Choosing a Location for Your Business
Where should you locate your business? One expert will tell you location is absolutely vital to your company’s success; another will argue that it really doesn’t matter where you are—and they’re both right. How important location is for your new company depends on the type of business, the facilities and other resources you need, and where your customers are.
If you’re in retailing, or if you manufacture a product and distribution is a critical element of your overall operation, then geographic location is extremely important. If your business is information- or service-related, the actual location takes a back seat to whether the facility can meet your needs. In some cases, you won’t need a location at all—a home office setup with some remote capabilities could be all you need.
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If you’re in a technology-related business, choose a location near a university that can help you with research, provide a resource for further education for your staff, and serve as a breeding ground for future employees. Some universities even offer space to entrepreneurs at a low cost—or even free. Another growing and affordable option are co-working spaces, many of which have set up near universities.
Regardless of the nature of your business, before you start shopping for space, you need to have a clear picture of what you must have, what you’d like to have, what you absolutely won’t tolerate, and how much you’re able to pay. Developing that picture can be a time-consuming process that is both exciting and tedious, but it’s essential that you give it the attention it deserves. While many startup mistakes can be corrected later, a poor choice of location is difficult—and sometimes impossible—to repair, especially if you’re locked into a long lease.
Types of Locations
The type of location you choose depends largely on the type of business you’re in, but there are enough mixed-use areas and creative applications of space that you should give some thought to each type before making a final decision. For example, business parks and office buildings typically have retail space so they can attract the restaurants and stores that business tenants want nearby. Shopping centers are often home to an assortment of professional services—accounting, insurance, medical, legal, etc.—as well as retailers. It’s entirely possible some version of nontraditional space will work for you, so use your imagination.
Homebased. This is probably the trendiest location for a business these days, and many entrepreneurs start at home and then move into commercial space as their business grows. Others start at home with no thought or intention of ever moving. You can run a homebased business from an office in a spare bedroom, the basement, the attic—even the kitchen table. On the plus side, you do not need to worry about negotiating leases, coming up with substantial deposits, or commuting. On the downside, your room for physical growth is limited, and you may find accommodating employees or meetings with clients a challenge.
Working from Home? Avoid Solopreneur Isolation
Solopreneurs get the benefit of working on their own schedules. No bosses, no morning commute, no more clocking in and out. They can work from anywhere in the world whenever they want. For all the flexibility this allows the lone wolves of entrepreneurship, it also removes a lot of the conventional comforts of a 9 to 5 workday spent at the office: no Bagel Tuesdays, no office gossip, no water cooler around which to congregate, no casual after-work drinks, nor the sense of solidarity with fellow colleagues. This can be very isolating and sometimes depressing. Here are a few tips that can help solopreneurs gain a sense of community:
1. Occasionally find a co-working space or a cafe. Sometimes, when you’re working for yourself, you can hardly tell if you’re working at all, or simply just fulfilling stress-motivated tasks on your own (especially if you know you’re a while off from being remotely solvent). One way to reclaim some semblance of an office environment is by literally going to the office: co-working spaces have become massively popular in larger cities, and they’re filled with like-minded entrepreneurs and freelancers. These rentable desks for freelancers offer a familiar work environment while forming natural bonds between creatives who can share ideas, collaborate on projects, or find moral support. Cafes work well enough (and don’t require membership fees unless one considers the cost of an endless stream of coffee). These are a popular workplace option, but they can experience hectic rush hours and the noise that accompanies the rush hour. Moreover, it’s easier to overstay your welcome, and, unlike co-working spaces, they don’t provide business-focused amenities like printers, scanners, or photocopier machines.
2. Join mentoring groups and social media communities for local entrepreneurs. It’s important to remember that, as a solopreneur or otherwise self-employed professional, you’re not alone even though it often feels like you are. Your workdays don’t include the trappings of the typical office life that most of your friends experience. For you, there is no “typical office life,” and nobody is going to understand this more than people who have your job. So, to help combat this lack of a typical office, it’s important to find people who have your same type of job. There are often Facebook groups for area entrepreneurs or mentoring rings set up by local incubators. By getting active in these communities and attending entrepreneurial events and meetups, you will feel less on your own, and more supported, while networking with potential collaborators.
3. Plan team parties, and maintain a non-work-related “fun chat.” If you’re an entrepreneur or a freelancer who works with a larger team or if you’re a solopreneur who interfaces with your virtual service providers (like a virtual assistant), but still each of you works separately at home, often you’ll forget that the others exist while you’re own your own doing your tasks, and this isolation lowers morale. Make sure you’re connected with the rest of your team or network often: weekly calls with all of you on the same group call, an active online chat program, and regular team parties to celebrate birthdays, company milestones, and anything else, can really strengthen your company while reminding each team member and yourself that the goal is greater than the tasks involved.
