Business, Profits and Strategy

Have you ever asked yourself what your company is truly worth to your landlord? Have you considered the financial implications to your company’s landlord if your company were to relocate to another building? Do you know how substantial those costs really are? Let's consider the possibilities.

Let's say that at the end of your company's current lease, it elected to relocate to another building in another part of town that was owned by a different landlord. In order to entice you to relocate, it's almost a certainty that your new landlord will have taken into account the costs your company would have to incur to relocate. I'm sure you would, as well.

So, how would your company's decision to relocate affect your current landlord? At the very least your landlord would seek a new tenant(s) for your space. That effort would require your current landlord to spend dollars.

Andrew B. Zezas, SIOR
Relationship Manager,
Strategist, President & CEO
(908) 245-5999 x11
andrew.zezas@realstrat.com

Typical expenses associated with securing a new tenant(s) may include: carrying the space vacant while searching for a new tenant(s); marketing and advertising; preparing your old space for a new tenant; construction materials and services; capital improvements; broker commissions; professional fees, such as: architectural, engineering, environmental, legal, and accounting; administrative fees; governmental permits and filing fees; and more.

That's a pretty tall order, just to lease space to another tenant(s). Let's look at the details:

Assuming that your company occupies 50,000 square feet of office space, the landlord's costs may look something like this:

New Lease Term: 10 Years
Vacancy - 1 Year: $25.00 / square foot (First year’s rental rate)
Leasing Incentive: $12.50 (6 months free rent)
Marketing & Advertising: $1.00
Space Preparation, Construction: $25.00
Capital Improvements: $ 2.00
Professional Fees: $ 1.00
Administrative Fees: $ 0.50
Government Fees: $ 0.20

Total: $ 67.20 per square foot

*Commissions have been omitted as they are constant throughout all analyses

Click here for examples for Distribution and Technology / Flex real estate

Assuming that the landlord secures a new tenant(s) at a net annual rental rate of $25.00 per square foot, it would take the landlord two years, eight months, and one week to recuperate the costs associated with completing that transaction.

*All of the above line items are subject to multiple factors that could cause them to increase or decrease. Every building and every market performs differently.

Hint: The above analysis, and likely some variation of the above costs, may constitute not only the cost your current landlord would incur if your company relocated, but those costs may also be similar to the costs your new landlord will bear in order to complete your relocation transaction.

Here's the $1,000,000 question!

If your company did not relocate, and elected to remain in its current premises instead, what costs would your current landlord have to incur in order to inspire your company to complete such a transaction?

Another Hint: If your company secured a $25.00 per square foot rental rate and only required some minor upgrades and modifications to its premises, and perhaps a fresh coat of paint and some new carpets, your current landlord’s costs are very likely to be a lot less than the $67.25 referenced above!

Here's an example:

• Vacancy - 0 Years: $0.00 / square foot
• Leasing Incentive: $12.50
• Marketing & Advertising: $0.00
• Space Preparation, Construction: $10.00
• Capital Improvements: $ 2.00
• Professional Fees: $ 0.50
• Administrative Fees: $ 0.25
• Government Fees: $ 0.20

Total: $ 25.45 per square foot

Difference: $ 41.75 per square foot

Assuming that your company extended its lease at the same net annual rental rate of $25.00 per square foot as in the above scenario, it would take your current landlord about one year and a week to recuperate the costs associated with completing that transaction...half the time and $41.80 per square foot less than if your company relocated and your current landlord was forced to find a new tenant(s).

So, how much is your company worth to your landlord?

At 50,000 square feet, your company is worth $2.09 million in transaction cost savings (what we call "Additional Profits"), let alone the other profits that your lease will generate for your current landlord over its term.

Now, here's the next question you should ask your landlord before you make a decision to relocate your company:

"Mr. Landlord, if we remain in our current premises and extend our lease, how much of that $2.09 million would you share with us as an added incentive?"

*All numbers and scenarios above, while based on realistic market dynamics, are hypothetical, are intended for educational purposes only, and do not apply to any particular company, landlord, building, market, or otherwise. Consult a qualified service provider before making any real estate decisions.

Andrew B. Zezas, SIOR, is Relationship Manager, Strategist, and President & CEO of Real Estate Strategies Corporation, Publisher of "Business, Profits and Strategy", a monthly online publication read by thousands of business, financial, and real estate executives nationally, and, is the author of two new real estate books, The CFO's Guide to Understanding Corporate Real Estate Transactions and The CFO's Guide to Hiring the "Right" Real Estate Service Provider, both of which will are available at www.TheCFOsGuide.com.

Mr. Zezas is well-known for his ease and informative style of public speaking, and has given informal talks, formal presentations, and has lead training and educational programs for business, professional, government, and trade associations, throughout the US and Canada, including the American Management Association (AMA), the U.S. Postal Service, RealComm, Building Owners and Managers Association (BOMA), Society of Industrial and Office Realtors (SIOR), and others. Andrew is founder and National Chairman of the SIOR Tenant Representation Specialty Practice Board, a group of over 300 tenant representation focused commercial real estate professionals from around the world. He is a licensed real estate broker in New Jersey, New York, Connecticut, Pennsylvania, and Florida, and is a licensed real estate instructor in Texas and Indiana. He can be reached at 908 245 5999 or via email.

Real Estate Strategies Corporation, located in Kenilworth, New Jersey, and serving its clients throughout the country, helps companies create and execute Business DRIVEN Real Estate Solutions...and Opportunities, faster and with less risk. Visit www.RealStrat.com.

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