If you’ve made the decision to start your own small business and realized that you don’t want to work from home, then you need office space for your business! How do you go about finding and leasing space? We’re going to identify some of the things you should consider when looking for your new space as well as what type of lease would work best for you. This post includes some of the more common situations you’ll encounter when looking for and leasing space, but is not intended to be an ‘encyclopedia of leasing.’ There are seemingly endless lease types and situations, covering it all would be impossible.
Some may see it necessary to find a real estate agent that specializes in commercial leasing. This decision is up to you. If you need guidance because you’re unsure or are unfamiliar with the area in which you are looking, then find a good agent. On the other hand, we’ve had three leased office spaces over the history of our company and never engaged a real estate agent for these searches. We knew where we wanted to lease and contacted the building or management company directly. If you feel confident in your ability to handle the deal then a real estate agent won’t be necessary. Some placement companies and agents get perks for placing you in certain buildings. The spaces an agent is favoring may align with your requirements but then again it may not. Make sure your agent can show you any available space. It’s OK to ask the question.
The first and most basic questions you’ll need to answer are where and what. Is there a specific location or area you require and what type of space are you looking for? Some businesses need major road access for large vehicles, proximity to the highway or a location near a major retail center. A vehicle service business, for example, will do much better and need far less advertising/marketing if it’s located on a major busy street corner rather than stuck in an industrial park. Other business types will need no such major exposure because they’re not servicing the general public and instead serve other businesses. This business would just need some efficient space to set up shop. Will you bring customers to your location to perform services or show them products? If this is the case then maybe you need space close to a retail center or in a trendy converted loft building. Obviously, the more exclusive and desirable the building, the more you’re going to pay in rent. Everything has a trade-off. Our second location was a horrible, small, interior office in a larger office building. The price was right but the space was uninspiring to say the least! We were never able or willing to bring clients there.
The next things to consider will be how much space you need and its required amenities. A two or three person company will need a lot less space than a company storing and delivering furniture. They will also need completely different types of space. The small company would probably want a suite in a larger building while the delivery company will most likely need a larger portion of an industrial building with a loading dock. Do you need a conference space or a flex room? Is it OK if it’s shared by other building tenants? Be careful and don’t let someone talk you into too much space or space you don’t like. You could be stuck there for a while.
Once you’ve found a great location it’s time to negotiate the lease. In some cases this is a misnomer because negotiating might be impossible. Many professional advisors will tell you to ‘negotiate the terms of the lease.’ Usually, a management company will not negotiate the terms of the lease, especially if they have many tenants and they’re all on the same terms. It could become very difficult for them to keep track of everything if all their leases were unique. An individual landlord, on the other hand, may be much more amenable to negotiating lease terms and verbiage. Here are some of the terms that are almost always negotiable. The length of your lease is usually something you can control. Look at the future of your business, growth potential and the location. If it appears you will do well and don’t anticipate needing to hire multiple staff members causing you to outgrow the space then sign a longer term lease. If you view the location as temporary or anticipate massive growth then you should sign year to year or a shorter lease term. This gives you the ability to upsize or move when required without having to cancel or renegotiate the lease mid-term. How much is the rent? Will it be affordable for your business and worth it for the location/amount of space? How does it compare to other, similar spaces in the area? This is also a place where a little negotiation could be possible. If the building has a large vacancy percentage, chances are, you’ll have a little negotiating room on the price. Don’t overpay for the space unless it’s exclusive and you know what you’re getting into. If it is exclusive, do you really need ‘exclusive’ or just think you do?
Agreement types and other costs should be considered when leasing. There are a myriad of lease agreement types and terms. We will cover a few of the most common. Under almost all lease types the management companies or landlord charge a certain amount per square foot of space you’re leasing. This square footage may just be the footage of your suite or it may include a percentage increase for the common areas of the building that can’t be leased. These would be storage closets, maintenance rooms, bathrooms, hallways and other non-leasable spaces. This common area cost is usually referred to as the CAM (acronym for ‘common area maintenance’).
When shopping for space, pricing will usually be called out at per square foot cost per year. In other words, if a 900 square foot space rents for $26/square foot this would be 900 x 26 = $23,400/year or $1,950/month. Many times this square footage price does not include CAM or taxes. The price may be called out separately.
Full Service or Gross Lease
This is a lease where a fixed monthly rent is charged, it doesn’t change and usually includes everything. This means that the property taxes, insurance, maintenance and any other building expenses (CAM) are built into the cost of the lease. This may or may not include utilities for your suite. Some buildings will meter them separately and require you to pay them directly where others just take care of all the utilities. Electric paid by the building is usually very rare. Heating and water are paid by building owners more frequently than electric, but not always. Be sure to ask!
Triple Net Lease
This lease type splits up the monthly rent, CAM and property taxes into three separate charges. The base rent usually doesn’t change and the CAM and taxes will fluctuate to reflect actual expenses paid by the building owner. The CAM under most lease structures will include janitorial costs but as always, you should ask. You may have to find and pay for your own cleaning service. It’s always better to know this before you sign on the dotted line!
Single and Double Net Lease
These two lease types are just variations on the triple net lease. The single net has a base rent that includes everything except the property taxes. This protects the building owner from year to year fluctuations in taxes over long term leases or in areas where property tax rates climb quickly. The double net lease has a base rent that includes everything except the property taxes and property insurance.
Percentage Lease
Percentage leases apply more to a retail business in a shopping center or similar space. The cost of this lease includes not only the monthly rent and CAM but also a percentage of your gross revenues. This is usually seen only in an area where the space is exclusive or in high demand. The landlords have the ability to draw large retail crowds and can afford to demand unusual terms. Work closely with a realtor or attorney to protect you on this lease type. How you define the income of the business could greatly affect the amount of rent you pay. Renter beware!
One last important consideration is insurance and your coverage by the building owner’s policy. If there is an accident in the building and you we’re even involved or present, are you covered? Is there special insurance that you would be required to get? For example, our current office rental agreement stipulates that we have to obtain plate glass window insurance for large display windows we have. We thought it was odd that the responsibility fell on us but they made it clear that it was non-negotiable!
Happy renting!