4. Maintain regular work hours that include lunch breaks. When you have a lot on your plate, it’s very easy to wake up, pour yourself a cup of coffee, and get straight to work without looking back up for the next 10 hours--especially if you work alone at home, without other employees there to form groups by the door at lunch hour. And, just as easily, it’s tempting to throw your regular schedule out the window, start in the early afternoon, and work until past midnight. To keep some semblance of a routine workday, wake up early and set a regular time to sit down at your desk (and definitely have a desk, regardless of how comfy your couch looks). Take a proper lunch break when time allows. Walk to a take-out place nearby, or use the accessibility of your kitchen to make something fresh, hot, and nutritious. If you can, try to stop working at 5 or 6 P.M. You never want to feel like you’ve wasted a day on work alone. Find what works for you.
5. Breakfast or lunch meetings. Go out to breakfast or lunch with other entrepreneurs and business owners, even if it’s to just get out of the office. Meet them at a networking event and ask them if they’d like to do lunch. You may find this a more suitable environment to meet people and get to know them. Try to do this two or three times a week to help you get out of the house.
6. Schedule video conferences, business calls, and meetings early in the morning. One way to get you out of bed and presentable early in the morning is by scheduling all your meetings, video conferences, and business calls as early as you can. By giving yourself a social start to the day, you’re setting a motivational tone for the rest of the day. After all, social interaction is an energizing activity. Let your exchange of ideas, general housekeeping updates, and new potential business prospects help kick start a productive day at work. Plus, you will be more likely to get up and get dressed.
7. Get daily exercise. This should apply to anybody in the workforce, whether they work from home or not, but it’s usually the remote professionals who need this advice the most. With no commute to speak of, or often no reason to leave the house, it’s tempting to stay in your pajamas with a laptop in bed. However, daily exercise helps send endorphins through your system that helps you feel better, keeps your health in check, and helps you physically feel accomplished. At the bare minimum, take the two 15-minute breaks a day required by law to take a walk around the block. You will come back entirely refreshed and able to accomplish more that you would accomplish otherwise.
Retail. Retail space comes in a variety of shapes and sizes and may be located in free-standing buildings, enclosed malls, strip shopping centers, downtown shopping districts, or mixed-use facilities. You will also find retail space in airports and other transportation facilities, hotel lobbies, sports stadiums, and temporary or special-event venues.
Mobile. Whether you’re selling to the public or to other businesses, if you have a product or service that you take to your customers, your ideal “location” may be a car, van, or truck. With so many options for wireless connectivity, laptop and tablet computing and smartphones that can practically mimic a low-powered computer, a mobile office isn’t so hard to fathom.
Commercial. Commercial space includes even more options than retail. Commercial office buildings and business parks offer traditional office space geared to businesses that do not require a significant amount of pedestrian or automobile traffic for sales. You’ll find commercial office space in downtown business districts, business parks, and sometimes interspersed among suburban retail facilities. One office option to consider is an executive suite, where the landlord provides receptionist and secretarial services, faxing, photocopying, conference rooms, and other support services as part of the package. Executive suites help you project the image of a professional operation at a more affordable cost and can be found in most commercial office areas. Some executive suites even rent their facilities by the hour to homebased businesses or out-of-towners who need temporary office space.
Co-working. WeWork is the most well-known and largest of a growing cadre of co-working spaces that have the amenities of a larger company, with open desk spaces and private offices accommodating teams of one to 100-plus. For a monthly membership fee, you get access to a concierge service, office supplies, mailing services, high-speed wifi, cleaning, coffee stations (and craft beer), networking events, and more. A dedicated desk membership is as low as $220 per month at one location, while a private office can be as little as $400 a month. Most memberships include access to conference and meeting rooms, common spaces, and WeWork’s social network, WeWorkCommons, which enables entrepreneurs to interact and exchange ideas. WeWork has nearly 300 locations in 59 countries. Other large competitors include corporate-space stalwart Regus and upstarts Knotel and Grind. Local co-working spaces may offer a better deal, so be sure to check them out before making your decision.
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Be wary of incentives. Often incentives—such as free rent or tax breaks—may mask problems. There’s usually a good reason why any location offers incentives, and you need to be sure what it is before you sign up. You should be able to start a profitable business in that location without any incentives, then let the incentives be a bonus.
