Nonprofit Accounting Basics

Is It Time to Be Proactive with Your Office Lease Situation?

Note: Articles published before January 1, 2017 may be out of date. We are in the process of updating this content.

Updated: 
Dec 01, 2020
Author: 

A. Michael Gellman

Sustainability Education 4 Nonprofits
Topics: 

A familiar scenario has played out month after month for many nonprofit organizations during this prolonged period of financial uncertainty, remote work, and virtual programs and meetings. The time has come again to pay another month’s rent for your headquarters office. Frustrated that your office space is going mostly unused, you cut the check and feel like this is a wasted expense.

While it is easy to feel helpless in this situation, it is time to start the proactive planning process and take control. There are only no options when you have convinced yourself there are no options.

All organizations should be assessing and documenting how their office space needs have changed and what their new space requirements will most likely be for the next 24 to 36 months. Consider whether downsizing your space would be appropriate in light of a large portion of your staff continuing to work remotely and/or with staggered shifts using hotel (unassigned) offices. Calculate how your business and funding models have changed and analyze the impact of these changes on your overhead and occupancy structure and your bottom-line. Communicate these realities and budgets to your lease brokers and ask them to develop appropriate battle plan options that could be on the table and make sense for your organization.

Once you have a better grasp of your organization’s needs going forward, your options will vary depending on where your organization stands in the life cycle of its current office lease. I like to separate this into three different life-cycle positions: (1) near-term (for leases expiring in the next 6 to 12 months); (2) mid-term (for leases expiring in the next 12 to 24 months); and (3) long-term (for leases expiring more than 24 months from now).

1.            Near-Term (leases expiring in the next 6-12 months)

If your organization is in this position, you are in a relatively good place. While it is still hard to keep paying rent for space you are not using, you should have more bargaining leverage (and thus more options) than other organizations. You should be well into your planning process for your next space. However, you will need to determine relatively quickly your office space needs going forward. Explore approaches for your next lease that maximize flexibility, such as shorter lease terms (e.g. 36 months instead of the more traditional long-term 7 to 10-year leases) and reach out to your current landlord to see what options they might have available. There is a lot of shuffling of office space at the moment as smaller organizations move out and larger organizations jump on options to move into smaller spaces.

2.            Mid-Term (leases expiring in the next 12-24 months)

Organizations in this position have some advantages, especially if they can continue to afford their current lease commitments. Building owners are highly motivated right now to hang onto current tenants and knowing a lot of space will be dumping onto the market in the near future. Your landlord may be willing to accommodate your organization’s move to a smaller space in the same building or offer highly discounted options to get you into a new long-term lease to keep their long-term occupancy rates as high as possible. This will give your organization more time to read the office rental market and better position your staff and organization for a more optimal headquarters that will serve your needs for a longer period of time.

3.            Long-Term (leases expiring more than 24 months from now)

Admittedly, this is the most difficult of these three positions, but still there is hope and options to consider. Organizations in this position may need to approach their landlord with requests to modify their current lease or perhaps negotiate an early lease termination. The timing and approach of these communications should be carefully strategized and discussed with your lease broker and/or real estate attorneys. These advisors should be able to provide insights into what leverage your organization may have, the best timing and the financial implications of these negotiations.

Planning Tip – For all three scenarios above, plan to be transparent, proactive, and thoughtful with your communications. Be Transparent: share your challenges, strategies and proposed plans with staff, Board, and interested third parties. Do not just tell. Ask for input and comments. Be Proactive: begin to move quickly to gather information and formulate plans. Be Thoughtful: recognize that all strategies have advantages and disadvantages. Reach out to those who will be affected and let them know you are thinking about their needs.

These are disruptive times. Innovation requires great thought and decisive action. An organization’s office headquarters is a sensitive subject that factors heavily into its budget needs, self-image and reputation, and the work environment of its staff. It will be very important to listen to and respond to inquiries from those impacted and show empathy and respect as you go through the process of repositioning your office headquarters to align to new realities.