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For law firms of all sizes, next to payroll, the single largest item on the monthly balance sheet is usually office rent. Even while the broader economy slows, an unprecedented consolidation of ownership of commercial space by an ever smaller pool of landlords Blogginout the unceasing 'flipping' of office buildings by many REIT's has resulted in drastically increased office rents, annual rent increases, operating expenses, and parking costs.

In this environment many firms are feeling increasingly pinched by the cost of their office facilities. The most effective way to minimize and control these costs is to adopt a comprehensive facilities strategy which identifies your firm's needs, maximizes negotiating leverage with your landlord, and results in a lease document with tenant friendly essential terms. The following provides a brief framework for the law firm principal or administrator seeking to minimize facilities costs.

A. First Step: Develop a Facilities Plan
A common refrain among legal organizations of all sizes is that those charged with making facilities decisions simply don't have the time to focus on the firm's office needs. Managing partners have law practices to run and office managers have a myriad of other administrative functions to fulfill. However, devising and implementing a simple facilities plan 12-24 months before lease expiration can save most firms literally tens of thousands of dollars over a typical lease term.

There are a myriad of considerations that go in to a facilities plan. However, the key components that should always Soul included are:

1) Size: Is the present facility equipped to accommodate the growth (or shrinkage) the firm anticipates during the next lease term?
2) Efficiency: Does our present facility make good use of the space the firm is paying for? Could it be reconfigured to make better use of the available space? Do the available relocation options lay out efficiently?
3) Budget: What sort of budget does the firm reasonably expect to able to devote to facilities during the upcoming lease term? Is that budget reasonable in light of the current landlord's demands and the available relocation options?
4) Location: Directly related to budget is the issue of location. The cost of office space within a particular submarket varies widely depending on the exact location, date of construction, and prestige the Snahzuzeafqrfq buildings. Could the firm get better space for the same money by considering other submarkets? Would moving inconvenience staff? Will the firm be less marketable to clients if it moves to a different submarket or quality of building?

After carefully considering these factors, the firm should draft a brief memorandum memorializing the plan. While the firm's needs may change during the renewal/relocation process, the written plan will serve as a guide to remind the firm's administrators of overall strategy, ensure that the partners share a common understanding of strategy, and help the firm's broker effectively achieve its goals.

B. Second Step: Simultaneous Lease Negotiations With Several Landlords
Attorneys, especially those whom have attained the rank of managing partner, are generally skilled negotiators. Despite that skill, in negotiations with current/prospective landlords, many fail to fully leverage the power their tenancy affords, because they do auto insurance quotes present a credible risk that if the landlord does not acquiesce to the firm's demands, the firm will take its tenancy (and attendant income) elsewhere.

The importance of presenting a credible risk of flight cannot be underestimated. If even the most skilled negotiator were to enter arbitration without conducting preliminary research, propounding discovery, or reading the case file, he or she would have a very limited chance of resolving the dispute on favorable terms. If opposing counsel knew that this hypothetical adversary had not done its homework, success would be even more unlikely, because this unprepared litigant does not pose a credible threat to prevail on the merits of the underlying dispute. Much like this unprepared litigant, the tenant who negotiates without presenting a credible threat of flight to its landlord fails to exercise the full leverage its tenancy affords.

Obviously, in order to present a credible threat of flight, the tenant must never assure the landlord that it is captive in its current location, or that it has its 'heart set' on a relocation site. In addition, the following two steps are advised:

1) Begin Negotiations 12 Months (or more) Before Expiration: Many firms which have not recently moved are surprised by the amount of time necessary to occupy relocation space. The process of finding suitable space, negotiating financial terms, producing an acceptable lease document, obtaining construction bids and permits, building out the space to the firm's Stalker914 cabling, and finally physically moving, can take upwards of nine months, even with reasonable diligence from all parties involved. Landlords know this - they are engaged with relocating tenants on a daily basis. Accordingly, when the tenant waits until 3 months (or less) before expiration to begin negotiating with their current and prospective landlords, from a negotiating perspective, they have hamstrung themselves. At the 3 month juncture, the firm's current landlord knows that if the tenant really intends to move it will likely be forced into a costly holdover while its relocation space is built out, and the new landlord knows that each day it delays in negotiations makes the tenant's holdover situation more untenable. Accordingly, in order to maximize leverage, it is essential that the legal tenant begin negotiations on relocation space far in advance of expiration of its existing lease.

2) Retain a Skilled Broker: Commercial real estate brokers are often viewed with skepticism by the legal community. One common critique is that since attorneys negotiate for a living and have the legal experience necessary to read lease documents, there is very little value added to the transaction by the involvement of brokers. To be fair, much of this skepticism is well deserved. Because brokers are not limited by the same rules pertaining to conflicts of interest as attorneys, double dealing abounds, and many brokers appear more concerned with quickly closing deals than tough negotiation on behalf of their clients. However, selecting a broker with the proper experience and training can provide several essential negotiating tools. A good broker will:

i. Survey the Market: One of the fundamental functions a broker performs is to survey the market and inform the firm on suitable relocation opportunities. A good broker will not simply print off vacancies from a database-he/she will independently verify their availability, and ensure that all spaces presented to the client are either presently suited to the firm's needs or could be modified to fit the requirement. Even if the firm has no intention of relocating, this market survey is fundamental to sound lease negotiation because the availabilities the broker provides will give the firm a believable and independently verifiable basis from which it can threaten to relocate if the existing landlord does not negotiate in good faith.

