How to Save Costs by Restructuring your Property Agreements
Zac Goodman, Partner, Third Sector Property
The downturn in the global property markets, driven by lack of real estate financing and weak demand, presents a window of opportunity for third sector organisations to reduce their cost base - at a time when many face plummeting donations, rising costs and increased pressure on their services. And as property is one of the largest overheads for any charity rental agreements are an excellent starting point for charities looking to future-proof their finances.
The recession has given rise to fundamental changes in the UK commercial property markets with UK market values now slumping at a 16 year low (according to IPD's UK Monthly Index) and not expected to return to growth until 2013. Meanwhile the steep rise in business insolvencies is compounding the bleak picture but it does highlight that the downturn has brought about a shift in power between landlord and tenant. It's even possible to significantly reduce costs, potentially even mid-lease.
Restructuring rental agreements can save thousands of pounds, even mid-lease, with the right approach and advice. Third Sector Property can help your charity negotiate a straight-forward rent reduction and also offer:
- assistance to get charities better lease terms when renewal is due
- renegotiate a lease mid-term
- help to find the most suitable and appropriate property
- renegotiate terms that stipulate unrealistic costs such as maintenance
If a lease was agreed in 2004 or after, it is more than likely that the rent is substantially above market value. However, the boon for struggling charities is that the days of upward only rent reviews are over and there are now multiple options to secure more favourable lease terms from landlords keen to minimise voids. This is part of a wider global trend: a CoreNet survey found that 48% of the world's leading companies are reviewing options for exiting their leases early.
There are four main possibilities for charities hoping to ease their rental burden. First, if the charity is experiencing genuine financial difficulty it may be possible to renegotiate terms, even where there are several years left to run on the lease. After all, landlords are more likely than ever to consider lower rental yields if the tenant may potentially default and go into administration. Secondly, charities that are on a more stable financial footing may also make savings if their existing lease is has less than two years left to run. In our experience many landlords consider sacrificing part of their income in return for a lease renewal. Thirdly, any charities may be able to improve cash-flow by negotiating down payment terms from quarterly to monthly instalments. Finally, if tenants have a break clause or their lease is due to expire and the current space no longer suits their needs, there is no shortage of supply of premises available on very flexible and favourable terms.
While landlords can be flexible, circumstances vary and therefore delicacy and a real understanding of the issues they face is required. In addition to the steep empty rate taxes they face, Capital Economic recently predicted the increase in voids will potentially wipe up to 5% off the typical landlord's income. Therefore lease longevity and security of tenancy are the principal motivators for landlords. A further spur is that charities are considered to be the ideal tenants, since they are the most reliable and timely with their payments, and are also eligible for rate relief.
As ever, good negotiation is based on knowing the facts. Understanding local supply and demand is crucial and it is also advisable to review comparable local properties to understand the strength of the negotiating position.
Yet despite these fresh opportunities, most charities are unaware that landlords are now often willing to renegotiate terms. Our research among 130 of the UK's leading charities found that a quarter (25 per cent) of all cost cutting is being made to crucial project investment and frontline services. Meanwhile only 13 per cent of savings have come from trimming rental costs and other overheads, despite 80 per cent claiming they have been negatively affected by rising overheads during recent months.
The time is ripe for charities to reduce their real estate overheads. By cutting their costs, many charities have been able to secure the long-term financial health of their business and/or channel the savings into frontline services.