As Albert Einstein once said, “Everything should be made as simple as possible, but not simpler. North Forest Office Space was built from the stones up (literally and figuratively) on the premonition that we could take the complexity and risk out of leasing commercial office small for small business owners and medical and dental practices. And 600 customers, 5 cities and 35 years later, we realized that we have done just that (and stumbled upon some other successes along the way).
To extend our commitment to keeping the process of finding office space for small business owners simple and secure we have decided to share with you some of the important issues that come up daily in our line of work - from the initial search for space to your lease expiration. 99.7% of all businesses in the US are categorized as small businesses (less than 500 employees according to the Small Business Administration). Our typical customer leases around 1,300 square feet. The smallest is around 130 square feet and the largest is around 5,000 square feet. Translation: almost all of our customers are small business owners (and the majority find themselves in the owner-operator role). Moving forward we can assume the following: time and money (and at our company, trust as well) are of the essence.
We realize that you have many choices when it comes to reading information about commercial real estate everything in America, but we genuinely hope the following articles/tips/anecdotal stories will be unbiased and helpful during your search for office space. We encourage you to reach out to us with questions (even if you’re not interested in our space). Please contact us and we would be happy to give you our two-cents, free of charge.
If you have begun your search for commercial office space or are planning on taking the leap soon, here are some of the important things to determine before you begin your search.
Budget - Know how much you have to spend. This should be based on a clear financial view of your business and forecasted with conservative revenue estimates and expense lines. If you need clarity consider using your accountant or a trusted financial resource.
Type (Class) - There are different classes of office space available, and that will impact the price heavily. Have a good idea of what you are looking for, i.e. Class A, B, C (Definitions). For example, is it important in your industry to have high-end finishes or is the bottom line more important?
Location - Do you have a general idea of where you want to be located? Do you prefer downtown, suburban or rural locations? This will impact lease rates heavily. The premium locations will cost a lot more, but if you rely heavily on foot traffic and visibility it might be a price you’re willing to pay. If location is not as important, look for properties slightly off the beaten path but convenient for your business and employees, possibly close to highways or airports.
Communicating your immediate office space needs and future needs effectively with potential landlords will save lots of time when it comes to the searching process. However nothing is ever perfect, and much like searching for the perfect home, sacrifices will have to be made. Knowing which of these items (budget, class, location and size) you are willing to bend on is just as important as knowing your initial needs.
Sometimes the first step business owners want to take, if they are leasing commercial office space for the first time, is to begin searching. The problem with beginning your search before you determine your budget is that you will get to see amazing spaces with great amenities that are way out of your budget, and you will never be satisfied with office spaces within your budget. If someone suggests you see a space that is “a little outside your budget, but you’ll really like it”- JUST SAY NO!
There is no hard and fast rule for how much your rental payments should be as a percentage of revenue, but there are some good tools to help determine what you can afford. Below is a list of items to consider when putting together a budget:
Utilities: If gas and electric are NOT included in your lease rate, make sure you have an estimated cost for any space you are considering. Ask for previous billing statements. Most landlords will have cost estimates on a per square foot basis. In older buildings you can expect your utility bills to be higher than in newer spaces, mostly because they lack the energy efficient fixtures and HVAC systems that come with new spaces.
Internet/ Phone: Sometimes business owners get fixated on the monthly rental payments to the landlord and forget about some of the incidentals. Know what your monthly payments are for phone and internet and if you plan on adding some new lines at your new office make sure you get quotes from that provider. Add this figure to your monthly payment.
Insurance: This expense is often overlooked; most landlords will have a minimum requirement for their tenants, which is often outlined in the lease. Ask any potential landlords what insurance policy they require, and make sure you include it in your budget.
