Office Space

Episode Notes

Transcript

The Un-Billable Hour

Office Space

09/25/2018

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Intro: Managing your law practice can be challenging. Marketing, time management, attracting clients, and all the things besides the cases that you need to do that aren’t billable. Welcome to this edition of The Un-Billable Hour, the Law Practice Advisory Podcast. This is where you will get the information you need from expert guests and host Christopher Anderson, here on Legal Talk Network.

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Christopher T. Anderson: Welcome to The Un-Billable Hour, the Law Practice Advisory Podcast helping attorneys achieve more success. We are glad you can listen today on the Legal Talk Network.

And today’s episode is about everyone’s favorite, physical plant. I have got to tell you, physical plant is probably the least sexy on the front end of the topics. People always want to hear about marketing and sales, that’s the most exciting ones to do on The Un-Billable Hour.

But physical plant, I will tell you what, when I do lectures, when I talk to people around the country, they love the physical plant talks, because it’s the thing that we know as lawyers, who run our businesses, we know the least about — particularly about today’s content, which is about leasing and engaging commercial leases for office space in which to put your law firm.

So the title of today’s show is Leasing the Right Way and my guest is Andrew Lechter. Andrew is the Vice Chairman of Savills Studley, the leading commercial real estate services firm, specializing in tenant representation. In short, his business is all about helping tenants, including law firms, avoid mistakes and get things right when it comes to leasing their commercial space, leasing their offices.

And of course, I am your host Christopher Anderson, and I am an attorney with a singular passion for helping other lawyers achieve success with their law firm businesses as they define success.

In The Un-Billable Hour each month we explore an area important to help you grow your revenues, get back more of your time and/or get back more professional satisfaction from your business. The Un-Billable Hour is dedicated to helping lawyers achieve freedom through their businesses, and our guests help you learn more about how to make your law firm businesses work for you instead of the other way around.

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Today’s episode of The Un-Billable Hour is again Leasing the Right Way and my guest today is Andrew Lechter. Andrew is the Vice Chairman of Savills Studley and I welcome you Andrew. Welcome to the Un-Billable Hour.

Andrew Lechter: Thank you very much. Look forward to the conversation.

Christopher T. Anderson: You bet. Now, first of all, my introduction is notoriously really brief and pretty bad, so as background, if you don’t mind, if you would share with our listeners how did you come to be involved with commercial real estate, particularly from the tenants’ perspective, what got you into it?

Andrew Lechter: Well, like a lot of people who get into their professions, I got into it somewhat accidentally, actually after a brief stint at law school and I decided that being in another part of business was more to my liking.

But as far as my focus on tenants, most of the commercial real estate world is very landlord oriented, when you drive around town and you see a sign in front of a building saying space available, call so and so, that’s either the owner or an agent for the owner marketing their property.

What I like about being strictly on the tenant side of the equation, kind of on the consumer side of the table is that I am selling and providing a service and I am very much agnostic as far as the location that my clients ultimately select.

(00:04:59)

I think if you are representing a building, you are selling more of a product, and just like lawyers, I would rather sell my expertise. And our goal is to even the scales between a business that is very much dominated by landlords, who build the buildings, typically write the leases that they then send to tenants, who then edit them and redline them and negotiate, but being on the tenants’ side kind of evens the scales and it gives the tenants an advocate to represent their interests throughout the process.

Christopher T. Anderson: Yeah, I can see that. I mean coming from the perspective of a business owner, as I am, I mean landlords, people who own buildings, and they do — often they do great jobs and they provide great space, but let’s face it, they are entering into tens, sometimes dozens, sometimes more transactions per year, and me, I am doing one every five, maybe ten years. So having someone who actually knows what’s going on could be really helpful and that does seem to level the playing field.

Andrew Lechter: That’s exactly right. Landlords do this every day and lawyers who are charged with handling this responsibility for their law firm may do this every five or every ten years.

The other thing, as you mentioned, landlords — many landlords do a terrific job. They build beautiful buildings, they build nice space, they manage the buildings well and that’s what they should do, but let’s remember, and this doesn’t make the landlord the bad guy, but their interests are not necessarily the same as a tenant’s interest.