Industrial. If your business involves manufacturing or heavy distribution, you will need a plant or a warehouse facility. Light industrial parks typically attract smaller manufacturers in nonpolluting industries as well as companies that need showrooms in addition to manufacturing facilities. Heavy industrial areas tend to be older and poorly planned and usually offer rail and/or water port access. Though industrial parks are generally newer and often have better infrastructures, you may want to consider a free-standing commercial building that meets your needs and is adequately zoned.
Issues to Consider
With an overview of what’s available, you now need to decide what’s most appropriate for your business. Julien J. Studley, founder of Julien J. Studley Inc., a real estate firm that represents commercial tenants nationwide, says the major things tenants are looking for are the best possible deal on the space and an available work force. Be systematic and realistic as you consider the following points.
Bring It Home
Looking for a way to launch your business with the minimum investment possible? Then consider setting up shop in a home office rather than in a commercial space.
Working from home makes a lot of sense when you’re launching a business and have limited startup funds. In addition to saving beaucoup bucks on operating expenses like rent and utilities, you’ll save on commuting costs and wardrobe expenses. You may even be able to take a tax deduction equal to the percentage of your home that’s used as Business Central.
But there are some disadvantages to working from home. Clients may not find your cozy home office very professional. You personally may find it difficult to concentrate on work when the sun is shining or when the mall, golf course, or your children are chanting your name. Friends and family also may drop in unannounced because you’re at home. And the list of distractions goes on.
Minimize those distractions by establishing your office in a spare room or quiet corner that can be dedicated strictly to the business. Furnish it with office furniture (even if second-hand), and invest in a business computer. Install a separate business phone line with voice mail. Then make it clear to well-meaning visitors that you maintain regular business hours and the computer is off-limits to the kids. If necessary, arrange to meet clients offsite if your home office doesn’t reflect your image as a savvy professional.
Finally, before you hang out that shingle, make sure your municipality doesn’t have any zoning ordinances that prohibit homebased businesses. Some communities ban certain types of businesses, including those that will generate a lot of traffic or have employees working onsite. Make sure you know the rules first.
Style of Operation
Is your operation going to be formal and elegant? Or kicked-back and casual? Your location should be consistent with your style and image. If your business is retailing, do you want a traditional store, or would you like to try operating from a kiosk (or booth) in a mall or a cart that you can move to various locations? If you’re in a traditional mall or shopping center, will the property permit you to have a sidewalk sale if you want to? Can you decorate your windows the way you want to?
And here’s another option: Consider opening a pop-up retail location (see “Cart Blanche” on page 276). Pop-up retail operations suddenly “pop up” unannounced in highly visible locations, (hopefully) draw in big crowds, and then vanish or transform themselves into another type of retail location once they’ve raked in the cash. In some cases, these stores are in business for a ridiculously short period of time—from just a few days to a few weeks. But they’re a great way to determine the local interest in your product, move product fast, and generate new excitement and interest in whatever you sell. Halloween and Christmas stores have been using the concept successfully for years, and some of the biggest mainstream retailers like Target and the Gap have adopted the concept as well. Pop-up spaces are usually leased temporarily for a flat fee, so you won’t be locked into a typical retail lease of about five years. Since landlords are always desperate to lease space, all you generally have to do is ask to land a great pop-up location.
Demographics
There are two important angles to the issue of demographics. One is your customers; the other is your employees. First, consider who your customers are and how important their proximity to your location is. For a retailer and some service providers, this is critical; for other types of businesses, it might not be as important. The demographic profile you’ve developed of your target market will help you make this decision (see Chapter 7 for more on developing your target market).
Cart Blanche
Carts and kiosks have become familiar sights in American malls and in public spaces in big cities around the country. They sell everything from inexpensive gift items to pricey jewelry and artwork. They make mall and other prime space affordable for the business owner, and the mall operators benefit from extra rent and a wider variety of merchandise. For business owners, leases can also be shorter and lease terms more favorable to someone just starting out.
Consider using carts and kiosks to test your product in a retail setting before making the larger investment in a traditional store. Styles range from simple to elaborate; whatever you choose, be sure it’s attractive, well-lit, functional, and situated in a good spot for foot traffic. In big cities, keep the underground in mind—passageways between subway stations, underground mini-malls catering to commuters, and the like provide excellent foot traffic of regular commuters and tourists alike. Many transit systems have taken to leasing cart space as a way to increase revenue.
Then take a look at the community. If your customer base is local, is the population large enough, or does a sufficient percentage of that population match your customer profile to support your business? Does the community have a stable economic base that will provide a healthy environment for your business? Be cautious when considering communities that are largely dependent on a particular industry for their economy; a downturn could be a death knell for your company.
