How to Save Money When Managing Real Estate Leases. 10 Ideas for Saving Money

Published on Monday, 18 November 2013 08:19:18    Written by Marc
Of all the important tasks that real estate managers face on a daily basis, it would probably be fair to say that finding ways to save money probably ranks pretty high on the list. If your company leases sites for its operations and your job is to manage these leases, chances are that your responsibilities also include finding ways to save money for the company. Few departments do not have ‘saving money’ somewhere in their objectives these days and the real estate department is no exception.

How to Save MoneyHow to Start

There are probably as many situations as there are companies, but if your company leases a number of sites you need to constantly be aware of potential sources of saving and then find ways to apply your ideas. Nevertheless, let us start with what we have. Suppose you manage leases for 50 sites, and they are a mix of office, warehouse, and industrial.

You might think that once you found the best site for the company, negotiated the lease on the most favorable terms possible, and provided your colleagues with some assistance for moving into the site, your job is done. Actually, managing leases is an ongoing job so your work does not end once you take over the site and as mentioned previously, finding savings is part of the job. So, let us look at potential sources of savings when managing real estate leases. I made a list of ten areas where real estate lease managers can potentially find savings.

  • Lease audits
  • Renewal options
  • Right to terminate
  • Subleasing
  • Maximizing space
  • Consolidation
  • Renovation of site
  • Conversion
  • Sharing
  • Relocating
  • Bonus tips
  • Cost reduction
  • Revenue generation

Now that we have our list, let us look at each one in detail.

  • Lease audit. Conducting regular lease audits does not only keep the landlords honest, it can result in receiving substantial credit from the landlord. And the funniest thing is that sometimes you can do a lease audit one year and redo it the following year and find things you missed the past year, or find the same error or over billing (and request a credit) that you found last year. Do not be afraid to conduct audits, preferably each year if possible, especially on costly leases.
  • Renewal options. Renewal options are there to give you the peace of mind that if you need to remain at the site after your lease expires, you will have the possibility to extend your lease. However, these options can also play in your favour if you worded them in your favor and the lease rates start to increase. The options with a pre-determined maximum price can help you save money. In addition, if you see that rents are on an increasing slope, you could exercise your option in advance; use that negotiation power with the landlord to lock in good rates before your lease ends.
  • Right to terminate. This clause is meant to allow you as a tenant to vacate a site if you really need to exit it prior to the end of your lease. Sometimes exiting a site before your lease ends can save you money, even if there is often some kind of penalty attached. It is sometimes worth it to pay the penalty and be free of all lease obligations than continue to pay rent for years on a site you no longer need. However, this clause can also be used as a ‘negotiation’ tactic, when it is done well.
  • Not that we would ever encourage real estate manager to lie to landlords, but suppose you have a site for which you would like to do some renovations and for which you do not have the entire required budget. Alternatively, you simply want a rent reduction. Depending on the market conditions, informing your landlord that you need to exercise your right to terminate because you need to go to another site (which is cheaper or already renovated) can sometimes motivate the landlord to give you a proposal with a rent reduction.

    Of course, if your goal is to get a rent reduction in order to do some space renovation, do not even start the renovation planning before you complete your rent reduction deal with the landlord because if the landlord hears about your plan it will be dead in the water. Nevertheless, I have used termination rights on numerous occasions to get better rents or simply a special tenant inducement. The landlord will obviously want to take back the termination right in exchange for the rent reduction, but it is often worth it. So, whenever negotiating a lease, try to include at least one termination right (with acceptable penalties), even if you do not plan to use it, it is a clause that does not cost anything, and might come in handy to save money at one point.

  • Subleasing. This one is obvious. Subleasing a site you no longer need can help get back a portion (or even in some exceptional times, the totality) of your lease costs. The moment your company is no longer using a site, try to negotiate first with the landlord to give back the keys to the site and exit your lease. If that fails, try to sublease the site as soon as possible.
  • Maximizing space. This is making sure your site is fully used. For example, if you have an office site, which is experiencing growth in staff, and need extra space, start by taking a good look at your site layout to see if you have a good layout that maximizes the site. If you have space that appears under used, a small office renovation might free up some space and prevent you from having to lease some space. Look for how you use the site you are leasing.
  • For example, if you use office space to store stuff that does not necessarily need to be in that office space (storage boxes and other things you refer to only occasionally), try and see if you can relocate these things to a lower cost site or to another site of the company. Maybe your colleagues have some place in their office or maybe the landlord can offer storage space in your building at a low cost that what you pay for the office. Most offices are not maximized, over years people tend to hoard ‘stuff’ everywhere and move furniture left and right and you end up with sites that are far from maximized. There can be good savings here if you know where to look.

  • Consolidation. This one is also trivial in nature because consolidation is often about saving money. When sites are too big or underused, consolidating sites often makes sense. Sometimes it is about merging an entire group/office with another site and sometimes it is about merging two or more groups/office together in a new site. However, the result is the same: using less space.
  • Renovation of site. This can be used for a number of cost saving reasons. First, by doing a renovation to a site you might be able to remain at the site for many more years since renovating a site is often cheaper than building a new one. For example, if you have an office space, which you have, been leasing for 9 years on a 10-year lease. You could decide to move to another site at the end of your lease and build brand new offices, or you could extend your lease and do a ‘fresh up’ of the site, changing the carpets, painting the walls, refreshing the washrooms and the lobby.

    You will probably have good negotiation power if you remain at the site (its most often much cheaper for a landlord to renew an existing tenant than to market a site to try and find new ones) and can avoid the cost of moving and building new offices. In addition, the renovation can often give you the chance to look at your office layout and try to maximize your site (see tip number 5 above).

Click to view Part II!