At the end of the day, a landlord’s interest is to get the maximum rent, with the minimum investment, and I will touch on another point that’s important, providing the tenant with a minimum of flexibility. Of course, a tenant wants to get the maximum benefit in terms of concessions, pay the least rent consistent with quality and have the maximum amount of flexibility to expand or contract as their business requires.

So like a lot of other situations in business and particularly those in which lawyers come across, it is an adversarial relationship. And again, our job is to even out the scales or maybe even not even them out, maybe tilt them in favor of the tenant so the tenants get overall better terms.

Christopher T. Anderson: Excellent. Yeah, so I think that’s great. I think our listeners should really understand that, right, you are in the same business we are, for the most part. We help our clients get in on a level playing field sometimes with other parties that have ostensibly more power because of greater knowledge, so that’s fantastic.

So let me just — let’s move into the real big question to start off our conversation, but law firms, like I said, in my business I maybe look for space of a few years, but why — for law firm owners in particular, why is office space an important topic for them? What should they be thinking about, before we get to talking about the lease, what should they be thinking about in regards to space and how that’s important to them?

Andrew Lechter: Well, office space is important I think for a number of reasons. The first thing is that it sets a perception of your business to clients, prospective clients, potential hires, the other firm against whom you may be in, in a case and perception influences a lot of things.

And also because real estate occupancy expense is often a firm’s second or third largest expense, it has a big impact on the bottom line.

Christopher T. Anderson: Sure, and you have to balance that. I absolutely hear you. I mean I work with a bunch of law firms across the country and it surprises me how often I go into a law firm that’s developed a brand, we stand for representing high net worth divorces or we stand for helping the little guy in criminal cases or we stand for, whatever they stand for and then their space doesn’t speak to that brand, their space just is totally something different and I really hear you.

And I think then we all think about it as far as our clients are concerned, but you brought up some great points about how it impacts hiring, your ability to hire, some people that you want to work for you might not want to work in the space that you have got, or it may be too credi or it just may not speak to the brand that you are trying to represent and so you get the wrong people. So I think that’s a really great point. I appreciate that.

Andrew Lechter: Right. There was a major firm, I will withhold the name, but those of your listeners in the Atlanta area going back about 15 years or so will know who I am talking about. They were a premier firm and they built space that was very opulent. They were trying to go for a look that said we are very successful, you can trust us because we have enough money to spend on space and it’s nice, but it went over the top.

(00:09:54)

And that was also at about the time that fee pressures started rearing their heads in law firms and of course we all know that continues and the level of opulence in the space was a definite negative for the firm, so much so that when that firm relocated, they designed their space in a completely different manner.

Christopher T. Anderson: Yeah, they learned a very hard and probably very expensive lesson.

Andrew Lechter: Correct.

Christopher T. Anderson: Since you have brought up relocation and building offices that then don’t match your brand, what’s happened in the real estate market today? I would love you to address this. I feel like it’s been kind of bopping along in one way, but I feel a change coming. What are you seeing in the real estate market today?

Andrew Lechter: Well, over the last few years markets nationally have tightened and after years of being very tenant favorable, most of them have shifted pretty strongly in favor of landlords. So that means the number of choices are down and prices are up. It’s the old supply and demand issue that we all learned about a long time ago.

And I think the reasons for that — the reasons for the tighter supply is an outgrowth of the financial crisis 10 years ago, lending restrictions are much tighter than they were years ago. So it used to be that landlords could build buildings on spec, meaning with no pre-leasing they could build a 20-story building and hope that it leases.

Now, in most cases depending on the market, buildings have to be between 30% and 50% pre-leased in order to move forward. So there’s less new space available and construction costs have soared in recent years, and that goes for both the base building, the building that you see essentially from the outside and the tenant improvement cost, the cost to build each tenant space, so all of that gets factored into rental rates.

Christopher T. Anderson: Right. And so observing I still see that — you hear the old joke that the building crane is the national bird of Atlanta, but looking around Atlanta, Miami, even New York, it seems like there is still a lot of building going on, but you are saying that it’s not keeping up with demand?

Andrew Lechter: Oh Chris, you are right, there are a lot of cranes in those cities that you mentioned and in others, a lot of those cranes are residential and what’s interesting, and this is another reason that markets have tightened and Atlanta is a very good example.

