Facility Management Magazine, April 2013: Negotiation of the rental agreement, disposal of surplus space, appeal the property tax. There are various ways to save on real estate. We set out 13 for you.
There are many ways to cut costs with real estate but the amount of space that you use is pretty much the most important. Additionally, it has an indirect effect on all other aspects like rent, service charge, energy consumption, property tax, etc. But how much space can you actually save? To get an idea of the potential you can measure this with a time utilisation study. It often transpires that in traditional settings, between 40 and 60% of workplaces are not being used: external meetings, sickness, holidays, and suchlike.
Once it is clear how much space is really needed, it is time to look at how your accommodation can be adapted to meet those needs. Maybe there are possibilities to consolidate locations. Less locations means less receptions, less canteens and so on and so forth. Nevertheless, it is also important to view this in a wider context. Merging locations can also met increased costs of mobility.
It is crucial to take into account all costs in weighing up alternatives. How often are just the rental levels taken into account in comparisons? Just as important are the moving costs, service charges, maintenance and capital expenses. If you want an accurate comparison of the alternatives, it is important to carry out a scenario analysis in which all the costs are compared. If you regard real estate as a real factor of production you can take it a step further than TCO and look at the total cost of productivity. Analysing costs is only really effective when placed in the perspective of the wider objectives of the organization. Cheap does not always have to mean that it is good for the business and the profit margin.
In making a choice between different properties it is important to take a good look at the maintenance costs. Older buildings are maybe cheaper in terms of rent but the cost of maintenance is often much higher. Carrying out your own investigation into the state of repair at the outset is of great importance. It prevents surprises at a later date.
Sustainability presents a further opportunity to earn money. An often heard remark is that there is no capital available to invest in sustainability. Nevertheless, there is a number of solutions available that can be financed via leasing and that delivers an improvement to the bottom line from day one. For instance with a lighting lease.
Service charges are a grey area. In many cases they don’t get the attention they deserve from tenants; there is a lot of money involved but many occupiers see it as difficult and demanding of too much time relation to the expected savings. That is wrong. In the majority of annual reconciliations there are mistakes, deliberate or not. Often it involves small amounts but sometimes extremely large amounts are wrongly invoiced. In almost all cases it is worth having an audit carried out by a specialist. It is not often that the specialist doesn’t more than recoup their fees.
Everybody knows the examples from their daily practice. There are all sorts of reasons that organisations change. Growth, shrinkage, mergers, takeovers, strategic reorientation and so forth. And then it turns out that the property is too big or too small. Long contracts are then a millstone around your neck and the premium for the longer rental term, a few months’ rent-free disappears into the sunset. Often such a property can be vacant for years and the tenant is unnecessarily paying rent, service charges, maintenance and suchlike (note: one month rent-free only covers around half of the monthly running costs). That doesn’t mean that you should only be entering into short rental agreements but matching with the possible organisational developments and volatility can be very worthwhile. The solution is in negotiating break clauses or conditions for the (partial) return or expansion of space. Although this sort of advantage is not always directly visible in financial terms, ultimately it turns out to be of great value. Unfortunately, because of this, it is often quickly dismissed during negotiations. Flexibility has a pricelist so too much of it is also a waste of money!
Another aspect of flexibility concerns the tenant’s improvements. Particularly in traditional office concepts a fortune is invested in creating cell offices and suchlike. Some enterprises carry out an internal rebuilding every year. By applying generic workplaces with functional diversity much of these costs can be avoided.
Surprisingly enough we often encounter situations where tenants silently allow their rental agreements to extend on the basis of contentment with the accommodation and not wanting to jeopardise the location or simply out of ignorance of the possibilities. It is always worthwhile to talk to your landlord. For landlords the retention of tenants is worth a great deal and that principle should be put to your advantage.
If there is one factor that is important in negotiations for a tenant then that is time. If you start too late, you will have your back to the wall and ultimately as organization you don’t want to end up on the street. Landlords are very conscious of this and delaying tactics are often successfully employed. Ensure that as tenant you have the initiative in the ‘game’.
If relocation is one of the options, or if it’s about acquiring a new location, make sure that there are always alternatives. Negotiate simultaneously. A one horse race usually ends in a sub-optimal result with many concessions by the tenant. The mistake is often made of only reaching agreement on the main terms (financial and lease term) and only thereafter negotiating on the other terms and conditions. Legally there is then no way back and there is scant opportunity to achieve anything further.
You don’t have to wait until the end of the contract to start negotiations. If landlord and tenant wish to agree something else during the term of an agreement, they are free to do so. Certainly in the current market, landlord and tenant can act in their mutual interest, for example by extending the lease term in exchange for financial concessions or the reduction of the total rentable area.
