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Despite significant leasing activity in 2004, San Francisco remains flooded with millions of square feet of available space. Adjusted for inflation, today’s rents are close to mid-1980s levels. Savvy law firms recognize this as an unprecedented opportunity to improve profitability and cash flow by reducing real estate costs. One savvy manager recently renegotiated his firm’s existing lease, which was not scheduled to expire for two years, generating cash savings of $1.5 million over an 18-month period. In order to capitalize on current market conditions, law firms must keep in mind the following critical success factors: • Leasing decisions have a major impact on achievement of business objectives. It is a mistake to view real estate simply as a cost of doing business. Your real estate decisions are critical and have a tremendous impact on your bottom line. Real estate can potentially contribute greatly to your firm’s business performance by affecting key business drivers: Profitability. Real estate costs affect operating expenses and cash flow. Operational flexibility. Your lease defines your ability to expand or contract, and it affects recruitment, productivity and retention of key attorneys and support staff. • Firms must plan 12-18 months before a lease expires. Market or business conditions, nota lease expiration date, dictate the best time to renegotiate or renew a lease. The renegotiation/renewal process takes more time than most law firms realize. Taking full advantage of current market opportunities requires development of a project plan and negotiating strategy. You will need 12-18 months to renegotiate, review legal documents and make improvements to your space. Allowing adequate time for negotiations to unfold is critical. As a lease expiration date approaches, a landlord knows that it becomes less feasible for a tenant to occupy alternative space. If you don’t start early, you give the landlord the upper hand in negotiations. • You must have current, accurate, “real” market information. Understanding a landlord’s financial situation, upcoming lease expirations, and negotiating style will enhance your negotiating strength. Access to “real” market information, actual transaction details, current proposals active in the market, and financial concessions made by landlords, put a tenant on a level playing field with a landlord. “Real” market information and insight into a landlord’s situation is not available to a tenant. It is only available from real estate professionals who are making deals in the market every day. Anecdotal evidence from neighboring tenants is incomplete at best, and often inaccurate and misleading. • Savvy law firms are represented in the lease renewal/renegotiation process. Most negotiation experts advise to never negotiate “your own deal.” This axiom certainly holds true in lease negotiations. Landlords salivate at the thought of negotiating directly with a tenant. This has little to do with the intelligence, business acumen or negotiation skills of the tenant. The quickest and easiest way for a tenant to compel a landlord to propose market rates is by bringing in a third-party tenant representative. Even before a professional real estate adviser creates a competitive environment, a tenant will see an immediate change in the landlord’s negotiating posture. This is because hiring an experienced real estate professional will bring instant credibility to the notion that your firm might relocate. A tenant adviser, through a project plan, ensures that the final solution is not only cost-effective, but also supports operations and is aligned with your firm’s business objectives. • A simultaneous, competitive bid process is the key to the best deal. Strategically, a law firm should be prepared to relocate if a landlord does not agree to economic deal points in line with the market. Landlords do not present market-rate offers to tenants until they are convinced that the tenant has a relocation alternative negotiated. Only then, once your landlord has heard on the street that you have another option “teed up,” will your landlord propose the most aggressive rates and other economic concessions. • A renegotiation or renewal project should be viewed as a “new” project. Organizational structures and work processes change over time. The longer a law firm has occupied a leased space, the more dysfunctional and inefficient the layout tends to be. Firms that continue to operate in space that is less than ideal suffer reduced attorney and staff productivity. Even if your firm desires to stay in its existing location, the space may need to be “refitted.” Refitting may entail changing the size of the space, reconfiguring the layout of offices or furniture, cleaning up the paint and carpet or upgrading the IT infrastructure. In today’s market, law firms that attempt to deal directly with their landlord fail to take full advantage of an unprecedented opportunity to reduce costs and increase profitability. Engaging a competent real estate professional is the only way to ensure that a lease renewal or renegotiation reflects current market conditions. Research and experience indicates that professionally represented law firms negotiate leases that are 15 percent to 20 percent lower in total, effective cost (including commissions) than firms that are not represented. Your firm’s office lease can be a competitive advantage or disadvantage. In light of market conditions, all firms should assess their unique situation to consider how they may be able to take advantage of this still tenant-favorable leasing market. The current imbalance between supply and demand will not last much longer. This window of opportunity is closing. John Giordani is a tenant adviser with BT Commercial Real Estate in San Francisco. He can be reached at 415-677-0429 or [email protected]. • Practice Center articlesinform readers on developments in substantive law, practice issues or law firm management. Contact News Editor Candice McFarland with submissions or questions at [email protected]or go to www.therecorder.com/submissions.html.

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