I remember when I moved here 30 years ago I would go and meet with a landlord or a developer and they would say well, this is phase one of our project and here are the next three phases, and those three phases were going to be office buildings. And fast forward to today, phase one, the office building, may be the only office building that got built and the other three phases became either retail or residential towers. And so you have got less supply of office space and less future supply because those sites that at one time may have been slated for office buildings are now occupied by residential buildings.

Christopher T. Anderson: Okay. Well, that certainly makes sense.

All right. Well, we are talking with Andrew Lechter. Andrew is the Vice Chairman at Savills Studley and we are talking about commercial real estate and how it relates to law firms. We are covering what’s been going on in the market. We are going to take a break here. When we come back we are going to talk about what the changes in the market mean for law firms and we are going to get into some of the things law firms should be considering when they enter a lease, but right now we are going to take a word from our sponsors.

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Christopher T. Anderson: Welcome back to The Un-Billable Hour. We are talking with Andrew Lechter, the Vice Chairman at Savills Studley today, and we are talking about commercial real estate and its meaning for lawyers.

Before the break we were talking about the real estate market becoming a little bit tighter and so I wanted to come out of the break and talk to you Andrew a little bit about what does that mean for law firms? What should the takeaway be, if the market is getting a little bit tighter, choices are a little bit slimmer, how should law firms react and think about that change?

(00:15:00)

Andrew Lechter: Well, the one thing is not to wave the white flag, because the market has shifted in favor of landlords in many cases, it does not mean that law firms are automatically going to have to — have to pay more.

Christopher T. Anderson: Right.

Andrew Lechter: I think what it highlights is the need to take a thoughtful approach to a firm’s real estate commitments, and one of the most important things is to shift the dynamic from thinking about rental rate being the be-all and end-all of determining whether you have a “good deal” or not, and looking also at how efficiently a firm uses space.

There’s not as much control that an individual tenant, especially a smaller tenant can exercise over the rental rate which obviously is set by the market, but if a law firm comes to a building and says, we need 10,000 square feet for instance, which is about half a floor in a typical building, but through thoughtful design they were able to plan let’s say getting into even 9,000 feet, 10% less, think about it, that’s the equivalent of taking a $30 rental rate and reducing it to $27.

Christopher T. Anderson: Sure.

Andrew Lechter: But it’s a lot easier to use your space more efficiently than to knock the rental rate down. I’m not saying you shouldn’t do both, you should try to do both, but reducing the amount of space that a firm uses can have a much bigger impact on the overall expense, and there are many ways for firms to do that.

Christopher T. Anderson: So let me — I don’t know — I know I am going to be putting you on the spot here but I am often asked this question, do you have any rules of thumb for like how many square feet per person would equal an efficient use of space?

Andrew Lechter: Yes, there are guidelines and it depends on the size of a firm because obviously there are economies of scale.

Christopher T. Anderson: Sure.

Andrew Lechter: But generally somewhere in about the six or seven hundred per square foot range per attorney, so if a firm has ten lawyers probably somewhere in the six or seven thousand square foot range.

Christopher T. Anderson: Okay.

Andrew Lechter: And that covers, that’s not just an individual’s office but that’s all the space the lawyers’ offices, the support staff, the common spaces such as reception and conference, take all that space divide by the number of lawyers, and an efficient plan should be in that six to seven hundred square foot range.

That’s going to vary a little bit based on, as I said, the size of the firm, the type of practice, a practice that’s very paper-intensive, may require more space than others but those are good guidelines.

Christopher T. Anderson: Yeah, and as a guideline or rule of thumb, does that anticipate a couple of conference rooms and stuff like that as well?

Andrew Lechter: Absolutely, absolutely.

Christopher T. Anderson: Okay. Great.

Andrew Lechter: But one of the ways — the ways in which firms can use space more thoughtfully as efficiently is, for instance, using the interior so that non-windowed areas of space for attorneys in many markets and certainly in prior days that was not viewed as an acceptable way in which to provide offices to people, but what’s interesting is as secretarial ratios have improved and libraries have essentially disappeared the configuration of an office building hasn’t changed, there is still going to be interior space and firms have two choices, they can either leave it empty and fallow and so cost money or they can re-purpose that space to house functions such as conference rooms which don’t need the visual bang and impact of a conference room right off the reception area with a downtown view, or as I said offices for lawyers and firms that use contract or staff lawyers, that’s being done all the time, many big firms are using interior offices for first, second and third year associates before they graduate to a windowed office.

