Reducing Office Relocation Costs
Office Relocation Costs: Landlord Contributions
Reducing Office Relocation Costs
Are you planning an office move and looking for ways to value engineer your project? Perhaps you’re wondering whether to relocate or refurbish your existing office? Whatever your situation, you're looking for ways to reduce your real estate costs.
If so, you're in the right place. We've been working with companies to design and deliver workspace projects on time and on budget since 2008. Today, we'll go through one of the most impactful yet overlooked ways to reduce your office fit out costs: landlord contributions.
Whether you’re negotiating a lease for a new office or renegotiating your existing lease, landlord contributions can play a big part in reducing your real estate and office fit out costs. With some careful planning and negotiation, you can save large sums on your rent and/ or your fit out. Along with tax deductions, this is one of the most overlooked ways to reduce your office fit out costs.
In this article, we'll go through 4 ways you can work with your landlord to reduce your real estate costs. We'll then 4 essential steps to follow to negotiate the best contributions from your landlord. By the end, you'll know how to maximise landlord concessions for your lease negotiations.
Rent-Free Period
The most common form of landlord relief for office fit out is a rent-free clause. This gives a period, normally at the start of the lease, where you can use the space without paying rent. This is usually to reflect the period of time required for fit-out works or to compensate for required repair works. A rent-free period may also be used as an incentive to sign the lease.
This is popular with many tenants because the rent saved can instead be invested in office fit out, reducing the upfront costs of moving office. It is popular with landlords, because it is a relatively simple clause that does not affect the ongoing rental rates. While it normally applies to new leases signed, this is also occasionally used as a renewal incentive.
Fit Out Contribution
A fit out contribution is an incentive whereby your landlord covers the cost of some of your office fit out. You work with a design & build company to design and deliver your office fit out as normal, but your landlord will contribute to the cost. This will normally be in the form of a rebate or a cash incentive.
There will probably be certain conditions for the contribution to be applicable. Common conditions are overall project value or a formal tender process. It’s important to consider the tax implications and risks when negotiating a contribution clause. These clauses will often include a 'clawback' right which will allow landlords to reclaim some or all of the contribution value if you terminate the lease early.
Landlord Works
Another form of landlord contribution is landlord works. This means your landlord will carry out the fit out works themselves, either completely or to a Cat A+ level. This can become complicated because you will have limited decision-making power and design influence. The overall fit out costs will also be higher than if you had worked directly with a design & build company. You need to consider how much cost the landlord is covering, and how much it saves you overall.
More commonly, landlords will fit out space to a Cat A+ level. Under normal lease agreements, the space is leased in a Cat A state. This means your space has raised access flooring, suspended ceilings, and lighting, but no finishes or furniture. With a Cat A+ lease, the landlord completes most fit out works, typically including fitted teapoints, receptions, and basic furniture. You then only have to add branding and any specific requirements.
Negotiating with the landlord to increase the standard of the space will increase your ongoing lease cost. This needs to be compared to the costs associated with the Cat A model to see which is best for you. For more help comparing the two, read this article.
Rent Reduction
Rent reduction is a cut in the ongoing monthly rental rates spread over some or all of the lease term. This means the payments are more stable for both the tenant and the landlord, improving cash flow. Landlords do not like this option, as property values are calculated by rental rates.
As a compromise between a rent-free period and rent reduction, some landlords will offer deferred rent or staggered rates. You pay lower rates for a few months before increasing to the full rate. This can help tenants manage their cash flow with the upfront relocation costs. Meanwhile, the cash flow loss of a rent-free period for the landlord is reduced.
How to Negotiate Commercial Lease Incentives
Real estate is the second-highest expense for most companies. On such a big investment, getting the best deal is essential. This includes not only the initial costs, but ongoing costs, risk exposure, and flexibility. There are a few key steps you can take to maximise landlord contributions.
Prioritise Incentives
What form of contribution suits you best? Depending on your situation, the cashflow boost of a rent-free period may be more beneficial. On the other hand, a landlord contribution may give you the budget to fit out the space to a higher standard, improving the wellbeing and productivity of your people.
Research Current Benchmarks
Rental rates and incentives tend to be heavily localised. It’s important to work with a real estate agent who knows the local market and what constitutes a “good” incentive. Market conditions such as economic growth and regional workspace supply and demand can also affect what makes a good landlord contribution.
Research Tax Implications
Each different type of landlord contribution will have different tax implications. There are several tax relief schemes available, such as AIA and capital allowances. Some categories of business expenditure (e.g. repair) are not taxable, while others (e.g. certain improvements) are. Working with a qualified accountant and tax professional is essential to minimise the cost and risk of your lease.
Work with an Expert
We strongly recommend using an experienced commercial real estate agent to help you find and negotiate your lease. This generates an average saving of 22%. An experienced real estate agent should know your local market, and be able to identify suitable properties that match your needs.
They will then be able to negotiate on your behalf, getting you the best deal possible. Many will also be able to identify workspaces that are not on the open market, which can further reduce real estate costs.
Reducing Your Fit Out Costs with Landlord Contributions
Maximising your landlord’s contribution is an excellent way to reduce your costs, improve your cashflow, and enhance the quality of your workspace. With careful planning, you can consider what type of incentive will work best for you. It’s important that you work with qualified experts to make sure you are getting the best deal possible, in terms of cost, quality and risk.
To learn more about reducing your office fit out costs, read 3 Steps to Reduce Tax in Office Fit Out and 5 Ways to Keep your Office Fit Out on Budget.
To take the next step, download your Fit Out Cost Guide 2024. There, you'll learn everything you need to know about the cost of your office fit out, including benchmark costs, factors that affect fit out costs, and how to set a project budget. Download Your Fit Out Cost Guide Here.
