Sooner or later, your company is bound to make a move. Maybe you’ll need more space, or you’ll want to consolidate operations or cut costs. Perhaps your landlord simply won’t renew your lease.

     Whatever your situation, moving gives you an opportunity to control one of your single largest overhead items: the lease for your office space. You may even be able to structure an arrangement with profit potential. But there are major risks, too. For instance, many companies miscalculate their actual needs. I once worked with one manufacturer that had been at the same location for 20 years when it experienced a sudden spurt of growth. The company rushed to sign a five-year lease for the 7,600-square-foot floor below it. Initially, it used the space as a warehouse, reorganizing inventory and tools it had accumulated over the years. Then, the chief executive officer discovered the company could use its old space more efficiently and didn’t need the new space at all.

     While relocating is a major challenge for any company, it’s also an opportunity to make a fresh start. To take advantage of the many opportunities presented by a move, careful planning is essential. Here’s an overview of what you can do to make your move a smooth and successful one.

EXAMINING YOUR OBJECTIVES

     Often, personal as well as business goals can play a role in your decision to move. That’s OK – just as long as you acknowledge these influences and then give them no more weight than they deserve. For example, the CEO of a natural-resources company I once worked with loved to ski, so he built an extraordinarily handsome and expensive office in an out-of-the-way mountain location. This facility became a tremendous burden when the company faced a market downturn and had to cut costs. The company carried the all-but-empty building on its books for years, unable to get rid of it.

     Among the critical issues to consider as you develop a clear, realistic statement of objectives: are you primarily interested in cutting costs, enhancing your image, reducing employee travel time, finding a more skilled labor pool, escaping government regulation, providing for future growth, or turning your real-estate holdings into assets rather than expenses? Many companies fail to articulate their objectives. The result can be months of wasted time and a less-than-optimal solution.

HOW MUCH SPACE DO YOU NEED?

     Next, determine how much space your operations actually use now. The best way to do this is to hire an architect or space planner. After learning how your employees use office space and how the parts of your business are related, a space planner can help you eliminate wasted space from your footage figures while still allowing for storage, lobbies, and corridors.

     Then, consider how your space needs are likely to change. If your company is stable, your designer can more easily develop a space plan that will serve you during a multiyear lease. If changes in your operation are likely to change how you use space, you’ll need more flexibility – an open space plan, modular systems, or offices of a size and configuration that can accommodate employees of different ranks.

     Finally, compare the measurements of your current space and your estimated near-term needs with any locations you consider. But remember that landlords have many different ways to measure rentable area – the usable area on two different "10,000-square-foot" floors can vary by more than 20%. This means one of these floors might actually be too small for your company. In addition, if there’s a big gap between the landlord’s quoted rentable area and the usable area, space quoted at a lower rate per rentable square foot can actually turn out to be more expensive

     Space planning is likely to involve certain sensitive decisions, such as who will get window offices, how large to make the vice-president’s office, and how many people will share offices. Now that office space is so expensive, many companies are phasing out bigger and plusher office space as a perk that comes with climbing the corporate ladder. These days, a chairman or president tends to get between 250 and 400 square feet; a vice-president, 150 and 250 square feet; and clerical worker, 45 to 75 square feet. Developing standard units of space will minimize rivalry and tedius individual negotiations about these perks. It will also enable you to rearrange your office layout more easily during the term of the lease.

OFFICE HUNTING

     Once you realize that a move is inevitable, it’s time to start looking for a new location – probably the hardest decision you’ll make. There’s more to finding the right location than sticking pins in a map. If you’re like many CEOs, you probably feel that location is the main reason your current building is so desirable. Start by analyzing the other features that make your present offices suitable.

     If increasing taxes, occupancy costs, and wages are major incentives for your move, you’ll be considering other cities and states for your new home – which means you’ll have a broad range of factors to consider. For instance, how will corporate income taxes affect your company’s profitability? A video-game company that employs 125 people recently decided to leave New York City for New Jersey, because New York State taxed it on out-of-state sales. Lower personal-income tax and property-tax rates can also be important factors in attracting and retaining good employees.

     How about the labor pool? Are there enough people in the area who are skilled and ready to work at reasonable rates? These days, real-estate decisions are often driven as much by demographics as by bricks and mortar. You may be tempted to move from a downtown location to the suburbs. But today, many suburban locations also suffer from congestion, high wage rates, and a shortage of skilled labor. The minimal savings may not justify such a move.

     Can government incentives help you reduce the cost of your move? Many states, eager to attract certain kinds of businesses, offer real-estate tax abatements and low-cost loans for building or improving a facility. Contact state and local economic development offices and real estate brokers to see if you can factor any such benefits into your financial analysis.

