Commercial real estate leasing tips for growing small businesses.
You’ve come a long, long way. Your start up has survived tough times. Your “office” was a countertop one day, a local café the next. You’ve been a nomad, avoiding commercial office leases like the plague and constantly hunting for a make-do space where you could get stuff done.
Now your start up is a bonifide business with a team that outgrew your garage, the big table at the local Starbucks, and even the coworking space you rent by the month.
It’s come time to bite the bullet and lease—gulp!—commercial office space.
But WAIT…step away from the Craigslist office ads and read on. There are a few essential things to know before you dive into the deep end of commercial office leasing.
Start Early. Develop a Plan.
A commercial lease is a business asset. Getting the most from your lease takes lead time and planning. This is a crucial first step. And now that you have a team, don’t take it alone. Consider:
- Aligning your business and expansion plans. This is critical. If you don’t have a business plan, go back to start! Then evaluate your space needs.
- Forming a planning committee with different business function leaders, or if needed, people you trust from outside your business.
- Collaborating with your team to set priorities and answer critical questions, like: Where is the best location for your business? How much space do you need? What kind of building best represents the image you want to convey to customers? Is the building convenient for customers and employees alike? Is it ADA compliant? Is there enough parking? Which properties will accommodate future growth of your business?
- Documenting the best use of space. How many square feet do you need now? In two years? Cubicles or an open, collaborative workspace? Conference rooms? Kitchen? How many bathrooms? Think through this now.
- Envisioning an ideal lease contract scenario. Have a crystal clear sense of what you want and how much you can afford to pay for it before you begin negotiating.
Don’t Go it Alone—Hire a Broker.
As an entrepreneur, you’re used to taking risks. Lone wolf style. You now have a team that can help you plan. You can make your team even more impactful by adding a commercial real estate expert to its ranks. Here are some tips for finding the right one:
- Talk to local business owners. You’ll be surprised how candid they’ll be. Their input and advice can help you avoid common pitfalls and find the right broker. In short, talk to people. Lots of them. Don’t rely solely on Google searches and LinkedIn.
- Hire a commercial real estate broker. COMMERCIAL is the operative word—residential and commercial real estate brokers have very different skill sets and expertise. A residential broker will not know the office market as well as the commercial broker sitting across the negotiating table from you, who is representing the landlord. Level the negotiating field by partnering with an experienced broker and avoid getting the raw end of the deal.
- Find a commercial real estate broker with experience in your specific property type and market. Smaller businesses do not fit the client profile of national commercial real estate firms that represent enterprise-level organizations. Regional and hyper-local brokerages, on the other hand, know their markets intimately, draw on local connections, and have their fingers on the pulse of daily activity. And they are hungry for your business. Research local commercial brokers who close a lot of lease deals of the size you are shopping for, in the property type you want to lease.
- You have nothing to lose—the landlord typically pays brokerage fees. Yes, hiring a broker may run against the grain for a do-it-yourself, die-hard entrepreneur like you. But when it comes to signing a two, five or 10 year lease, a good broker can help maximize your ROI and avoid the damage a poorly negotiated lease deal could cause. Remember, bad leases kill businesses! Lucky for you, landlords usually shoulder the leasing fees for both the landlord and the tenant brokers. So this is a no-brainer.
Understand this if anything: every lease is negotiable. Your back is not against the wall and you have options. Another six months operating remotely won’t kill your business, right? This is where your careful planning and carved out lead-time plays in your favor. You won’t hold all the negotiating cards, but you certainly will hold some.
Here’s some commercial lease negotiation tips to digest:
- Read the fine print! Read the lease. Carefully. Assume nothing. If your lease doesn’t state that the landlord pays for HVAC replacement and repairs, then he doesn’t. Have your team read the lease. Have a real estate lawyer read it. Then, make sure to read it again. Don’t just rely on your broker.
- Nothing is off the table. Every market has its own unique set of lease concessions, or “freebies”, that landlords will agree to, in order to stay competitive. (Want to know what those are? Call a commercial real estate broker.)
- Shorter leases mean fewer options and less negotiating power. Fewer years generally means fewer office space options and fewer aces up your sleeve. Conversely, committing to a longer lease term opens up more space options, lowers monthly lease payments and, if you negotiate fearlessly, offers greater opportunity for you and the landlord to build a lucrative lease deal. That doesn’t mean high quality two-year leases don’t exist. It simply means they are harder to find and negotiate.
- Negotiate renewals. The ability to negotiate renewal options depends on your specific situation, but it’s important to know just enough to be dangerous. Ask if you can add a renewal option for another few years (this is particularly useful if your office space market is small and space is hard to come by). Keep in mind, rent is usually higher for the renewal term, and you’ll need to balance this risk with the security it provides you.
- Negotiate expansion options. If you feel your business could outgrow the space you are negotiating, explore expansion options, which involve, among other things, the landlord saving space they own (adjacent, nearby or elsewhere in town) for you when you need it. It certainly complicates things for landlords for a variety of reasons, but again, it is something you can try to negotiate. At the very least, try and locate in a building where expansion space is available and landlords are eager to keep growing tenants.
- Understand rent increases and net vs. gross. Your broker should handle this, but you should be informed heading into the process. Net lease terms generally don’t include utilities, HVAC repairs, taxes, insurance and other costs. Gross leases do. And be very aware how the lease specifies that your rent changes—or “escalates”—each year. This, too, can be a negotiation point.
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