Common Area Maintenance (CAM): We will talk more about CAM charges in future articles about different lease rates. For preliminary searches make sure you know if they are included in the lease rate, and if NOT what the charges are and what services your payments cover. (Some landlords will charge for new roofs, sidewalks etc. or some stick with the regular landscaping, snow removal…)
This is not meant to scare people away from looking for new space or moving out of a home office (although it may seem that way). Think of it as “preventative medicine for reducing risk.” Getting the right space and location for your business is an investment in your business - but you just don’t want to bite off more than you can chew.
If you have ever searched or are currently searching for office space you will notice that most developers will market their properties as Class A, Class B or Class C, with Class A being the nicest and most expensive and Class C being basic space that is least expensive.
What are the criteria for determining the class? The three most common factors that determine the classification of a particular office building are: location, age and interior finishes.
Class A: Newest buildings with lots of curb appeal, in a desirable location with high end finishes and amenities such as covered parking, a workout facility or large atrium
Class B: Basic Amenities and mid-level finishes, well-maintained, tend to be popular because they cater to a wide range of business owners
Class C: Older buildings with a few improvements, great for businesses on tighter budgets or when aesthetics and location are not important
The classification of an office space can be used to describe your needs to a potential landlord. For example, you might say something like, “Very few of my clients come into my office so I do not need spectacular looking space, but I want my employees to feel comfortable while working - perhaps a Class B space will work for my business.”
Class is also a reflection of price; you will pay more in rent for a Class A building than you would a Class B or C. Just make sure that the cost difference can be justified. Buildings are compared relative to other buildings in the same market, so Class A office space in a major metropolitan area will probably be nicer and cost more than Class A office space in a small rural town.
Since there is not a single independent third party that grades office buildings, you can expect that most developers will advertise their space in a class that is higher than what outsiders would classify it as.
Our advice? Make sure that:
As a recap, here’s a step by step guide for small business owners searching for office space. 1. Create a budget. There is no hard and fast rule for how much your rental payments should be as a percentage of revenue, but there are some good tools to help determine what you can afford. We do recommend using conservative monthly revenue and expense forecasts to determine what you can spend on rent. See the section on budget to learn more.
Determine your needs. Knowing approximately how much square footage your business requires is a good thing, but an efficient floor plan can cut this number down significantly. When looking for space it is more important to know how many offices you will need, how many cubicles you have, if you need a large/small conference room, how many restrooms you require, etc. This allows the leasing representative to really get a good understanding of what you need in your space. If you have an existing floor plan of your current office this could be a great way to communicate what works and what doesn’t with a new landlord.
Choose an area. Consider being close to existing customers, a short commute for you and your employees, visibility and easy access for new customers. To learn more about how location can impact your search see the section on class.
Find available space. Start on the internet. Trade websites like loopnet.com and other listing sites like craigslist.org can save you a lot of time. You can also just use search engines and search for “office space for lease in ____”. If you do not find anything then get into your car and drive around the area you would like to be and look for leasing signs.
Tour spaces. Now that you are ready to see some spaces, make sure you request to see the floor plans and know the lease rates prior to setting up a tour. Pricing and floor plans can make or break a deal right out of the gate. If something is way out of your budget or the floor plan isn’t going to work, don’t waste your time with a tour.
Narrow your possibilities. Use a lease comparison sheet to help you compare locations easily. Organize information into a “best fit” model. Make a list of your must-haves in one column and list possible properties in the next few columns to see how they stack up.
Once you have narrowed your possible spaces down to a few that, for the most part, meet your basic requirements (budget, type, location and size), it is time to evaluate and decide which of these will be the best fit for your company.
Every small business is different- but every small business owner typically looks for ways to reduce risk. Since leasing office space results in a very large large financial commitment and can represent a significant portion of a business’s monthly operating expenses, we have a put together some tips for small business owners to follow when evaluating and deciding which office space is right for their business.
The Lease: The lease is extremely important document when considering a potential landlord or office space. All issues that arise throughout a tenancy will defer back to what is stated in the lease. Commercial office space leases are written by the landlord and their attorneys. They have years of experience writing language to cover all potential circumstances that could occur before, during and after your tenancy. This means that most leases are written in favor of the landlord. How much so will vary. We will discuss what to look out for and things to consider when reviewing the lease of a potential landlord.
