To Buy Or Not To Buy?

One of the early jobs I had in my career, I worked for a lawyer who was a terribly smart business owner and as good as anybody I’ve ever known at seeing trends and skating to where the puck is headed. I learned a lot from him, some of it not entirely pleasant to learn, that I’ve carried forward in the years since.

One of the relatively few things I saw him get wrong on the business end of his practice was his insistence on never having the firm own real estate. I imagine he looked at the big law firms in the downtown high rises and noted that they rented real their estate and applied the same logic for his firm. For whatever reason, he was dead set against owning real estate.

Years later, after I moved from practicing law to doing practice management consulting full-time, I found myself with the opportunity to visit with many law firms across North Carolina. I had by virtue of my position at that time, a front row seat to witness how lots of successful (and some not so successful) North Carolina firms solved the common practice management issues. After years of serving as a law firm managing partner, I thought I already knew a few things, but this was like doing graduate work in law firm practice management compared to what I already knew. I had some workable ideas and models, but I had only been looking through a keyhole. Now I was getting to see the whole field. I learned a ton.

One of the things I learned was how much real estate investment can be, under the right circumstances, a huge financial boon to the owners. It can also be an albatross around your firm’s neck if you get it wrong, so I don’t recommend it hastily or uniformly. But has been a good thing for lots of North Carolina lawyers for a long time and still can provide some real value.

Before I get into the analysis, it’s worth saying that we are still in the midst of unpacking the post-pandemic effect on commercial real estate and there is just no telling where this path ends. I don’t have the skills or education to add much value on that part of the equation. I will just share that in addition to the analysis a lawyer might go through for their firm, they should also take account the unique market conditions of our current moment.

So, why do I say that lawyer I worked for made a mistake not owning real estate? It was really more of a missed opportunity than a mistake –unusual for a lawyer who didn’t miss too many business opportunities. His firm was well positioned to avoid the downsides of real estate ownership and he would have profited handsomely from the upsides. 

He had all the things that correlate with success in real estate for law firms:

1. a stable office size and location;
2. a deep bench of talented staff members to shoulder the property management burden;
3. a client base and practice area that meant the firm needed to keep a physical office footprint;
4. lots of access to low interest rate loans over the years.

Here’s how I would unpack the analysis for a firm. 

Locked into size: the first downside of owning real estate is your firm gets locked into a certain size for the office. If you have a space for four lawyers, your firm feels empty if you don’t have four. If you need to hire a fifth, you have to do some gymnastics to find space. Your decisions about how to grow, shrink or otherwise staff your firm get run through the floor plan of available space as a major consideration. What should be a strategic decision about market opportunities for growth or operational realities for shrinking, gets driven by a real estate commitment that is hard to change.

Takeaway: firms that are stable in their size and staffing levels are best positioned to make a commitment to buying a real estate. Firms that are growing or shrinking or otherwise less stable are better off renting.

Locked into location: the second downside of owning real estate is your firm is locked into its physical location. If development in your town makes your office neighborhood less desirable, if opportunities arise in the town down the road, or if your clients cite your location as a negative in their dealings with your firm, it becomes harder to make a change.

Takeaway: firms that are confident in their commitment to their physical location are the best candidates for buying real estate. If your town’s development is highly dynamic or your market opportunities are shifting geographically, renting might be a better choice.

Property management: law firm managing partners have enough hats to wear every day. Owning firm real estate adds a property manager hat to that list. All of the hassle and maintenance needs of your home will duplicate in your office. From taking out the trash, to replacing light bulbs, to fixing a broken walkway… it all becomes the firm’s responsibility. If you have a vision, as so many lawyers do, of your firm being located in a 100 year old historic home walking distance to the courthouse (looking at you, Harper Lee, for this persistent lawyer fantasy), then you can multiply the maintenance commitment by 3.

Takeaway: if you don’t love property maintenance as a hobby, you will need to either assign the duties to a staff person, outsource it (which won’t be cheap) or do it yourself. It probably won’t be a huge part of your to do list every day, but it will likely pop up on days when you least have the bandwidth to deal with it. Firms that have the headcount sufficient to assigning property management duties to a staff member are in the best position to absorb the extra work of owning property without adding taking on significant additional expense.

Do you even need an office: one of the enduring legacies of the past few years is a lot of rethinking about what work needs to be in person and what can be done virtually. Some practices absolutely need office space to sit down in person with clients. Some have concluded that they don’t. If you purchase real estate, your firm is buying into the notion that you will continue to need to meet clients (or do depositions, or mediations, or whatever) in person in your space for years to come. If you don’t see that in the future for your firm, you may be able to reduce, if not eliminate, the line item for office space from your budget. Owning real estate will deeply affect your ability to make that conclusion dispassionately.

Takeaway: some practices don’t need offices as much as they used to. If your firm doesn’t need an office, why take on the expense? Firms that have practices that will require a physical office for the foreseeable future are the ones that are best suited to make an investment in real estate.

Cost of money: the cost of borrowing money has jumped precipitously over the past year or so. Any property that your firm would consider buying, will be far more expensive each month due to the current interest rate environment. When those rates might come down are anybody’s guess, but I wouldn’t encourage buying a property on the theory that the rates will come down drastically or quickly.Takeaway: lots of firms bought, or refinanced, their properties while the rates were exceptionally low. If your firm missed that window, make sure you take account of the current rate environment when you analyze any potential purchase.

To summarize, purchasing real estate might make sense if your firm runs that analysis, and is:

• Stable in size
• Stable in location
• Staffed sufficiently to manage the property
• Committed to in person meetings with clients, etc.
• Able to manage a purchase at a higher loan interest rate

If your firm checks those boxes, owning real estate can provide an income earning asset, that appreciates in value and replaces the expense of rent. It provides diversification in your portfolio and for a lot of lawyers, helps create a glide path to retirement. I’ve met more than a few lawyers who ended up making a lot more money on their firm’s real estate than they did in their practices. Even if you don’t hit that lottery, it can provide a significant additional vehicle for retirement savings, and one that can be almost painless.

Best of luck, and as always, I am available to talk through this, or any other issue you want to discuss in a complementary practice management consultation for Lawyers Mutual insureds. You can sign up for a consult at my Calendly link. I look forward to speaking with you.