Christopher T. Anderson: Yeah. The windowed office still seems to carry some status, but I’ll tell you. I mean, I’ve even been in some places lately where there’s a lot more co-working space in the middle and the offices have become smaller in using space that way and people are working in a more social and engaged manner than walled off in individual offices.

So, yeah, there’s a lot of creativity that I’m starting to see with how space is configured. That’s very different than the old standby traditional office space. What are some of the most innovative things you’ve been seeing?

Andrew Lechter: Well, I represented a firm a few years ago, a big firm an Am Law 100 firm that interestingly had moved into a building that our firm along with a good architect had designed around them, the building was built for them, they were the lead tenant, they took about 70% of the building and they were the reason the building got built, and it was really designed around their use and it was really designed around their use.

(00:20:03)

And what was very interesting that in just eight or ten years, their needs had changed so much and they were growing that we repurposed a lot of that interior space that I mentioned a few moments ago that really was no longer needed.

They had empty secretarial stations, they had some other spaces on the interior that was no longer being used. We repurposed that to add interior offices, which at that point or once the renovation was complete added about 30% capacity of number of offices per floor.

Christopher T. Anderson: Wow.

Andrew Lechter: So, this firm went from having roughly 40 offices per floor to having over 50 offices per floor including the interior offices. And when you think about that, floor of space in this building rented for close to $30 a square foot. So, for every floor in which they added those interior offices that was space they didn’t have to lease. It saved them millions of dollars over the term.

Christopher T. Anderson: Sure. No, that’s amazing, which is a great segue actually because what I wanted to really get into you with is talking about — first, I want to just talk about what are the things people should look for in a law firm lease of commercial space.

But particularly — I want you to cover all of them, but particularly I’m going to want to focus on that flexibility. You just mentioned a great example of a big firm whose needs changed, they were growing but the way the use space changed, I want to talk to you about how to build that flexibility.

But the first question is really just, what are the elements that a law firm’s lease should include which our listeners be looking for when they’re entering into a lease?

Andrew Lechter: Well, that answer varies. The particulars vary among firms and what’s important to them, but I think all firms can agree that what a law firm should not include is any personal liability. And once a firm is established and provides strong financial information to a landlord, personal liability is usually a non-issue. It’s usually off the table.

Christopher T. Anderson: By personal liability, you mean like the owner is saying, I’ll be personally responsible for the rent.

Andrew Lechter: Correct.

Christopher T. Anderson: Okay, yeah.

Andrew Lechter: What we always strive for is that the lease is in the firm’s name and that the landlord’s only claim in the event of non-payment of rent or default on lease is the assets of the firm. We don’t want the landlord to go after an individual personally.

Christopher T. Anderson: Right, yeah.

Andrew Lechter: One way in which to secure a lease, let’s say, it’s a relatively new firm, they don’t have a track record and/or the landlord has to spend rest in the landlord to make a significant investment, one of the credit enhancements that can be provided in lieu of a personal guarantee is a Letter of Credit, security deposit, representing some portion of the landlord’s out of pocket.

And the two key things to — if a law firm provides a Letter of Credit, the two key things to negotiate are the amount of that letter and the burndown rate. Obviously, we want to start out with the smallest number possible and have it burn off as quickly as possible.

Christopher T. Anderson: Yeah, okay.

Andrew Lechter: So, no personal liability is something that a lease should not include, and of course, the most favorable economic terms that a firm can secure and that includes both the rental rate, the rate of escalations which will tell the firm how much it’s going to cost over time, the allowance, because again most firms don’t want to spend their own capital improving the building. And I would say a non-economic factor is the flexibility to expand and contract during the lease term.

Most law firm leases because the extent of the build-out are going to be a minimum of five years, often ten years or longer and we all know that business changes much more rapidly than that.

Christopher T. Anderson: Yeah.

Andrew Lechter: And also there’s no law written that changes in a law firm for instance bringing a group of new partners on or maybe the reverse, bad thing, a group of lawyers leave, there’s no rule that says those things only happen when a lease is due to expire.

Christopher T. Anderson: Every five years.

Andrew Lechter: Right.