Pricing Models: There are several different ways that landlords structure lease rates. What is included and what is not will vary from property to property and landlord to landlord. We will compare the pros and cons of the different pricing models.
Business Growth/Decline: Although you do your best as a small business owner to be able to forecast revenue and expenses, sometimes there are extenuating circumstances that influence your business’s success or failure. When negotiating a lease agreement, know what your best and worst case scenarios are and how they will be played out as per the lease agreement. For example, if your business fails are you personally liable for the remainder of the lease payments? Or, if you land a few big deals and have tripled in size will your landlord be able to accommodate your growing business?
Lease Term: Many small business owners will negotiate heavily for short term leases with the idea that it reduces risk and gives them the ultimate flexibility. While this may be the case, there are some things to consider that could make a short term lease disadvantageous. We will share insight from the landlord’s point of view on this matter and discuss how to reduce your risk and still reap the benefits of a longer term lease.
It is not uncommon to get to this step of the leasing process and have to eliminate all of the possible spaces and go back to the searching process. Time is a great negotiating tool, so give yourself plenty of it. The last thing you want to do is settle for a space (or landlord) you don’t like because you ran out of time to find something else.
If you have spoken with a few potential landlords about lease rates you have probably realized that there is a gamut of ways to present lease rates, which can be hard to follow or keep straight. Below we have attempted to simplify this spectrum and explain the language. At one end there are triple net lease rates (commonly written as NNN) and at the other, gross lease rates. In a NNN lease rate, the tenant pays a lower base rent to the landlord and then pays all additional expenses separately (as shown below). In a gross lease rate, all operating expenses are included in the monthly rental payments. In the middle of the spectrum is a modified gross lease rate. See below for a quick look at what is included in the three major pricing models.
Triple Net Lease Rate (NNN Rate) Included in Monthly Payment Additional Expenses
Modified Gross Lease Rate Included in Monthly Payment Additional Expenses
Gross Lease Rate Included in Monthly Payment Additional Expenses
Disclaimer: Phone and internet get added to the mix occasionally, especially for small executive-style office spaces.
There are pros and cons to all pricing models. Here are some tips:
Gross Lease Rate: Great for businesses who that need to know exactly what their monthly payments will be for the term of the lease. While this may seem like an obvious advantage for a small business, sometimes a landlord will inflate the rental rate to cover the variable utility charges. Consequently, you may overpay for some things you don’t need or consume.
Modified Gross Rate: If you are renting with a landlord that adopted this pricing model, be very clear about what is included and what is not when reviewing the lease. After that, a modified gross rate is a great low risk option because tenants don’t have to worry about maintenance charges (such as driveway or roof repair) and property tax hikes. The tenant only pays for the utilities that they use. (We may be a little biased here, since this is how we structure our lease rates.)
Regardless of the pricing model you end up with, know who (landlord or tenant) is responsible to cover the cost of all potential expenses and have a good idea of what those expenses will be.
The lease is extremely important document when considering a potential landlord or office space. All issues that arise throughout a tenancy will defer back to what is stated in the lease. The time to negotiate those outcomes is before you sign the lease - not after. We can sympathize with the small business owner who might breeze over some legal jargon when handed a very long, wordy document. It may cost anywhere from $500 to $1,500 to have your attorney review a lease and recommend changes. Actually, we sympathize so much so that we have gotten our lease down to a measly 6 six pages and are currently working with our attorneys to make it even simpler.
At the time of lease signing it may not seem all that important to understand fully every aspect of the lease. But doing so can save you a lot of heartache should a problem between you and your landlord occur. Below is a list of items you should expect to find in a commercial lease and some pointers to navigate that negotiation.
General Information: Don’t assume the obvious; make sure your lease encompasses the details of the property, rental payments, square footage, the information of both parties that are entering into the agreement, start date and end date of the term, any remodel work to be done, etc.
