Reducing Office Relocation Costs
Are you planning an office move and looking for ways to reduce the cost? Or perhaps you’re wondering whether to relocate or refurbish your existing office? Either way, landlord contributions can be a big factor in reducing your real estate and office fit out costs.
When you're deciding whether or where to relocate your office, you’re making a big decision with huge financial and strategic consequences. Most professional services spend 10-15% of their annual revenue on real estate. There are several major upfront costs, as well as ongoing ones. Upfront, you have agent and advisor fees, as well as fit out and relocation costs. Ongoing, you have the office space lease and operational costs.
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.
At Zentura, we are always working with new and existing clients to create and update their workspace strategies. We support them from workspace consultancy and lease negotiation to design and delivery of office fit outs. In this article, we’ll explain the 4 most common ways your landlord can help you reduce your real estate and fit out costs. We’ll also give you some tips to help you negotiate these into your lease. Let’s get started!
Fit Out Contribution
A fit out contribution is a commercial lease incentive whereby your landlord covers the cost of some (or all) of your office fit out. Under a fit out contribution clause, 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 may be in the form of a rebate, or sometimes a cash incentive.
There will normally 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.
More commonly, landlords will carry out the fit out works themselves, either completely or to a Cat A+ level. Your landlord arranging your fit out completely can get complicated. 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.
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, to compensate for disrepair, or 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.
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. However, as property values are calculated by rental rates, this option is not preferred by landlords.
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, and leasing is the biggest component. 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.
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 CIS and super reduction. Some categories of business expenditure (e.g. repair) are not taxable, while others (e.g. certain improvements) are. Working with a qualified accountant or 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, as this generates average savings 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. In a market where occupancy rates are volatile, landlords are prepared to offer generous incentive packages to high-quality tenants. This can either take the form of assistance with your office fit out works, or a rental rate reduction in lieu of that.
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.
While leasing is the biggest cost of your office relocation, you will also need to factor in legal costs, dilapidations, fit-out costs, operating expenses, and the actual relocation itself. To learn more about what that will cost, check out our article on the cost of London office relocation in 2022. You’ll get a full breakdown of everything you need to know about office relocation project costs.
For further advice on how to relocate your London office, contact our workplace experts. We can help you to shortlist and audit a number of suitable properties for your office, working with our network of commercial property agents. Our workspace consultancy package helps you uncover the data that will guide your decisions and planning for the future.