Christopher T. Anderson: Yeah, in fact and I find — yeah, I find that they’re most likely to occur about six months after you sign a five-year lease. It seems to be the most appropriate time for major changes to happen.

Yeah, so we’re going to take a break and when we come back, I want to poke into this because I want to poke into change that comes and how law firms should anticipate that. What they can negotiate upfront knowing that change is coming and the most likely change to come is the one you’re not expecting.

But first, we’re going to have a word from our sponsors and then we’ll be back with a break. We’re talking with Andrew Lechter, he’s the Vice Chairman of Savills Studley and we’re talking about commercial leases for law firms.

(00:25:00)

And we’re going to come back and talk about how to negotiate flexibility into your lease after these words.

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Christopher T. Anderson: Welcome back to The Un-Billable Hour. We are talking with Andrew Lechter. He is the Vice Chairman of Savills Studley and we are talking about commercial real estate, particularly leases as it refers to — or deals with law firm and law firm business space.

And just before the break we were talking about all the things that law firms should expect to look for in a lease, no personal guarantee, no personal responsibility and a variety of other things, and right into the break we were starting to talk about flexibility.

So I want to go right back there Andrew and ask you, we were just saying, like the most likely time for unanticipated change is not at the five or ten year mark when the lease is signed, but usually sometime in between, and in my experience most often right there in the first 6-12 months.

So what can a law firm do to help them have terms that can anticipate change and be flexible with change?

Andrew Lechter: Well Chris, I think it focuses on two things. One is the design of the space, and if firm space is being designed really from scratch, the onus is on the designer to make sure that there are logical places in which space can be expanded, and also because Murphy’s Law sometimes prevails and bad things sometimes happen that are unanticipated, looking at ways that the space can be reduced without it costing too much money or really gutting the overall look of the space.

And then the other thing is to make sure that there is flexibility in the lease contract. Landlords definitely don’t like to provide for expansion options, because an option means that they are limited in terms of how they can lease adjacent space. And they really don’t like to give contraction options, rights in which a tenant has the right to give up space.

But in both of those instances, that highlights the needs for the law firm or the law firm’s representative to create a competitive environment among different landlords so that there is competition for the firm’s tenancy.

Usually what we like to look at on an expansion side are what I call layered options. And part of this comes with a sense of okay, well, if I am going to — if I have a choice between taking space on the 10^th floor or the 15^th floor, maybe I want to go to the 15^th floor because there are a number of small tenants on that floor and I have been able to ascertain, because the landlord should give it to me, the expiration dates of these tenants. So I know that I can get space in two years or four years or five years as these other tenants’ leases expire. Those are also rights that you can negotiate.

Christopher T. Anderson: So even — like even if those smaller tenants were possible renewals, you can negotiate the right to have first dibs on the space?

Andrew Lechter: You can negotiate the right to have first dibs if they don’t renew and usually landlords try to withhold renewal options, not grant renewal options to small tenants.

A lawyer friend of mine once told me that options are great to have and terrible to give. So if you look at that from a tenant’s perspective, it’s great to have an option and from a landlord’s perspective, it’s terrible to give a give an option, because from the landlord’s perspective it limits their flexibility to lease their building in a way that they might otherwise prefer.

But generally, even if a tenant has a renewal option, generally smaller tenants, and I would say that’s tenants who occupy less than a third to a half of a floor, generally have rights in their lease where the landlord can relocate them within the building.

(00:29:56)

It’s another thing to negotiate if we are the one on the receiving end of that where the landlord insists on having a relocation right in our lease and it’s also something to negotiate in the lease of your own document, so that if you do want to exercise your relocate — or if you want the landlord to exercise its relocation right to accommodate your expansion, you know what those terms are and what the costs are going to be.

Christopher T. Anderson: Yeah, that makes perfect sense. So as we come up against the end of the show what I want to do is, I think these are great suggestions for negotiating flexibility upfront and certainly someone with more experience than a lot of law firm owners have to help them do that would be amazing.

The last thing I want to talk about is okay, I am in my lease, I didn’t hear this show before I got into my lease and now there are things about my space that aren’t working for me, it’s either the layout is not right, it’s too big, it’s too small, or there’s something else that’s just not right about the space. I mean I didn’t negotiate all this stuff up front. Am I stuck? Is there anything that can be done?