Maintenance: This is a very important aspect of the lease because this is mostly likely where disagreements between the tenant and landlord will occur. Make sure you understand whether or not CAM charges, taxes and insurance are included in your lease rate. In addition, know specifically who is responsible for things such as light bulb replacement or HVAC breakdowns.
Landlord’s Liability: This is where the lease language usually gets very legalese. Normally language is written to limit the landlord’s liability should something “bad” occur on or in the property. Having a solid commercial general liability and property insurance policy in place for your business is recommended for the protection of your property and claims against your business.
Assignment and Subletting: This is an important topic to discuss with your landlord prior to signing a lease because this could affect your bottom line tremendously. Perhaps your business model changes, and a few years into your lease you find that you don’t need all of the space, so you would like to sublet a portion for the duration of your lease. Most landlords allow subletting, but you need to get approval.
Destruction of Premises: This section of the lease will outline a landlord’s responsibilities for rebuilding your office should it get destroyed or partially destroyed. Understand if and when the lease terminates if the landlord can’t rebuild within a certain period of time. Know your rights so you can continue to conduct business.
Event of Default: This section of the lease will describe the rights of the landlord if you as the customer do not comply with the terms and conditions stated in the lease. Make sure that you are okay with the terms stated in this section. For example, if you fail to make rental payments, what is the amount of time you will have to remedy the missed payments before the lease can be terminated? Are there any additional fees or penalties for a missed payment?
Office Space and Park Rules: Our advice here is to know what the rules are and make sure that you and your employees can comply with these rules. If you have a bunch of young men in your office that enjoy playing football during their lunch break, make sure it’s not against the landlord’s rules. Most landlords will hold the lease signer responsible for the behavior of his/her employees. You could be subject to eviction if you can’t comply with the rules.
Holdover: To be in holdover status means that your current lease has expired and you have yet to sign a renewal or move out of the space. When you first sign a lease and you have years before you need to either renew or look for another space, you might think it would be ridiculous that you would end up in holdover status. Trust us when we say that people do. Landlords charge anywhere from 125% to upwards of 200% of your monthly rent to stay in holdover status. Make sure you know what your costs will be if you do end up in this situation.
The take-away: You will likely come across many other line items in a commercial lease; these are just the big ones. More importantly, if you are handed a document that you cannot understand or do not have time to review, ask your future landlord for clarification or consult with a trusted professional or legal counsel. What you should not do is just sign the lease thinking that these situations are so unlikely to occur that it doesn’t matter what is in your lease.
Although you do your best as a small business owner to forecast revenue and expenses, sometimes there are extenuating circumstances that affect your business’s success or failure. Since leasing office space spans such a long gap of time (relative to the small business cycle), is legally binding, and commits capital over a period of time it is inherently risky. Using the worst case (terminating your lease early) and best case (needing larger space) scenarios we put together a list of tips that can assist in reduction of risk associated with leasing office space.
Our classification of the worst case scenario is having to terminate your lease agreement with your landlord prior to the end of the term. Explanations are infinite, but in our experience the most common have been: bankruptcy, a buyout by another company, relocation to a different area of the country or the primary becoming disabled.
Here’s how to protect yourself against a worst case scenario in a lease:
Personal Guarantee: Signing a personal guarantee makes an individual (typically the business owner) personally liable for the lease payments. In the case of bankruptcy; if you sign a five-year lease on a property and your business only makes it three years into your lease, you will have to make the last two years of payments from your personal accounts. When signing a lease make sure you understand what you what you are personally liable for – i.e. read the fine print. Landlords typically ask for personal guarantees on space when they have to put a lot of money into customizing the space to suit your business. If this is the case you can always negotiate; possibly only personally guarantee the amount of improvements that are specific to you business or have the dollar amount decrease as you get closer to the lease expiration date.
