CEO Adviser: Leasing Strategies

If you own or manage a company operating in the Puget Sound region and lease your real estate premises, then your lease payments are more than likely your second-highest business expenses after labor costs. As such, you would expect most CEOs to take active steps to leverage market conditions. Surprisingly, during our monitoring of commercial lease activity, we find that most business owners time their lease decisions on either current expiration or option dates, such as renewals or expansions.

It seems every month we learn of rapidly growing startups like Qumulo and Zulily that secure a new round of private financing and immediately evaluate expanding their operations. For growing organizations, we cant stress this enough: Business needs should always drive real estate decisions, not the other way around. In the Seattle market, we continually see leading established companies, such as HomeStreet Bank, strategically introducing new business lines, expanding revenue channels and growing their employee bases. Their business needs drive their real estate decisions. In addition to HomeStreet Bank, we work with several CEOs who recognize that their business growth trumps their leasing guidelines. Alternatively, other companies need to reduce their operating costs now, in order to withstand the increasing fluctuations in the marketplace.

True, every company wants the best space at the lowest price, but these variables are subjective. Our experience is that companies are most satisfied when their business needs determine the spaces and lease terms that work best, as opposed to negotiating terms predicated on their landlords timing.

The good news is, regardless if you are growing, contracting or simply staying put, a CEO can minimize the impact of a lease on the income statement as well as on the balance sheet, while maximizing the flexibility to deal with future business needs. Here are four useful strategies to consider when evaluating your lease costs in 2013.

OPERATING EXPENSES ARE ONE-THIRD OF YOUR RENT; BE PREPARED FOR INCREASES. The influx of new investors paying top dollar for Seattle properties is creating higher valuations of office buildings. This situation results in higher property taxes and insurance premiums for landlords, who ultimately pass all of the increases through to building tenants. If you negotiated strategically, you likely have an option to audit these increases.

ORGANIZE YOUR REAL ESTATE PORTFOLIO. If yours is a multilocation operation, tracking key dates for lease expirations, options, rent escalations and expansion rights is critical. For example, missing out on an option to expand can negatively affect your ability to do business at that location. There are a number of solutions available to help you streamline and organize your portfolio data.

BUILD IN FLEXIBILITY. Lease rights and options are a privilege for tenants who know when and how to ask for them. For example, an option to terminate the lease early may carry a stiff penalty, but its a price many companies are willing to pay when their business needs change dramatically and they must move. Negotiating option rights to expand into additional contiguous space and the ability to give surplus space back to the landlord in the future are strategic advantages.

HIRE AN ADVOCATE. Landlords and property managers negotiate leases for a living. Their advantage is magnified when you are negotiating on their operational terms, not yours. Leverage the skills of a tenant-focused real estate adviser who can assist you with all three of these strategies and many more.

By taking the initiative, a CEO can transform an organizations real estate liability into a competitive asset for 2013 and beyond.

ROB NIELSEN is a senior associate and PETER TRUEX is a senior vice president in the Seattle office of Jones Lang LaSalle. They represent office space users in site selection and lease negotiations.