Not always the most obvious choice but the expectation is that this will occur more often. There are landlords that are in difficulty and need to release capital. With a realistic revaluation, price expectations will move closer together which could be beneficial for both parties. Due to frugality during the crisis, there are companies that have the financial means available. In the US it is actually quite normal that tenants and banks come into direct contact in respect of real estate where the investor is in negative equity and agreements are made directly between the two parties.
Many rental agreements were closed with a clause wherein the rent after, for example, five years could be adjusted to market level. Landlords were keen to include it in the expectation that market rents would outpace the rent index. However, the reality is otherwise and hence it offers a chance for tenants to adjust the rent downwards. The contract often has a mechanism where each party engages its own expert to come to an agreement on the revised rent. If there is such a possibility in your contract, there is a significant chance of achieving savings. Be aware, there are often time limits attached.
The local property tax valuation is often accepted without question but in practice the valuation is sometimes significantly different to the actual value. For landlord and tenant, appealing the assessment can deliver tens of thousands of euros per year. Possible legal costs can be reclaimed from the municipality on the basis of the decision on process cost compensation in administrative law.
As indicated earlier, it can happen that a rental agreement is silently extended, rent reviews are not signaled and other contractual points are missed simply because a proper system is not in place to administer the rental agreements. Forgetting to terminate one contract on time means that all other cost saving initiatives could be for nothing.
By systematically and properly maintaining the information it is possible to signal patterns and deviations and even to benchmark internally. Of course it is essential to keep the system up to date. A good system will indicate whether indexation has been correctly applied and offers the possibility to match invoices with budgets. For firms that account to IFRS standards it is always advisable to keep a structured rental administration. They must activate the capitalised rental streams on their balance sheets to conform to the new lease accounting rules.
Lack of planning of the accommodation and not matching the real estate strategy to the organisational strategy means a great loss of efficiency. Research has shown that of organisations that indeed have a real estate strategy not even 50% derive it from the organisational strategy. In other words: it turned out that the real estate objectives as formulated were contrary to the organisations’ objectives. An efficient real estate strategy must support the company strategy.
In planning (particularly in cases of ownership) the exit strategy is also important; often the first time that an organisation thinks about its exit is when a part of the organisation is about to be closed. Under the heading restructuring costs a lot of costs can be ‘lost’ but that is in many cases unnecessary if this had been thought about at an earlier stage.
Many organisations presently have surplus space and have that space passively available whilst they wait for someone to take it over. In practice what often occurs is that the space can stand empty for months if not years and every month the rent has to be paid and the practical problems of empty property.
By quickly ‘dumping’ you may have to swallow a significant loss but it does create certainty and makes it possible to negate so-called onerous provisions. Ultimately that can be cheaper than being stuck with surplus property for a long period and then still having to let or surrender against a significant disadvantage.
Are there many rental properties at the same time? Then consider a portfolio disposal, whereby you can transfer the surplus property in one fell swoop to a professional party. Compare this with factoring.
At the end of the rental agreement there is an unpleasant surprise for many tenants: the property must be restored to its original condition at commencement of the agreement. If the landlord is unconvinced of the added value of the tenant improvements the only thing you can do is to order the skips and demolish all the walls, cabling, canteens, pantries, servers and suchlike. As tenant you wouldn’t be the first to have forgotten to make a provision in the accounts.
It is far better to agree in the initial negotiations that you do not have to restore the property to its original condition. Even if you did not do so, ensure that in any case you always have the landlord’s permission for every alteration that you carry out, preferably with the undertaking that you do not have to restore it at the end of the agreement.
If you do not deal with the subject matter on a daily basis, it is a good idea to buy in expertise in the aforementioned areas. However, how do you make a choice of advisor? Firstly it is important to realise that brokers predominantly work under instructions from supply-side parties and therefore receive the largest part of their turnover from those parties. Alternately working for landlords and tenants is not helpful for the impartiality and therefore the quality of the advice.
Even if the competition is stiff, listen for alarm bells if you are offered free advice or can negotiate fees that are too good to be true. You can be assured that the opposing party, the landlord, will happily make up the difference. The advice you receive is worthless.
Is it perhaps attractive to engage someone that works on the basis of a so-called success fee or performance fee? It sounds better than it is. Usually success is solely measured on the basis of the financial parameters. As you can see from this article, success has often many more nuances. The success fee gives a stimulus to the advisor to purely focus on the financial aspects at the cost of the non-financial factors and you have to therefore question whether that is in your interest.
Good advice pays for itself. Work with advisors that can work well together and can achieve synergy in the project. Engaging, for instance, a project manager during the negotiation process doesn’t just win time but also prevents costly surprises later in the process.