Many business owners are assessing their financial positions closely to determine how they can remain profitable in an uncertain economy.
Commonly, they’ll scrutinize factors like cost of goods sold, labor cost and overhead expenditures. But what about occupancy costs?
Some of the most successful companies in the region are restructuring their leases to make a material impact on their bottom line and help keep them in a strong financial position for the months ahead.
Here’s why it’s a smart time to consider your occupancy costs. Many companies are delaying larger decisions like whether they should relocate, make significant investments in tech to mobilize a fully remote workforce, downsize their office or open another location. Others have pulled out of their leases for good.
That means tenants have leverage they haven’t in the past. This is the time to reconsider your current lease, and identify opportunities to secure a better rate or make smarter negotiations until the long-term future for your business is more certain. Landlords and building owners are more receptive to creative asks and early negotiations, because they can’t afford to lose tenants.
There’s an obvious stumbling block that stops many business owners in their tracks: A lease is a binding contract. That means it’s impossible to change — at least without severe consequences — right? Wrong.
There are multiple ways to approach your lease agreement to increase profitability. Here’s how.
Terminate your lease on unprofitable locations
Especially for retailers or businesses with multiple locations, lease terminations and lease shortening are both negotiation strategies that can stop you from losing money.
If your sites have negative cash flow, it’s time to start planning. This process is difficult and requires a great deal of coordination. Plus, closing locations can impact purchasing, marketing and operational budgets. But if your under-performing location is losing at or more than its occupancy cost — making the losses unsustainable — then terminating a lease might be the best option.
As a first step, your real estate broker will assist you with approaching your landlord for a consensual lease termination. The landlord will very likely deny the request, but a helpful compromise is to suggest shortening the base lease term. This way, the landlord can quietly market the property while the tenant works towards a firm exit date.
“Blend and extend” your current lease rate
Perhaps you need a more immediate positive financial impact. In that case, talk with your broker about a “blend and extend” agreement. Here’s how it works.
Your broker will help you negotiate an extended base lease term with your landlord. For example, if you have three years remaining on your current term, you’d ask to lock in the same rental rate for an additional number of years. In many cases, you’ll actually be able to secure a reduced rate by pursuing a future option early. By blending the term and the rate in this way, you’re saving money over the life of the lease.
This approach is almost always a win-win because a landlord gains the peace of mind that comes with finalizing terms months in advance, and the tenant gets a rent reduction for extending their lease early.
Real example: I recently assisted a local financial institution in negotiating this type of agreement for its downtown headquarters. In the end, the company secured a lower rate, got additional tenant improvement dollars from the landlord and lowered its annual rate increase.
Ask for remodel assistance
Here’s another win-win setup to consider: If you’d already been considering a remodel on your location, there could be a way to serve both your, and your landlord’s, best interests.
Remodel assistance is one of the simplest ways to optimize your liabilities when it comes to occupancy costs. Not only can this approach bring down the cost of one remodel, it can allow you to renovate multiple locations without increasing the overall budget. In addition, both parties are contributing to improving the space and extending the term to monetize the investment.
Real example: Several of my clients in the law industry are looking to refresh their offices, especially as it pertains to providing more space between employee workstations for health and safety purposes. We’re approaching the negotiation by asking for landlord capital contributions for the planned remodels. In return for a request like this, landlords usually negotiate terms like additional lease length, so they can amortize their contribution over time.
Reduce square footage, if needed
If you have decided that it’s in your company’s best interest to downsize your office, consider asking your landlord to cut your square footage — but sweeten the deal by offering to extend the terms of your lease.
Similarly to the “blend and extend” approach, your landlord will enjoy the security that comes with locking in a tenant for a longer period of time, while you can likely cut costs and better support your employees.
Especially as many companies move towards a hybrid workforce — with some or all employees working from home at least some of the time — your space needs may have changed drastically in the last few months.
Before you move forward with this approach, work with an experienced broker to perform detailed occupancy planning. You’ll need to consider things like:
- Your hybrid workforce guidelines, and how often they’ll be reevaluated (every month? Every six months?).
- How many people will need to comfortably fit in the office at once.
- Whether your setup is conducive to hoteling or desk-sharing.
- How traffic patterns and communal spaces will need to adapt to accommodate health and safety guidelines.
Real example: Dozens of our local clients are working with us to approach their landlords for a lease extension in exchange for less square footage. In our experience, the negotiation is usually very successful, because landlords don’t want to lose high-quality tenants even though the times may call for slightly different occupancy needs.