Assignment/Subletting: Having the right to assign the lease or sublet a portion or all of your office can alleviate many of the worst case scenarios that would result in your having to terminate your lease. If you are preparing to sell your business or feel that there is a chance you would need to relocate your office to another city or town, negotiating the right to assign the lease to another business willing to take it over or subletting some or all of the space can protect you in the future.
Death and Disability: The death and disability clause is used in a lease to terminate the agreement should a specified individual (usually the business owner) pass away or become permanently disabled. For example, a law firm with only one lawyer and a receptionist might want to negotiate a death or disability clause into the lease so that if the lawyer passes away or cannot practice law due to a disability, the law firm (which now has no practicing attorneys) won’t be liable for the remainder of the payments.
Our classification of the best case scenario is needing to move into larger space prior to the end of your lease agreement with your landlord.
Here’s how to prepare yourself for a best case scenario:
Relocation Clause/Expansion: Negotiating a relocation clause in your lease typically gives you the right to move into any other office that the landlord has available for lease. Specifics vary; make sure you’re aware of the guidelines.
Right of First Refusal: A right of first refusal in your lease means that you would like the landlord to ask you first if you would like to lease any adjacent spaces to your current office that become available, before they can lease it to another customer. “First rights” are beneficial because it could save you the cost of moving your entire office into a larger space. But, they are usually set up under a tight time frame. For example, you might only have 24 hours to tell your landlord if you’re going to take the space or not. Normally you will have to meet or beat the offer of the third party, so it might not be worthwhile to save the cost of the move if the terms and conditions of the deal don’t fit well into your business model.
We would’ve just lent you our crystal ball but it was misplaced some time ago - sorry! The important take-away here (as with all other lease negotiations) is to prepare for your best and worst case scenarios prior to the signing of the lease – not after.
Many small business owners will negotiate heavily for short term leases with the idea that it reduces risk and gives them the ultimate flexibility. While this may be true today, there are some things to consider that could make a short term lease disadvantageous as well as some benefits for longer terms. We will share insight from the landlord’s point of view on this matter.
If you have reached a point in your business cycle where you feel confident enough in the success of your business and you have relative stability, there are some advantages to signing a longer term lease. Below is a list of some of those.
Rent Abatement: Refers to a period of time that you do not have to pay rent, usually in the beginning of the term. If you are signing a commercial lease that lasts for several years, a landlord may use rent abatement to alleviate all of the moving expenses or incentivize you to sign the lease. Most landlords will offer the free months outside of the term. For instance, if you signed a five year lease and your landlord gave you 3 months of free rent your term would be five years and three months. Rent abatement is driven by multiple factors: market conditions, the performance of the office park or building where the space is located, the interest in the location, and other subjective factors that the landlord will consider.
Lower Lease Rates: This can manifest itself in two ways: a landlord could lower the rate as your term increases, or “freeze” the rate. Since most lease rates increase annually to keep up with increasing expenses, a landlord may offer to freeze the rate for the term of the lease or increase at a lower rate than projected.
Stability: Signing a longer term lease offers much more stability for your business and in the eyes of a landlord you are a lower risk customer. If the office park that you lease in becomes full, the first thing that the landlord is going to look to do is to “strengthen” the customer base at this location by eliminating higher risk customers. If you are a month to month customer and a new customer comes along who is willing to sign a longer term lease, your landlord could decide not to renew your lease, forcing you to find a new office. Relocation: Moving is expensive. If you sign short term leases and your business is constantly bouncing around, it adds up and takes time! Also, it might send the wrong message to some customers.
Tenant Improvements: The more time and money you invest in your landlord, the more time and money a landlord will invest in you. If your business requires some unique office features, the landlord will most likely make you cover the cost. But if you are committing to be in the space for a long period of time, he/she might be willing to cover some or possibly all of the “tenant improvements.”
Higher lease rates: Just like you would pay more for milk and eggs at the “convenient” corner store versus a larger grocery store, a shorter term lease usually means higher rates. Ask for a breakdown of the term lengths and rental rates and decide what’s best for your business.
