Reduce Your Occupancy Costs

By: Jason Sandquist

Posted on 09/13/2010 - 10:56am | From the Real Estate Blog

Every business in today's economy is looking for ways to save on the bottom line.

Real estate can sometimes be a business' largest expense, next to personnel or IT costs which are sometimes included. To fully understand where you can reduce occupancy costs, a business needs to be fully aware of what they are and how they can be reduced to save on the bottom line without hurting customer and employee satisfaction.

In plain english - occupancy costs are the costs that a tenant incurs while occupying the property. The longer version might include but is not limited to: rent, insurance, taxes, utilities, landscaping, security, furniture, etc. These are expenses and are capital related. There are other instances that might affect occupancy costs such as proximity to restaurants, hotels, entertainment, closeness to highways and public transportation. All these factors should be taken into consideration.

With the decline in commercial real estate values over the past few years, many businesses are paying more than what they need to. With smaller payrolls and staff, many business have too much space for their needs.

Here are some ways to reduce or control occupancy costs over time:

• A lease audit should be the first place to start. Landlords love to add terminology into lease agreements that most tenants don't understand if unrepresented and may pay for it over the course of the lease. They like to put clauses into contracts that allow them to charge tenants for capital improvements. This may be the quickest and easiest, you might be surprised at what you find.
• Businesses might want to think about an early lease renewal if they plan on being in the space years to come. This doesn't work for every business, it mainly depends on where you are in the lease cycle. A good time to discuss this strategy would be about six to nine months before the lease is due. By accomplishing this, you will get a a fair market rate or maybe even below which is a lot more favorable to your bottom line. Look for landlords to still try and get a the highest price possible but if the lease is longer, they may be more willing to accept a lower price for a tenant to remain in the building.
• There might be a way to lease excess space such as a sublease, but make sure you fully understand your current lease before you try this because you wouldn't want to break the terms. Just get the consent of the landlord before moving forward. The process in finding a subtenant make take a long period of time because of the current amount of sublease space available on the market today. Space can sometimes be half of the price as market rates on sublease space and can be attractive to a tenant.
• You could always try to renegotiate your lease for a more affordable payment or lease work-out, but this might be hard if the business has good financials. If a business is having trouble then the the landlord might be more open to options rather than having a business go under and have vacant space to market.
• The final way is to terminate your lease or have a buy-out. Probably the hardest to get accomplished because most property owners aren't trying to have any more vacant space than they already have. For the tenant, it can be expensive option but it might make financial sense. The longer there is left on the lease, the harder it is to get accomplished.