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Bulletin Winter 2016

Q: Best Business Practice Anita Turner My partner, Joe, and I were on a recent call and were asked by a managing partner of a local law fi rm for our thoughts on whether it was advisable for a fi rm to own its own building. Joe quickly responded, “If a law fi rm wishes to own real estate, they should buy the building next door and lease it out, while leasing their own space from another owner.” While his comment might sound a bit short, Joe’s further explanation made clear why his reasoning is sound and applies to any professional services fi rm including medical practices and accounting fi rms. Joe explained that there are two primary problems with owning your own single-tenant building and being the single tenant. First, you lose the fl exibility to grow, or to shrink. To grow, your only options become to restack your building to a denser occupancy with smaller and smaller offi ces or workstations, or to lease additional space in another building, thereby creating a two-offi ce operation. Once you have two separate offi ces, you end up duplicating things like reception and break areas, thereby creating added expense. To shrink, you either have to sell your building and relocate, or fi gure out a way to make the building a multi-tenant building and then fi nd tenants for your excess space. Th e decisions for the fi rm end up being compromised by the real estate. Should a professional services fi rm own its offi ce building or the one next door? Th e second primary problem with owning your own building is that usually the ownership entity is not the service fi rm itself but rather a group consisting of some or all of the fi rm’s partners that leases the building back to the fi rm. Over time, some of those partners may decide that they do not want to be invested in an offi ce building or may leave the fi rm. Others may reach retirement age and be more interested in a greater return on the real estate (translated as higher rent) than a lower cost of operations for the fi rm from which they are retiring. At the same time, the fi rm’s younger professionals not involved in the original ownership group move into more signifi cant production positions in the fi rm and resent or otherwise do not embrace the arrangement. Experience tells us that this change in perspective within the fi rm happens faster than most groups anticipate. While we have worked with fi rms that own their own buildings, we have found that once fi rms have been in this situation for 10 years or more, the fi rm (as opposed to the ownership group) seems to spend more time dealing with the downside rather than the upside of the arrangement. Service fi rms with multiple locations fi nd the ownership entity issue to be even more fraught with problems. For instance, if a Birmingham law fi rm acquires a Montgomery practice and those Montgomery partners own their building, the law fi rm leadership’s ability to negotiate a fair market transaction for all of the partners is compromised. Instead, they have to carefully avoid confl ict with one group of their partners. Th is usually results in an above-market deal for the law fi rm. If the fi rm instead invests in one of the many opportunities in any real estate market, whether it be the building next door or down the street, all the investment decisions as well as the fi rm’s offi ce space decisions are market driven. Th e partners still have the ability to leverage their individual situations by investing together which has the benefi t of “putting a little glue on everyone” without tying a typically long-term investment so closely to the potentially fl uid needs of the fi rm. A professional leasing and management fi rm can manage the day to day operations and be accountable to the ownership. G Anita Turner, a lawyer and member of the Birmingham Bar Association, is a Senior Director for Colliers International in Birmingham. 12 Birmingham Bar Association


Bulletin Winter 2016
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