Securing space to operate a new or existing business can be an exciting opportunity, but it can be a lot of work and have a significant impact on the bottom line of the company’s operations. Whether the business leases space or purchases the property (which is capital intensive for new businesses), there are many important issues that should considered. Here are just a few noteworthy items to consider.
Leasing Commercial Space:
Leasing commercial space may provide you with more flexibility than purchasing commercial real property. In most instances, you can lease a small space to begin, and even make arrangements to share common facilities and support staff, and expand your space if growth dictates. In other cases, you may want to lease space in a stand-alone building or a single floor or suite of a larger building.
Whichever type of leasing arrangement you consider, start by taking these steps:
- Anticipate your needs. Do you expect the business to grow quickly, and will you need space for expansion sooner rather than later? Are you planning to stay as a small operation for the foreseeable future? Or do you desire a high-traffic location for a retail business, with a longer lease to ensure your returning customers can easily find you? Does the business need industrial space that supports light or heavy manufacturing? Does the business need simply need executive office space and access to the occasional use of a conference room and support services?
- Find out the current going rate for commercial space in your area. A commercial real estate broker can be a valuable resource in helping you find the current rate. Doing so will help you better judge whether the rental terms offered by the owner are reasonable and what incentives may be available and currently offered by competing landlords.
- Consult with a real estate attorney to make sure the lease agreement is going to meet your needs. An attorney will likely identify areas of concern that you may not have considered.
Once a location has been identified, the parties have negotiated a non-binding letter of intent and are ready to document the lease agreement, your attorney should be able to assist you in making sure that all the important provisions are included in your lease agreement. Generally speaking, a lease agreement should include the following information:
- The amount of rent, including any planned increases (escalations) and the amount of a deposit or whether you can substitute a letter of credit from your bank;
- The lease beginning and ending date, and any options to renew it;
- What additional services the rent payment includes, such as utilities, janitorial, signage rights or parking rights;
- Who is responsible for maintenance and repairs, taxes, utilities or insurance;
- A full description of the space and a list of any tenant improvements the landlord agrees to make;
- Written confirmation of verbal information given to you, such as any restrictions for competing businesses, the approved zoning and uses, and whether the space complies with local, state, and federal requirements (such as the federal Americans with Disabilities Act); and
- Whether you may sublease your space or assign the lease, and how either you or the owner may terminate the lease.
Owning Commercial Space:
In some cases you may find that it makes more sense to purchase your place of business. This may be particularly true once your business becomes established and you have a good idea of what your expected growth will be.
- Purchasing options can vary widely. Small businesses, for example, may be able to purchase a “business condominium” similar to residential condominiums. Other businesses may join together in a co-op or tenant-in-common relationship to purchase commercial real property to cut down on the initial capital requirements generally required. In other cases, an outright purchase of the building may work best for your needs.
- Before purchasing commercial or retail space, be sure to speak with a real estate attorney. Purchasing business space is much different than purchasing a home; you will likely need someone with expertise to assist you in your acquisition.
Some of the same steps identified above for leasing commercial space are applicable to purchasing commercial real property. You should anticipate your needs and identify a place that will best fit those needs. Understanding commercial real property rates is key to negotiating the right deal. And utilizing a knowledgeable real estate attorney throughout the acquisition process is essential in what can be a complicated process.