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The Rent to Production Ratio

Your monthly office rent payment should not be greater than seven per cent (7%) of your monthly production. Ideally, it would be equal to or less than five per cent (5%). If you are missing the mark, there are several rent reduction and production improvement strategies that could be implemented to improve this ratio, all of which will require actively managing your lease.

Three primary rent reduction opportunities.

1. Understand your lease obligations. Your total monthly gross rent payments include: base rent (a fixed dollar amount per square foot agreed to in your lease), additional rent (generally includes the tenant’s share of realty taxes, maintenance, and insurance, adjusted annually), operations costs, utilities and HST. More than thirty per cent of additional rent statements we review indicate an overpayment. Landlords know tenants don’t understand additional rent components or how additional rent is administered. Most tenants never review or challenge additional rents and this can add up to thousands of dollars in rent overpayment per annum.

Many leased area representations are incorrect. A 10 per cent misrepresentation on a 3,000 square foot space at $30.00 per square foot equals $750 per month in rent overpayment. Determine how the leased area is calculated, confirm the measurement and have it certified. Keep in mind that this miscalculation can go both ways, you could be underpaying!

2. Negotiate better Terms. Understand that both base and additional rental payments are negotiable. Occasionally landlords are receptive to renegotiating during a term but be prepared to make a reciprocal concession. The primary opportunity for rent negotiation is during the initial offer to lease stage. The secondary, but still relatively powerful, opportunity is during a properly handled term renewal negotiation. Approach the landlord, well in advance of the option and expiry dates, with a plan to implement a realistic term renewal negotiation.

3. Relocate the practice. When the preceding opportunities are exhausted, consider moving. Calculate the monthly amount of rental overpayment at your current location, add that to the potential rental savings achieved at a new location, multiply the sum by 10 years (120 months) and add your moving and construction costs. This will give you an approximate break-even cost to move.

Many clients report production increases greater than 20 per cent by making minor and cost effective adjustments to their operation involving lease obligations. For example, a 20% production increase for a $600,000 a year practice results in $120,000 increase in annual gross income! The challenge, when using lease facilities to increase production, is to differentiate what is not there rather than identifying an existing obstacle.

Four primary opportunities to use lease facilities to increase production.

1. How much would your production increase if you were to renovate your space? Consider renovation as an investment. Between depreciation and tax opportunities - combined with the landlord’s participation - the cost of renovating may actually be zero when handled correctly, but the return on investment can be huge.

2. Effective use of signage to increase your visibility. Speak to the landlord about moving your pylon signage from a middle position to the bottom or the top of the sign. Consider adding your own module to the pylon sign. Improve your signage so it stands out. Add an additional sign to the front or side of the building. Buy another tenant’s signage position. Install signage in the windows of your practice. Paint and/or illuminate the exterior of the building to use the building as signage. Using stand-out signage to maintain “Top of Mind Awareness” and gain more branding impressions, can help retain existing clients and encourage new ones to use your services.

3. Improve access to your location. Imagine increasing your volume by 20 per cent simply by providing your clients with exclusive use, dedicated parking spaces that are always available at your front door! Approach your landlord with a rational proposal to designate certain parking spaces as “Reserved” spaces and roll out the red carpet.

4. Share or sublet a portion of your space with a non-competing, complementary business. As a caution, most leases contain very specific provisions related to sharing or subletting your space with others. Review your lease, and if required, approach your landlord prior to committing to any arrangements.

Thoroughly understood and properly administered, your lease should be treated as a business tool that will add value and help you reach your short and long term goals.

Written by
Ian D. Toms and Jennifer J. Miles

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