Tenant Credit: Evaluating Law Firms

TRA can help you evaluate the unique nature of law firms and the potential risks they pose to owners and investors. Understanding these risks is essential to, as long-term sustainability is correlated to a broad client list, diverse practice areas, and responsible personnel management.

While the supply of traditional law firm services continues to outpace demand, there is increasing competition among firms. Revenues are up in the industry, but compensation practices have hurt profitability. Growth in the number of registered attorneys in the U.S. has slowed to below 1.6% YoY, and law school admissions are down. The evolving landscape is likely to pressure law firm space needs for years to come, highlighting the need for greater diligence among these tenants.

Key Questions to Ask Law Firm Tenants:

• What are the firm’s major practice areas, and are there material clients that account for more than 10% of revenues or receivables?

• Does the firm have key personnel whose departure or absence would have a material adverse impact on the practice? Is there a succession plan in place?

• How much cash does the partnership retain year over year? What percentage of income is retained after distributions?

• How many equity and non-equity partners does the firm have? How many Associates? On average, how are these attorneys compensated?

• Does the firm have a sustainable local and regional client list, or will the location’s strength be tied more closely to the firm's broader reputation?

TRA is well-versed in evaluating the unique nature of law firms and the potential risks they post to ownership. You can request a copy of TRA’s Law Firm Questionnaire by e-mailing us at info@tenantriskassesment.com.

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