The right rent for you

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Published 08/09/10

I recently advised a very bright lawyer who was having difficulty with the math of seeking new office quarters. He wanted to understand the interplay between basic rent, common area charges (maintenance, taxes, etc., that the landlord assesses at the end of each lease year to cover the cost of operating the building, paid pro rata by each tenant), and his actual cost of occupancy (total actual rent).

That was top-down thinking. I suggested that he instead look at the situation from the bottom up — and in doing so, get his real estate broker actively involved.

The bottom-up process starts with figuring out what you want to pay for monthly and/or annual rent. You can do that in a number of different ways. You can say that, historically, you’ve earned X percent profit on Y revenue dollars; when you move into new quarters, you expect to earn more revenue — the facilities will be more efficient, you will be closer to prospective clients, the larger space will enable you to hire more staff, etc.

Whatever the expected revenue increase, if you pay the same percentage for occupancy cost, you can pay more rental dollars as an absolute amount of $Z.

If you want to be more conservative, assume that your revenue will stay the same even after the move, or simply conclude that you don’t want to pay more than the actual current rental dollars you are paying now.

That assessment looks at rental costs from the perspective of your own practice — what you expect in revenues and want you want to pay in rent. Don’t obsess over “experts” who say a lawyer should allocate 9 or 12 percent or some other fixed proportion of revenue to rent.

Such generic numbers totally miss the point on two levels. First, they allow lawyers to become self-satisfied that they are the same as others and that they need not try to do better than the average. On a broader level, why does it matter what others pay for rent? Certainly you cannot be too far out of line with your competitors and still stay in business. That, however, relates to the whole of your business/practice, not just to rent.

Once you have the specific number in mind that’s right for your practice, tell your broker to find you the space you require (with the specifications you want) for that amount. Don’t worry what words are used, whether they encompass base rent or common area charges.

The lease contract must state that the maximum annual rent will be $Z. If the broker says that you can find plenty of space for that amount, great; if the response is, “You’re crazy, there is no space for that amount,” then you have choices to make: join forces with another lawyer to share the space and cost of the space, reduce your profit and take-home pay, or simply work longer and harder to earn more revenue and cover the higher rent.

The point, again, is to make the decision in the context of your practice and what you can afford, not what a generic formula says you should pay.

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