How to Assess the Office Your Law Practice Needs

02/01/2014
From California State Bar: The Bottom Line, February 2014

Regardless of a law firm's size, office space is inevitably a large and complex expenditure – certainly in the top three expense categories for any firm. In these days of home offices, telecommuting, and virtual offices (often all one in the same phenomenon), some futuristic thinkers declare that where lawyers practice is irrelevant, so long as clients can call or email them. In an abstract sense that may be true. But, just as electronic files are unlikely to replace books and paper, the physical setting where lawyers interact with clients and colleagues will remain essential to defining almost all practices.

The Rules of Professional Conduct do not explicitly require a physical office, but obligations such as those under Rule 1.4 (regularly consulting with a client), Rule 1.6 (confidential communication) and Rule 1.15 (safekeeping client property) are best met in a physical office setting. That setting speaks loudly and clearly to clients about what kind of firm you are. If your firm's clients are blue collar workers, you may want to be near public transportation. If a number of clients are accused criminal defendants, proximity to the court house and bail bondsmen is important. If most of your clients come from suburban or exurban locations, they might prefer a location with ample free parking. Such messages define your firm much more clearly than any marketing brochure or advertisement.

Cost Assessment

Office costs can make a statement about the law firm itself, since high or low overhead often translates into high or low fees. Answer these questions consistent with your practice goals:

  • Is your rent consistent with the geographic area in which you're located?

  • Is your physical location one that you, your clients, and your prospects are comfortable with?

  • If you think better quarters would improve your practice, can you afford them?

  • Would better quarters allow you to take on better cases and charge more for them?

Three factors should define your space: what you can afford, which features are most critical to you, and what is important to your clients. If you are already in leased office space, an impending lease renewal is a good time to assess whether the firm should stay where it is or move in an entirely new direction. Take a macro view and analyze the economics of the firm (revenues, expenses, profitability) within the context of the current lease expense. Take a micro view and analyze the economics of specific practices, or the entire practice of a smaller firm, and whether current office conditions are adequate, or a move would be beneficial. Either way, assess rental costs against expected revenues, affordability and practice needs.

Financing Assessment

Whether purchasing or leasing office space, many law firms seek financing from their banker. A loan for new or expanded office space may be in the form of a line of credit (the lawyer borrows and repays at will up to the amount of the credit line, which may be renegotiated), a revolving line of credit (a designated sum is converted to a repayable term loan), or a term loan (generally longer for larger firms than smaller ones). Bankers make lending decisions based on the firm's finances (cash flow, receivables, revenue and profits), its qualifications under the "Four Cs" test (character, capacity to repay, capital, and collateral), and its FICO credit score (which estimates default risk based on credit history). Collateral and capital are the critical determinants in getting a real estate loan. Collateral is defined as the hard assets given to the bank to secure the loan; capital is an essential consideration in loans because the bank wants to know how much of the cost will be covered by the law firm's assets. If the law firm has an adequate capital base, the bank is more comfortable helping complete the purchase.

Space Assessment

Selecting an office is a complicated and difficult project and requires considerable thought, preplanning, and coordination. Even though the list of things to be done is long and extensive, you have to define the space that you want, physically and contractually. The best foundation for planning office space is to survey the very precise wants and needs of lawyers and staff: number of electrical outlets in each person's space, location of data and telephone cables, proximity of copiers and fax machines to work areas. This list becomes a tool to share with brokers and leasing agents as a qualifier for the space they want to show you.

Lawyers often are on the lookout for better space – either because they are dissatisfied with their existing surroundings, or are looking to make a move to a location that offers more expansion room and client convenience, additional services, or more lawyers at a new location who practice in other practice areas that can lead to referrals. If you decide to move, be more discriminating when you select your next space, even if it costs you a few dollars more. In both the short and long run, you'll be happier, your clients will be better served and your referral base can grow by enabling you to know more, and better, lawyers in your new location.

Operations Assessment

There are other issues to consider. Make sure that the up-front expense of a move will realize greater potential future income. You should be wholehearted about your move – don't try to sneak into a new building by just putting a line in your email signature that as of such a date you are in a new location. There are many people you should inform about your move: not only clients, but financial institutions, insurance carriers, bar associations and courts, vendors, utilities, landlords, taxing authorities, the local legal media, and the postal service. To do otherwise will cause you far more problems than if you stay where you already are.

Moreover, office space should not be merely managed – its cost, composition, and financing must be part of the law firm's overall strategic plan. If the partners disagree about the firm's overall goals as well as specific objectives and strategies, then they will not "buy in" to any plan involving the purpose, structuring and cost of office space. It must be agreed by all partners, or by the lawyer and assistant in a solo practice, that office space is not a matter of ordering attractive light fixtures and carpeting, but instead is a defining element of the firm's business strategy and cost structure. In this sense a law practice and a law office truly are synonymous.

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