     If you need convenient access to an airport, interstate highways, railroad, or seaport, your choices may be sharply narrowed.

     Don’t forget the quality of life at any new location you’re considering. Subjective though this is, it plays a role in attracting top-quality employees. Many large companies accustomed to shuttling people around the country have learned that universities, cultural activities and good hospitals and schools are prerequisites for persuading their employees to accept transfers.

     Once you’ve determined which area you want to do business in, you’ll be ready to consider the desirability of specific locations.

     *  Image. If you do a lot of business from your office, the image it projects is important. The building’s façade and lobby and your own reception area inevitability become part of your marketing effort.

     *  Proximity to customers or suppliers. Companies that provide business services often need to be close to their clients. For example, graphic arts companies usually want to be within a few blocks of the corporations and advertising agencies that commission their work.

     *  Accessibility for employees. Is there adequate public transportation? Will your employees encounter frequent traffic jams as part of their daily commute? With the recent building boom, many office buildings and industrial parks have been located in areas where road systems are inadequate for the new density.

     *  Safety. Are you on a dark side street or in a neighborhood with a high crime rate? Will your employees feel safe if they work before or after normal business hours?

     *  Building security. Is the lobby staffed 24 hours a day, seven days a week? If not, how is access controlled during off-hours? Are stairwells and other exits monitored? If your building has a garage, investigate security there, too. Look for adequate lighting in these areas.

     *  Building maintenance and services. Find out what, if any, cleaning services the landlord provides. Can vendors and suppliers make their deliveries readily? If your employees work before or after normal business hours, check whether your offices can be heated and air-conditioned at these times. If heating or cooling your 20,000 square foot office means the landlord has to serve the entire building, the cost is likely to be prohibitive.

     *  Floor size. Some businesses, such as insurance companies, advertising agencies, and investment banks, tend to have a great deal of communication among departments and like to use open floor plans. These kinds of companies function most efficiently on large floors, say, with 20,000 square feet or more. Other businesses are likely to prefer more windows, which means a smaller size floor, with a higher ratio of perimeter to interior space.

     *  Floor load. If you maintain a large library or use any heavy equipment, verify that the floors can bear the weight or can be reinforced at a reasonable cost. Typical floor-load capacity for an office building is about 50 to 75 pounds per square foot, but a sizable library may require twice that.

     *  Electrical capacity. Older buildings don’t always have enough electrical capacity to serve today’s computer-intensive businesses. Some older buildings provide fewer than 5 watts per square foot, while a company that uses computers extensively may need 12 or more watts per square foot. Before settling on any location, find out if the electrical service is enough for your present and foreseeable needs. If not, find out how readily additional capacity can be made available and who will bear the cost for providing this additional service, which can be expensive.

     *  Asbestos. Especially with offices built between 1950 and 1975 or so, check for asbestos insulation. Certain forms of asbestos may create health hazards, for which you could be held responsible as an employer. Many cities and states regulate the removal of asbestos, and the cost of complying could effectively prohibit you from modifying or subleasing your space. If you do choose a building with asbestos, be aware that the painstaking procedures for removing it could increase your setup costs and delay your move.

NEGOTIATING THE LEASE

     It's fair to say that everything in a lease is negotiable, but what can be negotiated in your situation will depend substantially on three factors:

     *  Your clout as a tenant. Big tenants, those with more than one location, those with established financial histories, those considering to lend a building cachet – all have more clout than other tenants.

     *  Your landlord’s existing obligations. Mortgage covenants or a noncompete clause in another tenant’s lease, for instance, could limit your sublease rights.

     *  Market conditions. A landlord in Dallas or Denver, where the vacancy rate exceeds 30%, is likely to be more flexible than a landlord in Boston, where the vacancy rate is less than 10%.

     Next, remember when you sit down to negotiate that you’ll most likely be pitted against seasoned pros who know many ways to squeeze money out of a lease. Landlords focus on protecting their long-term profits, which they’ve recently seen eroded by inflation and government regulation. Years of experience have taught landlords to provide for every contingency, no matter how remote, and to shift risk from their side of the table to yours. To protect your long-term interests, you must approach your lease negotiation with a similar focus. Here are seven important clauses to look out for in your lease:

     1. Description of leased premises. This should state the rentable area you’re leasing. The lease should also describe the building – including total rentable square footage – and land in detail. These facts are all important for verifying operating expenses and tax bills.