Andrew Lechter: The good news is that firms are rarely stuck. I would say that it makes sense to do an evaluation, both internally and externally, with an expert that the firm trusts to understand what their options might be. If in a situation where the firm likes the building, there’s a few years left on the lease, maybe the firm needs more space, but in addition to needing more space maybe the layout needs to be tweaked, a landlord is going to be happy to accommodate because landlords are in the business of leasing space, and there’s no law that says leases only get modified at the expiration date.

Christopher T. Anderson: And so like all the things that we’ve been talking about; the flexibility, the changes, these could be set up — could be discussed, I should say, before the expiration date and it’s okay to approach the landlord but you’re also suggesting that you get some good advice before doing that.

Andrew Lechter: Yes, and the rights that we’re talking about can — if they didn’t exist in the original lease can be part of a lease restructure and in a restructure such as we’re talking about, sometimes it’s called a blend and extend, where a firm may have a couple of years left on the lease but they extend the lease in exchange for some concessions from the landlord.

Both parties win, the landlord wins because most landlords value term; the law firm wins because they make their space work better; but in addition to economic issues such as rent and tenant improvement allowance, any issue can be on the table on a lease restructure.

And particularly, if a firm is extending its lease, I would suggest that they think about expansion or flexibility rights.

Christopher T. Anderson: Yeah, definitely flexibility rights that seems clear. I mean a lot of the firms I work with they are growing and some of them growing quickly, and that this can be a real choker on a business as if you can’t expand in your current space and you have to either split space or — so that’s a great advice.

So one thing I wanted to just kind of end with is, should we be waiting, I’ve heard you talk about and mentioned that don’t wait until it’s — something’s not working about your lease or wait all the way for renewal. Is there something that law firms can do even when things are working fine to just sort of check up on their lease. Is there a lease checkup that they should be doing?

Andrew Lechter: That’s a great question. I would suggest that firms perform an annual checkup just like you get a checkup on your card at certain intervals, you get a checkup on your body at certain intervals. It makes sense to do the same thing as you would with any other important commitment in your business or in your personal life.

It’s possible that the situation that is good could be made even better. It’s possible that a situation that you may think is good maybe isn’t so good because maybe you look and see, oh, my competitors are using space more efficiently than I am, and even if their rental rates are the same, they may have a competitive advantage over you, and I would think that’s something that one might want to address or at the very least, they want to be aware of.

Christopher T. Anderson: Yeah, and as you said, as with all other things in our businesses, we should probably do insurance checkups, we do car checkups, we do body checkups, we should definitely do a lease checkup.

Andrew Lechter: Right.

Christopher T. Anderson: And we’re going to wrap it up there. This wraps up this edition of The Un-Billable Hour, the law business advisory podcast. My guest today has been Andrew Lechter. Andrew, again is the Vice Chairman of Savills Studley and he’s been just helping us a lot with understanding commercial leases and how they relate to law firms.

Andrew, thanks so much for being on the show.

Andrew Lechter: Thank you.

Christopher T. Anderson: You’re welcome. So you can learn more, I mean, if you’ve got further questions or want to learn more about Andrew Lechter or Savills Studley or commercial leases, you can check out their website at www.savills-studley.com and meet them there.

Andrew, is there any other place they should look, is there our Twitter or Facebook that listeners should check out?

(00:34:59)

Andrew Lechter: The website is the best thing or someone can call — anyone can call me directly at (404)504-0228.

Christopher T. Anderson: Excellent. Fantastic. Again, Andrew Lechter, folks, and so this is the end of The Un-Billable Hour. Until next time, this is Christopher Anderson, I look forward to seeing you next month with another great guest as we learn more about topics that help us build the law firm business that works for you.

Remember, you can subscribe to all the editions of this podcast at legaltalknetwork.com or on iTunes. Thanks for joining us. We will see you again soon.

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Outro: The views expressed by the participants of this program are their own and do not represent the views of, nor are they endorsed by Legal Talk Network, its officers, directors, employees, agents, representatives, shareholders and subsidiaries. None of the content should be considered legal advice. As always, consult a lawyer.

Thanks for listening to The Un-Billable Hour, the Law Practice Advisory Podcast. Join us again for the next edition, right here with Legal Talk Network.

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