It is already September, and captains of industry are navigating a turbulent two year old voyage that would even make Jacques Cousteau seasick. Economists, business leaders, and politicians are debating whether the nation’s economic storms resemble a slow moving Nor’easter that’s finally passing over, or if we’re entering the eye of a Category 5 hurricane that will eventually sink the fleet and leave survivors clinging to life rafts. Meanwhile, countless facility managers (fms) are bailing water (cutting costs), adjusting the sails (improving efficiencies), and struggling to help right their organizations’ listing ships.
With leaner staffing after layoffs, hiring freezes, and delayed projects, many fms are considering opportunities to reduce short-term real estate expenses. In facilities owned and occupied by their organization, fms might evaluate the feasibility of subleasing (i.e., renting designated portions of their space to outside firms). But a decision to become a “landlord” in order to reduce costs can require a complicated analysis that can be likened more to differential equations than simple addition and subtraction, especially if the facility was not initially designed for multi-tenant occupancy.
Beyond the preliminary cost and inconvenience of engaging architects, engineers, and contractors to demise subleasable space, logistics and security challenges related to construction, access control, emergency response, parking management, mail services, furniture, package deliveries, voice and data services, electrical distribution, HVAC controls, visitor reception, and even restroom access must be addressed. Fms must also consider the long-term impacts of subleasing and anticipate complications, should their organization’s space needs accelerate with improving economic conditions or suddenly explode with a large acquisition. Collecting rental income on unused space might seem like a fantastic idea, but if it takes 24 months to recover the initial investment—if a tenant stops paying rent, or if the organization suddenly must seek additional space outside the main facility (until a sublease expires)—a great idea can quickly become a costly mistake.
After studying initial costs, operational challenges, and long-term limitations and reviewing comparable sublease rates in a weak economy, fms often find that subleasing isn’t viable. In that circumstance, they may simply choose to condense operations and abandon specific floors or areas of their facility. Even without sublease income, expenses can be trimmed in unoccupied areas by turning off lights, eliminating cleaning services, and adjusting HVAC set points. In addition to saving money, reducing services and adjusting the temperature (up in summer/down in winter) in unoccupied areas can prevent renegade staff from unapproved “space grabs.”
Stepping through the sublease considerations for an owner occupied building can prove extremely valuable for an fm’s “mental toolbox,” especially when managing construction of new facilities. Design and budget planning with architects, engineers, and the organization’s CFO can include the costs and benefits of multi-tenant flexibility.
Flexibility is one of the key reasons many fms choose to lease rather than own facilities. With a properly negotiated lease and a dependable landlord, an organization can expand during boom times and contract during slowdowns. Rights of first refusal, rights of first offer, early termination provisions, and automatic expansion options can be strategically used to provide financial and workspace flexibility. When compared to purchasing an existing building or launching “ground up” construction of a new building, fms can upfit an additional floor or add an adjacent suite in a leased facility relatively quickly. A landlord may even agree to pay for all construction costs and amortize them in the rental rate over the term of the lease.
In tough times, fms with leased national portfolios can compare regional operational needs with existing costs per square foot, total square foot leased, lease expiration dates, and early termination options. Opportunities may exist to consolidate offices, staff, or entire business groups. Proactively negotiating lease extensions can be another method of securing financial incentives from landlords eager to retain tenants with good credit and/or payment history. Agreeing to a three year or five year lease extension in exchange for a market adjusted rental rate and/or several months of free rent can immediately improve an organization’s cash flow.
When deciding to vacate a leased facility—whether through an early termination or natural lease expiration—fms must understand the lease terms thoroughly prior to planning the departure. It may be tempting to treat a move out with a lower sense of urgency or diligence than a move in project (especially if the space being officially vacated has been unoccupied for some time), but logistical blunders in transferring phone services, moving data center equipment, securing files, or removing furniture on time can have serious financial implications. Properly managing a move out can also prevent legal liability associated with confidential documents (e.g., client social security numbers) or financial damages if the landlord has a new tenant expecting immediate occupancy.
Lease language regarding laws and code compliance, holdover and debates about items considered tenant property, or permanent improvements can also delay security deposit refunds and result in unexpected costs. Understanding the lease, communicating intentions to the landlord well in advance, and documenting all conversations and inspections in writing (and with photographs) can be valuable in avoiding problems.
Turbulence in the economy is affecting many fms in their work. By looking at ways that their facility spaces can be repurposed or reconfigured, savvy professionals may find cost savings—or even a new revenue stream. Knowing what these ventures entail is key to success.
Best wishes to all fms entering the “fourth quarter.” Yes, it’s finally football season!
Crane is a mechanical engineer and regional property manager with Childress Klein Properties, a leading real estate developer and property management services provider in the Southeast. As always, he invites readers to share their thoughts by sending him an e-mail.