     2. Use clause. This is the part of the lease that specifies what you can do in your space. Make sure it is general enough to cover all your likely activities and gives you flexibility to sublease your space. For instance, if your company sells office equipment, look for a use clause that says you may use the space for general office purposes and all other legally permissible purposes – don’t accept a clause that specifies "computer sales offices." If you plan a special use, such as training facility, get your landlord’s representation that zoning laws permit it.

     3. Audit rights. Your lease should specify a reasonable time for you to review increases in operating expense bills, access to the relevant documentation at a reasonably convenient time and place, and an effective way to protest changes you believe are incorrect.

     4. Repairs and maintenance. In a typical multi-tenant office building, your landlord will be responsible for structural repairs and for repairs to all exterior elements and common areas. You will be responsible for maintaining and repairing everything inside the space you lease, unless it’s a structural repair. The problem with this allocation of responsibilities is that there may be gaps in which neither you nor the landlord have clear responsibility for maintenance – for instance, window fittings and supplemental heating or cooling systems. You might be faced with the unpleasant choice of putting up with inadequate facilities or paying for an expensive repair yourself. To avoid this situation, specify in the lease that your landlord is obligated to maintain everything that’s not your explicit responsibility.

     5. Alterations and improvements. Chances are that during your lease term, you’ll want to make a change, say, to create a conference room. The typical alteration-and-improvement clause will likely prevent you from making any changes. Bargain for a clause that allows you to make alterations without your landlord’s approval as long as they don’t affect the building’s service systems. Your lease should not require that you remove such improvements at the end of your lease term.

     Most often, a landlord will insist on the right to approve the contractors you use. This makes sense. The landlord has an interest in seeing that all work done in the building is of suitable quality, that no liens are likely to be filed against the property by disgruntled contractors, and that your choice of contractors won’t result in unions picketing the building.

COUNTING DOWN TO MOVING DAY

     As you search for a suitable site, think ahead. The move itself can be handled relatively quickly, but allow plenty of time for planning. For instance, a typical 20,000 square foot office facility can be moved in a single weekend – if you’ve done your homework. For a move this size or smaller, it’s reasonable to allow a year to plan, locate an acceptable alternative, negotiate a satisfactory lease, and modify the interior.

     Your first step should be to designate one person who will act as liaison with brokers, owners, architects, engineers and others who will provide goods and services. The coordinator should be a senior executive. Companies too often try to save top management time by delegating the initial phases of the search for new offices. But little is gained if the person doing this job doesn’t understand the company’s true objectives and can’t make decisions about the sites under consideration. It’s critical to involve the real decision makers early on.

     If your business is divided into departments, you should involve someone from each one in planning for the move. They should inform your coordinator about how their departments, you should involve someone from each one in planning for the move. They should inform your coordinator about how their departments use space and how their needs are likely to change over time. During the move, these liaisons can communicate the plan with other employees. Afterward, they’ll be the contacts for correcting minor problems that arise.

     Sometime after appointing a coordinator, start considering the equipment you’ll need for the new offices. Don’t underestimate the complexities of evaluating office systems. For instance, the cost of installing and operating a phone system can exceed your monthly rent bills.

     Give serious thought to lighting arrangements, especially when employees spend hours in front of computer terminals. Inadequately designed lighting might lead to headaches and eyestrain. Ambient lighting, most often provided by overhead fluorescent fixtures, is the standard in many office environments, but task lighting might be better suited for your employees’ needs. Another plus: task lighting might reduce your electricity bills. Fewer and smaller lighting fixtures will use less power, and cooling your offices will cost less as well.

     Attention to the details will determine whether your move is smooth and your business can keep running without interruption, so arm yourself with checklists as the move draws nearer.

WHY NOT BUY YOUR OFFICE?

     Many companies should consider buying their own offices rather than leasing. As a tenant, you should build no equity, and you’re at the mercy of an unpredictable real estate market. For large space users, already accustomed to substantial outlays for rent and interior improvements, the added cost of buying might be slight. Ongoing costs can often be reduced by structuring the purchase as a joint venture or by renting excess space to another company.

     With a small, privately held company, the chief executive officer can buy a building and lease it back to the company. Not only will the CEO have an appreciating asset that can be kept if the company is sold, but the building can be depreciated to the CEO’s financial benefit.

     Buying or building a facility puts you in control, but you take on risks, too. Here’s a checklist of factors to consider:

     *  Title. You should hire a lawyer to do a title search. If you’re buying from a corporation or partnership, make sure someone with legal authority signs your deed. Watch out for easements, which indicate someone else might have a permanent right to use portions of your land. Get a perimeter survey so you know exactly what you own. In states where full-warranty deeds – which ensure that the seller is responsible for any problems with the title – are common, you should insist on one. Generally, the bank will require title insurance, and for a small fee, you, as the owner of the building, can also be covered.