Tenant Improvements: This is just the opposite of what was mentioned as an advantage of signing a longer term lease. Signing a shorter term lease usually means that you will either have to lease the office space “as is” or pay out of pocket (usually upfront) for all improvements yourself.
No Rent Abatement: As you could probably guess, a shorter term lease means no free rent. If you want to know what the tipping point would be, ask the landlord what the minimum term is and add a year or two.
Instability: Tenants that sign short term leases think that if they continue to need the space it will be there for them. This may not always be the case. As mentioned above, a short term lease is viewed as a high risk customer in the eyes of the landlord. This means that you could end up on the chopping block when the occupancy is such that the landlord will look to “strengthen” the portfolio. You could end up in a situation where you would have to relocate your office.
When entering into a commercial lease, the Landlord often requires a personal guarantee from the business owner, even if they have formed a corporation or LLC, and may refuse to rent the space without one.
This means that the guarantors will make the lease and other payments if the business fails. Landlords often ask for a personal guarantee from start-ups and other small businesses.
Read the language about personal guarantees very carefully. How long do they last, and what happens if the business fails and can’t fulfill the remaining payments on the lease? Why do landlords require a personal guarantee?
When landlords have to pay for a large amount of tenant improvements (i.e. constructing the space to your specifications), personal guarantees are usually required.
If you are a small business with plans to grow or are unsure of the future, limit your personal exposure. Designing the perfect office space shouldn’t be your highest priority. Find practical space with a reputable landlord.
Statistics show that only 50% of all new small business start-ups will be operating in 5 years. If your landlord requires a personal guarantee, negotiate to limit the term of the guarantee or best yet, look for a landlord that doesn’t require one.
Ready to sign that lease? Make sure you’ve done your homework. Here is a brief overview of the evaluation process once you have narrowed down your possibilities to a few spaces:
Pricing Models: There are several different ways that landlords structure lease rates. In a Triple Net (NNN) lease rate, the tenant pays a lower base rent to the landlord and then all additional expenses separately (see what those are). In a gross lease rate all operating expenses are included in the monthly rental payments. In the middle of the spectrum is a modified gross lease rate. Check out our diagram of the three major pricing models for a quick look at what is included in each one.
The Lease: The lease is an extremely important document when considering a potential landlord or office space. All issues that arise throughout a tenancy will defer back to what is stated in the lease. The time to negotiate those outcomes is before you sign the lease - not after. Click here for a list of items you should expect to find in a commercial lease and some pointers to navigate that negotiation.
Expansion and Contraction: Since leasing office space spans such a long gap of time (relative to the small business cycle), is legally binding, and commits capital over a period of time, it is inherently risky. Using the worst case (terminating your lease early) and best case (needing larger space) scenarios we put together a list of tips that can assist in reduction of risk associated with leasing office space.
Construction/Remodel: If you are leasing a new space that needs to be built out, know what allowances you are being offered to finish the space to your specifications. What is the likelihood that you will go over? If you are leasing existing space, are there any modifications needed? What will you have to pay for and how much will the landlord cover? Lease term length, business credit and market conditions will greatly impact these factors. Obviously the longer your lease term and the better your credit, the more tenant improvements the landlord will be willing to cover.
Personal Guarantees in a Lease: When entering into a commercial lease, the landlord often requires a personal guarantee from the business owner, even if they have formed a corporation or LLC, and may refuse to rent the space without one. This means that the guarantors will make the lease and other payments if the business fails. Landlords often ask for a personal guarantee from start-ups and other small businesses.
Lease Term: Many small business owners will negotiate heavily for short term leases with the idea that it reduces risk and gives them the ultimate flexibility. If you have reached a point in your business cycle where you feel confident enough in the success of your business and you have relative stability, there are some advantages to signing a longer term lease. Click here for more details.
You’ve narrowed your possibilities, and negotiated terms and conditions. It’s time to put that pen to paper!