.
But steering clear of these common mistakes is a step
in the right direction.
Top
Nancy Pacher (NPacher@usequities.com)
is the President and Chief Operating Officer of Chicago-based
U.S. Equities Realty. Pacher has acted as chief negotiator
in major lease and lease/equity transactions totaling
more than ten million square feet of office space in
25 cities nationwide. The Chicago Sun-Times named her
Broker of the Year in 1987 and she was a finalist for
the award again in three subsequent years. Other professional
accomplishments include: Commercial Property News “Top
Brokers 2004”, Crain’s Chicago Business
“100 Most Influential Women in Chicago”
in 1996 and Honorary Mention in 2004, Crain’s
Chicago Business 2002, “Who’s Who in Chicago
Business,” and Today’s Chicago Woman 20th
Anniversary Hall of Fame.
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