     *  Seller default. If you’re buying a building in which tenants will continue to occupy some space, get a statement from each tenant that the seller isn’t in default under the lease. This helps ensure you won’t wind up making repairs and providing amenities that were the seller’s responsibility. Of course, get a statement form the seller that all tenants are current on their rent payments and that there’s no litigation pending against the property.

     *  Economic analysis. If rental income will be essential to your ability to pay the mortgage, do your homework. Are your income projections realistic? How long, on average, does it take to find tenants for similar space in your area? What is the vacancy rate? What new construction and existing space will compete for tenants?

     *  Zoning.  Don’t assume that a building site has all the zoning approvals you’ll need. It’s common for zoning district lines to cut through individual properties. Grandfather clauses might permit uses on neighboring properties – or even in the building you want to buy – that might be prohibited for you as a new owner.

     *  Code violations. Does the building have the required number of fire alarms? Does the building façade comply with local ordinances? Does the wiring meet safety standards? Make sure there are no code violations to correct.

     *  Hazardous wastes. An owner of a contaminated site is potentially liable for its cleanup under federal and some state laws, even if it didn’t dump the waste. Talk with your state environmental protection agency to see what it knows about the property. Get a statement from your seller that three are no hazards associated with the site and negotiate for an indemnity.

     *  Financing. If you’re building from scratch, you might negotiate three packages: land, construction, and permanent financing. Interest or construction financing tends to be substantially higher than on permanent financing, since the lender is most vulnerable during construction. Lenders who offer construction financing might allow you to convert to permanent financing once your project is completed.

       With permanent financing, lenders routinely lend up to 85% of the value of land and improvements, secured only by the land. With new construction, however, lenders are likely to insist on a construction guarantee from you personally or from a corporation with acceptable net worth. Terms for permanent financing vary widely. Lenders might offer a participating mortgage, which has a lower interest rate, in exchange for part of the gain when you sell.

     *  Construction. Control during construction is essential. You might contract with a developer, construction manager, or general contractor. Once you’ve approved final working drawings and given your builder the go-ahead, limit your changes to essential terms.

     *  Construction contracts. Two common methods of paying for construction work are cost plus and guaranteed maximum price. With the cost-plus system, your builder develops detailed cost estimates. You agree to pay he actual costs in addition to an agreed-on percentage for overhead and profit.

     If you have a guaranteed maximum price contract and the project comes in for less, you and the builder share the savings. As an owner, you’d like the security provided by a guaranteed maximum price, but many experienced builders say it gives contractors an incentive to cut corners in order to increase their profit margin.

     Whichever method you choose, remember to pay your builder only for materials actually delivered and work that’s finished, minus a negotiated percentage called a retainage.

     *  Local politics. In many communities, there’s growing resistance to development. Make sure you understand the full range of approvals you’ll need, who the decision makers are, and what opposition you’re likely to encounter. Delays resulting from opposition can increase your costs significantly.

     *  Taxes. Tax considerations vary considerably, but you should be aware of 1966 tax law changes that significantly affect the economics of all real estate decisions. Depreciation schedules for commercial properties are now 31 years. Seldom can depreciation be used to shelter income from other sources. If you’re trying to calculate your ultimate return upon sale of the property after 5 or 10 years, remember that capital gains are now taxed at ordinary income rates.

     If you decide to have a developer build a facility you will lease, perhaps with an option to buy, you must maintain control. Consider these points:

     *  Walk date. Insist on a walk date in your agreement, which means you’re free to terminate the agreement and look elsewhere for space if your contractor doesn’t have the building finished by an agreed-upon date.

     *  Accountability. Make sure the builder can’t transfer ownership until the project is completed, and you’ve occupied the space for a year. A change of ownership during this critical construction phase invites disputes about who is responsible for what. The financial stability of a contractor or developer is a major consideration. If your contractor goes bankrupt during a job, you’ll pay extra to complete it. A guarantee from a bankrupt business is worthless. 

     *  Commercial condominiums. In many areas, you can now buy office condominiums. Like residential condominiums, these offer some but not all the advantages of ownership.

     Make a decision that fits your company. Buying might make sense only if you can rent out part of the space. Often law, accounting, and other partnerships avoid owning property because it can become overly complicated when partners come and go. Renting might make more sense if you can earn a higher return by putting your money elsewhere. Consider the overall temperament, inclination and resources of your business when you decide whether to buy, build, or lease.

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