THE HAMMER & THE NAIL:
Space Options For The Small Firm Practitioner
The practice began
in your finished basement. Your clients were charmed by the generosity of your
house calls and had no idea that the slight thumping they heard while on the
phone with you was your daughter’s sneakers in the dryer. Eventually you got
tired of finding court notices in the coupon drawer. It was time to get out of
the house.
Your mentor suggested a “space-for-services”
arrangement. She offered an office, fax machine and shared conference room in
exchange for 20 hours of work a week. You had a lot of time available in your
schedule and not much money, so it worked. But over time your practice got busy
and you realized that in billable hours (which you now could fill) that space
cost you $4,000 per month for 100 square feet. Once again, it was time to move
on.
The next step was to sub-lease space in another law
office. This allowed you to control overhead and provided respectable
conference room space and the usual amenities. It worked fine until your staff
began to grow. Your staff now includes a secretary, a paralegal, a high school
student once a week to file, and a law student in the summer. A few short years
after you started the practice, it is time to take out your own lease. And this
is an excellent time to do it – there’s lots of office space around.
If your clients are from one main geographic area, then a
local office creates good visibility and is the most economical and productive.
The larger the area from which you wish to draw clients, the more centrally you
must locate your office. A client from Queens will travel to Manhattan, but a
client from Brooklyn or the Bronx will not travel to Queens.
With some exceptions, attorneys in Manhattan tend to
locate their offices below Canal Street. (Exceptions include the “White Shoe
Firms” which locate wherever they please throughout mid-Manhattan, and are not
reading this column to decide where and how to rent space.) Locating in
Manhattan, however, does not require you to rent near the courts.
Notwithstanding the economic incentive grants offered to firms renewing or
relocating to lower Manhattan, currently the good deals are between 14th Street
and 30th Street, in and around the Silicon Alley area vacated by the dot.com
enterprises.
Most clients do not realize and do not care that all the
other attorneys are located near the courthouse. Clients want an attorney with
an office that gives an impression of confidence and success, that they can get
to within an hour, and that they don’t have to wait in too long on the day of
their appointment.
Of course you want to compare spaces on a cost per unit
basis. It is difficult to make an accurate comparison between office spaces
because owners have devised a Byzantine structure of pricing which brilliantly
subverts all attempts at comparison.
Here is how it works: Office space is rented for a set
dollar amount per square foot per year, called “Rentable Square Feet”[1].
When you ask the cost of renting a space, this is the number you are quoted and
in Manhattan for ordinary office space it runs from $15 to upwards of $75/square
foot per year. To determine the monthly rent, multiply the square foot rental
rate by the quoted Rentable Square Feet and divide by 12 months. A space quoted
as 1,500 Rentable Square Feet rented at $20/square foot will generate a monthly
rent of $2,500. This would seem to make it easy to compare space, but beware:
the quoted rent, the “Rentable Square Feet” is not the usable space. So there
is more to consider.
In theory, the Rentable Square Feet includes all the
space associated with the floor, including elevators, stairs, air conditioner
storages spaces, and common areas, which vary from office to office, so you must
make an adjustment to determine and compare the cost of usable areas. Usable
area is the “carpetable area” where you can actually put down your own two
feet. In reality, the Rentable Square Feet is a number arbitrarily inflated by
as much as 40%, over the actual usable area. The difference between Rentable
Square Feet and the usable area is a number called the “loss factor” which
varies from office to office (and sometimes from hour to hour). Now, you would
think that if you know the Rentable Square Feet, the loss factor and the rent
quote, it would be feasible to calculate the cost per square foot of the usable
area and compare the cost of office space. But wait, there’s more…
You have to measure the dimensions of the space
yourself. Ask for a floor plan, and then check the floor plan measurements with
a tape measure. Building owners have been known to make mistakes, sometimes in
their favor. You might think that now you can compare spaces. But wait, there’s
still more…
Often there may be additional fees, including air
conditioning maintenance, pass through taxes, garbage removal, cleaning, and an
annual escalation clause. In addition, sometimes there are fees with no
identifiable origin, similar to the undiagnosable fees that banks charge to
close mortgages. Ascertain which of these fees the owner is invoking and add
them to the bill. NOW start your comparison-shopping.
Educate yourself about the commercial rental market,
which fluctuates, cycles, rebounds and ricochets. Several websites
provide both searchable databases and reports about the current market
conditions. The Commercial Tenant’s Broker websites www.igdnyc.com,
www.tenantwise.com, and www.edwarren.com report that it is a renter’s market and
the websites itemize the aggressive incentives owners are offering to close
deals. Careful research and analysis will give you an edge in negotiating for
space in much the same way that you negotiate for a new car at the showroom by
waiving printouts from Consumer Reports about market trends and dealer costs.
This kind of work can be fun in a tenant’s market and is critical to success
when the market gets harder.
Owners are offering abatements up to a month for each
year of the lease. Be sure to bargain for this incentive. Owners are routinely
building out space to suit tenants, even in small spaces. In the alternative,
you may save more money by taking the space “as is” and getting additional rent
concessions from the landlord. This will require you to call in favors from
every family member you ever represented in traffic court and may require some
bartering for additional services as well, but it is an excellent form of sweat
equity. The photo of your partner with the paintbrush in one arm hand and his
two-year-old in the other is worth the price of the silk tie he loves to wear
for jury selection.
The “Good Guy” clause is a limitation of your personal
guarantee of the rent, which can easily run upwards of $40,000 per year for 5 to
10 years. Only guarantee to pay the rent as long as you occupy the premises.
If you vacate the premises with the rent paid up, even if there is time left on
the lease, you have no personal obligation to the owner to continue paying the
rent. You are the “Good Guy” because you paid for the whole time you occupied
the space.
The escalation clause is the percentage of your current
lease that will be tacked on to how much more you have to pay next year. The
escalation percentage should be a real number that you can verify, either a
straight percentage (a couple to a few percentage points) or an independently
published number, like the consumer price index. Trouble is brewing if you
accept an escalation factor to be determined later by the landlord, such as one
based on “the owner’s reasonable expenses.” The escalation clause is negotiable
and should be determined before you agree to the deal.
As always, ask yourself, “What would Adam Smith do?” The
goal of capitalism is to teach your money make you more money. The ideal
arrangement is to take a space large enough to sublease to newcomers, whose rent
payments to you will cover part of your rent, or more. (Be sure that all firms
within an office space are properly identified to the public, and be sure that
all attorneys sharing space are properly insured.) Negotiate a lease that allows
you to sublet and resist the owner’s attempt to take a percentage of your
subletting profits.
This is a good time to take a long lease at favorable
terms. Read the lease you are offered carefully, like a lawyer. Negotiate to
remove or ameliorate any harsh provisions. Once you have signed, the fun
begins. Now, for decorating issues, always ask yourself “What would Christopher
Lowell do?”
٭٭٭
| 
