The “How To” Guide for Small Business Owners Leasing Office Space

The path to your office space made simple.

If you find yourself with more questions than answers as you search for new office space, you’re not alone. It can be a confusing and time-consuming process. But we can help. North Forest Office Space specializes in office space for small to medium sized businesses, which means we have worked with many business owners, doctors and dentists, and we know what you’re going through.

We’ll walk you through the search and leasing process to make it easier.

First, determine your budget.

This ensures that you can afford the spaces you are looking at before you begin. Don’t forget to consider additional expenses that may or may not be included in the lease rate:

  • Utilities
  • Insurance
  • Taxes
  • CAM (Common Area Maintenance)
  • Internet/phone
  • Janitorial

Location is key.

You most likely already have an area (or a few areas) in mind for your business location. Whether you want to make sure it’s a short commute for you and your employees, or close to your customers’ homes, narrow down the areas to consider so you have a starting point. Remember that pricing can be affected by location - offices in the city can cost more than similar spaces in the suburbs. You should also think about whether you need a highly visible location on a main road, or if you have specific signage requirements.

Get the right size.

Office space is generally priced and advertised in square feet, but how do you know how much you need? It’s hard to determine what size space you need, because some layouts are more efficient than others so you may actually need less than you think. Start by considering the number of employees you have. How many offices/exam rooms do you need? Will you need a conference room, reception area, copy/file room, etc.? Then look at layouts that offer what you need, even if they have a smaller footprint. (Bonus: this saves you money!)

You also need to consider your business plans, such as expansion in the near future. You don’t really want to pay for more space than you need now, though so be sure to inquire about expansion options.

It’s all about your image.

Office space is categorized as Class A, B or C, with Class A space being the most luxurious and offering the most amenities (and also being the most expensive). Of course, some companies will advertise their space as a higher class than it actually is, so it’s important to see for yourself.

When deciding what type of space you need, consider the message you are sending to those who walk into your office. Do you need to impress clients? Or do you want to show that you are a no-frills type of company with low overhead? The space you choose will help you project the right image.

Compare apples to apples.

It can be difficult to compare the prices of different office spaces because there are several pricing models that are typically used, and there are variations within those models. Be sure you know exactly what is included in the lease rate, and ask for estimates of costs that are not included.

Here’s a quick rundown of the three common pricing models:

Triple Net (often written as NNN) - A lower base rent where the additional expenses are paid separately. The three major additional expenses are taxes, property insurance and maintenance costs (hence the name triple net).

Modified Gross - Some expenses are included in the rent, but not all. Make sure you know exactly what the landlord includes, and what you are responsible for paying separately.

Gross - All operating expenses are included in the rent. This is the most predictable model, but sometimes a landlord will inflate the rental rate to cover the variable utility charges. Consequently, you may end up overpaying for electric, gas, etc.

Look before you lease.

All issues that arise during a tenancy will defer back to the lease. The time to negotiate those outcomes is before you sign the lease, not after. Make sure that you understand everything in your lease, or consult with a trusted professional or legal counsel if necessary.

Important items to know in a lease:

General info - This includes property details, rental payments, square footage, information on both parties, start and end date of lease term, remodel work to be done, etc.

Maintenance - This is where most disagreements occur, so know who’s responsible for maintenance and repairs in your office and any common areas. Common Area Maintenance (CAM) is an additional cost that is charged by a landlord for additional expenses relating to maintaining the office building/park. In a gross lease rate and some modified gross rates, CAM is included. CAM can include routine costs like snowblowing parking lots, as well as unexpected costs like repairing or replacing a roof. Although they can vary from year to year, if CAM is not included in the lease rate, you can ask for an estimate based on previous years’ rates to help you budget.

Landlord’s liability - Part of the lease may be written to limit a landlord’s liability in case the property gets damaged or an injury occurs. Protect yourself and your business with commercial general liability and property insurance.

Assignment and subletting - Discuss this prior to signing a lease. If your business model changes, you might want to sublet a portion of your space, which you’ll need approval for.

Destruction of premises - This outlines a landlord’s responsibilities for rebuilding your office should it be destroyed or partially destroyed.

Event of default - This describes the landlord’s rights if you don’t comply with the terms and conditions stated in the lease.

Office space and park rules - Know the rules and ensure that you and your employees comply with them. Most landlords will hold the lease signor responsible for employee behavior.

Holdover - If your lease expires and you haven’t renewed or moved out, you are in holdover status. In this case, landlords can charge from 125% to 200% or more of your monthly rent.

Other factors to consider.

Term length - Many small business owners negotiate for short-term leases, hoping to reduce risk and gain flexibility. If you’re confident in the success and stability of your business, there are advantages to signing a longer-term lease, like rent abatement, lower lease rates and tenant improvements/remodeling.

Personal guarantee - Landlords often require a personal guarantee, even for a corporation or LLC. They may refuse to rent the space without one. Under a standard personal guarantee, if the business fails, the guarantors will make the remaining lease and other payments.

Construction/remodel - Know what allowances you’re being offered to finish the space to your specifications. If you’re leasing existing space, are there any modifications needed? How much will you pay for vs. the landlord? The longer the term and better your credit, the more improvements the landlord will be willing to cover.

Reduce risk.

Because leasing spans a long period of time, is legally binding and commits capital over a period of time, it’s inherently risky. You can reduce risk by preparing for the worst case and best-case scenarios prior to signing the lease.

Preparing for the worst case scenario - needing to terminate the lease: Make sure you understand if there is a personal guarantee and what you are liable for. For example, would you still have to make lease payments if you close your business and move out of the space? See if you can negotiate better terms, such as only guaranteeing payments while you occupy the space, or a decrease in the guarantee amount as you get closer to the lease expiration date. The death and disability clause can be used to protect a business from liability if the owner passes away or becomes permanently disabled. The right to assign the lease or sublet the space can also help reduce risk.

Preparing for the best case scenario -needing more space: 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 will vary, so make sure you’re aware of the details/guidelines. A right of first refusal in your lease means that the landlord will ask you first if you would like to lease any adjacent spaces to your current office that become available. This could save you the cost of moving your entire office if you need to expand, and the timing and conditions of the deal fit with your needs.