ii. Advise on Market Conditions: While most attorneys are excellent negotiators, even the most skilled real estate attorney is usually not apprised of the intricacies of the local real estate market. A broker familiar with the market will often be aware of vacancies and sublease opportunities that could work for the firm before they arrive on the market, and will be intimately familiar with trends in the firm's submarket which may affect landlord decision making. Finally, a good broker can advise the firm on whether particular lease terms (such as operating expense inclusions/exclusions) are customary within a particular market. This market knowledge can be an essential in forming a sound negotiating strategy.

iii. Save the Firm Time: Maximizing leverage requires simultaneous negotiation with several prospective landlords. Without the involvement of a broker, this negotiation process, when combined with the managing partner's everyday law practice, can prove untenable. A good broker will streamline the lease negotiation process by managing negotiations with both the tenant's current landlord and each relocation alternative, reporting back to the principal with concise summaries and financial analysis from which he/she can make informed decisions. Of course all lease negotiations must be conducted with the firm's express knowledge and consent, and the firm is advised to ensure that the broker's agency agreement expressly delineates the scope of the broker's authority.

The foregoing begs the question-how does the law firm principal select a broker with the proper skills? There are a myriad of considerations involved in this determination, but some of the questions that may be worth asking are (1) Does the broker's firm represent landlords in the area? (This presents a conflict of interest), (2) Does the broker have experience working with other law firms? (3) Is the broker currently working with other firms with space needs that might compete with this requirement?

For most firms, the most important question to ask is "what value is this broker going to add to the transaction"? Unless the prospective broker is willing to truly survey the market and leverage the firm's tenancy in simultaneous negotiations with multiple prospective landlords, his/her involvement may be of limited utility.

C. Final Step Negotiate Advantageous Lease Terms:
Once the firm has come to an agreement in principal to stay in its current location or selected and negotiated a relocation site, the parties must then negotiate a mutually acceptable lease document. In today's market, the typical office lease is extremely complex, and as such interpretation of particular provisions is necessarily beyond the scope of this article. However, those provisions which are most likely to affect a firm's facilities costs on an ongoing basis are as follows:

1) Operating Expense Inclusions/Exclusions: In a common 'full service' lease, the tenant is obligated to pay its proportionate of any increased 'operating expenses' which occur after the 'base year' in which the lease commences. If a tenant signs a lease in 2008, the landlord spends $10 on 'operating expenses' in that year, and in 2009 the landlord spends $11 on those same expenses, at the end of 2009 the landlord provides a bill to the tenant for its proportionate share of the $1 increase. Obviously, under this arrangement exactly what types of expenditures constitute 'operating expenses' which may be passed through to the tenant must be clearly defined in the lease document. Most tenants would not object to an increase in janitorial expense being passed through, but what about capital improvements? What about the litigation costs incurred by the landlord? The small firm tenant should work closely with its broker, and where applicable obtain outside legal counsel as to whether a particular leases' operating expense inclusion and exclusion list is appropriate.

2) Proposition 13 Protection: Under the typical 'full service' lease, the tenant is also obligated to pay a proportionate share of any increases in property tax incurred after the 'base year' in which the lease is signed. Pursuant to California's Proposition 13, commercial structures are reassessed each time they are sold, so given the dizzying pace with which commercial structures have been 'flipped' in recent years, this pass-through provision is a source of great consternation for many tenants. Unfortunately, in most California markets, landlords have been extremely inflexible in negotiating Prop 13 protection for tenants. Nonetheless, this particular pass-through has the ability to drastically impact the tenant's bottom line, and merits careful scrutiny.

3) Subleasing & Assignment: With a well thought out facilities plan, the hope is that the four walls the firm has negotiated will accommodate its needs throughout the lease term. However, due to unanticipated forces, firms may find themselves with excess space, or may need to expand beyond their landlord's ability to accommodate them. Excess space can be a prohibitive expense, and as such it is absolutely imperative that a law firm's lease have a strong sublease/assignment clause which (1) allows the tenant to sublease to any financially strong subtenant tenant with a similar use (2) requires that the landlord's consent to a proposed sublease not be 'unreasonably withheld', and (3) in the very least provides for a split of any profits the tenant receives as a result of the sublease.

There are obviously a myriad of other considerations that go into a typical office lease. However, these three provisions typically have the most direct impact on the tenant's bottom line, and as such warrant special consideration.

Many firms believe that they simply do not have the time to put together a facilities plan, negotiate months in advance, and carefully scrutinize their lease document. However, consider the following hypothetical:

In early 2008, a typical fifteen attorney firm in a "class A" downtown Los Angeles office building occupies 6,000 sq/ft of space. In the early 2008 market, through direct negotiations with its landlord several months before lease expiration, the firm could reasonably expect to negotiate a 5 year lease at $24.00 per square foot (annualized), with 4% annual increases in rent.

In contrast, by putting a plan in place, involving the right professionals, and carefully negotiating the lease document, the firm can conservatively expect to shave one dollar off of the lease rate, negotiate an additional two months of free rent, and an additional $10 in tenant improvements (depending on the landlord). In this hypothetical, over the course of the five year lease term, having a plan would save the firm $89,000 without even considering savings in operating expenses and other concessions. Assuming four partners, this equates to $22,250 dollars in profit per partner. Considering the minimal attorney time commitment required to put a plan in place, this extra in-pocket profit makes the importance of stepping back and focusing on your firm's facilities clear.

Luke Raimondo is an attorney and commercial real estate broker with Travers Realty Corporation, where he advises law firms of all sizes on office leasing issues. He can be reached for comments/questions at (213) 683-1500, and mailto:luke@traversrealty.com">luke@traversrealty.com