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Leasing 101 for law firms: issues and trends

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The current turbulent economic and real estate markets bring to light pitfalls and opportunities for law firms negotiating or renegotiating office leases. Many leasing issues currently in play pervade most industry sectors, but some are especially relevant to law firms.

Partner liability on lease commitments

Many law firms are controlled by multiple partners, and those partners should be concerned about their personal liability. Rather than becoming personally responsible for the entire lease obligation, the firm can and should obtain a letter of credit (LOC) from its bank. The maximum amount of the LOC should be the landlord's capital costs associated with transaction (typically tenant improvement allowances and leasing commissions), and it should decline annually in proportion to the remaining lease term.

Securing a declining letter of credit from the bank and reserving sufficient funds to back that letter means other law firm partners are not liable for partners who may become incapable of meeting their fiduciary responsibilities.

Capital cost containment

Law firms should negotiate with the landlord to amortize upfront leasing costs into the rent over time, rather than incurring the expense out of pocket or requiring the law firm partners to obtain financing on behalf of the firm. This tactic allows the firm to maximize distributions to its partners and/or maintain favorable debt capacity. Expanding law firms, specifically those looking to open offices in new markets, are increasingly attracted to second-generation or sublease space, which is often available on a turn-key basis and at below market rental rates for a shorter upfront commitment.

Increasing likelihood of a landlord default

Many commercial building owners are feeling the same crunch that decimated the residential real estate market. Some owners may default on their loans, sending the building to the bank or to another investor. Now more important than ever, tenants should seek a standard non-disturbance agreement from the project lender to ensure that the tenant will retain possession of the leased property.

Law firms should also request that the landlord's transaction capital obligations are escrowed so the firm is guaranteed use of those funds. Firms can also negotiate a rental offset provision so if the landlord defaults on a capital commitment, the tenant has the right to perform the work and offset those costs against the rent with interest.

Flexibility to expand or contract

Current conditions are making it easier for tenants to negotiate true options to expand their space, not the typical "right of first offers." This agreement can provide law firms with the space they will need without the obligation to lease the space if plans change.

Also more common now are contraction options in the form of provisions that allow the firm to give back some of its space within a specific time frame. Early termination rights might also be available in some cases.

Merger & acquisition considerations

A law firm's lease should be written to provide favorable sublease provisions that allow a firm being acquired to assign its lease to the acquiring firm simply with landlord notification, not landlord consent. A financial capability test is usually applied in this scenario.

Leases can also be written to allow the law firm tenant to sublease up to 20 percent to 30 percent of its space without prior approval from the landlord, saving administrative time for the law firm and providing flexibility to reserve or absorb space.

Tenants can also negotiate liberal sublease rights that will not restrict the law firm from subletting to current or prospective tenants of the building or requiring a minimum sublease rental rate.

Building identity

Historically, law firms have not aggressively pursued building signage. That trend has changed dramatically as they look for ways to brand themselves and want to take advantage of what can be, in effect, free advertising. Securing this signage can be a key point of the lease negotiation.

Calculation of square footage

A law firm's lease should be written so that the rentable square feet is based on the BOMA (Building Owners and Managers Association) standard and will not be subject to an increase due to remeasurement if the building ownership changes.

Space efficiency

Most firms are moving toward higher secretary-to-attorney ratios and digitizing once-spacious law libraries, thereby reducing square footage requirements. Additionally, many firms no longer use office size to denote seniority, consequently standardizing and often reducing office sizes. An experienced broker can help a law firm assess its true space requirements.

Rising construction costs

Increasingly, law firms maximize their construction dollars by using high-quality finishes in lobbies and public areas, while saving on finishes used in nonpublic portions of their space.

Parking

Many law firms rely on experienced brokers to identify areas outside of central business districts to facilitate the negotiation of higher parking ratios. Suburban areas like Carmel Valley are more attractive than downtown to some firms because of better parking availability for employees and guests.


Fleck is senior managing director and Moore is a vice president for the San Diego office of Jones Lang LaSalle Americas Inc.

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