Now think about your work force. What skills do you need, and are people with those talents available? Does the community have the resources to serve their needs? Is there sufficient housing in the appropriate price range? Will your employees find the schools, recreational opportunities, culture, and other aspects of the community satisfactory?
Especially when the economy is strong and unemployment figures are low, you may be concerned about the availability of good workers. Keep in mind that in many areas, few people may be unemployed, but many may be underemployed. If you are offering attractive jobs at competitive wages, you may find staffing your company easier than you thought.
Look beyond the basic employment statistics to find out what the job market is really like. Think about placing a blind test ad (the local economic development agency may do this for you) to see what type of response you will get in the way of applicants before making a final location decision.
Demographic information is available to you through a variety of resources. You could do the research yourself by visiting the library or calling the U.S. Census Bureau and gathering a bunch of statistics and then trying to figure out what they mean, but chances are you probably do not have the time or statistical expertise to do that. So why not let other people do it for you—people who know how to gather the data and translate it into information you can understand and use. Contact your state, regional, or local economic development agency (see “To the Rescue” on page 279) or commercial real estate companies and use the data they’ve already collected, analyzed, and processed.
Foot Traffic
For most retail businesses, foot traffic is extremely important. You don’t want to be tucked away in a corner where shoppers are likely to bypass you, and even the best retail areas have dead spots. By contrast, if your business requires confidentiality, you may not want to be located in a high-traffic area. Monitor the traffic outside a potential location at different times of the day and on different days of the week to make sure the volume of pedestrian traffic meets your needs.
Accessibility and Parking
Consider how accessible the facility will be for everyone who will be using it—customers, employees, and suppliers. If you’re on a busy street, how easy is it for cars to get in and out of your parking lot? Is the facility accessible to people with disabilities? What sort of deliveries are you likely to receive, and will your suppliers be able to easily and efficiently get materials to your business? Small-package couriers need to get in and out quickly; trucking companies need adequate roads and loading docks if you’re going to be receiving freight on pallets.
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If you are buying an existing business, look at the location as if you were starting from scratch. Ask questions like: Does the site meet your present and future needs? Have there been any changes regarding the location in recent years that could have a positive or negative impact? Will you be taking over the seller’s lease, and can it be renegotiated? Is there a clause in the lease that allows you to end it early if ownership changes? How easy would it be to move the business to a different location?
Find out about the days and hours of service and access to locations you’re considering. Are the heating and cooling systems left on or turned off at night and on weekends? If you’re inside an office building, are there periods when exterior doors are locked, and if so, can you have keys? A beautiful office building at a great price is a lousy deal if you plan to work weekends but the building is closed on weekends—or they allow you access, but the air conditioning and heat are turned off so you roast in the summer and freeze in the winter.
Be sure, too, that there’s ample convenient parking for both customers and employees. As with foot traffic, take the time to monitor the facility at various times and days to see how the demand for parking fluctuates. Also, consider safety issues: The parking lot should be well-maintained and adequately lit. If you’re considering locating on a main street of a local downtown, consider how far—and how expensive—the parking is for would-be customers. Monitor whether parking fills up and consider what potential customers do when they can’t find a spot easily. In many downtowns, churn is high in part because of parking issues.
Competition
Are competing companies located nearby? Sometimes that’s good, such as in industries where comparison shopping is popular. (That’s why competing retail businesses, such as fast-food restaurants, antique shops, and clothing stores, tend to cluster together.) You may also catch the overflow from existing businesses, particularly if you’re located in a restaurant and entertainment area. But if a nearby competitor is only going to make your marketing job tougher, look elsewhere.
To the Rescue
Some of the best sources of information and assistance for startup and expanding businesses are state, regional, and local economic development agencies. According to Ted M. Levine, founder of Development Counsellors International, a consulting firm specializing in economic development and travel marketing, there are nearly 20,000 economic development groups worldwide. Their purpose is to promote economic growth and development in the areas they serve. They accomplish that by encouraging new businesses to locate in their area, and to do that, they’ve gathered all the statistics and information you’ll need to make a decision.
Levine says economic development agencies will help any new business, regardless of size, in four primary ways:
1. Market demographics
2. Real estate costs and availability; zoning and regulatory issues
3. Work-force demographics
4. Referrals to similar companies and other resources
For the best overview, start with your state agency. The state agency can then guide you to regional and local groups for expanded information. Also consider looking into resources and incentives available through local Business Improvement Districts.
Proximity to Other Businesses and Services
Take a look at what other businesses and services are in the vicinity from two key perspectives. First, see if you can benefit from nearby businesses—by the customer traffic they generate—because those companies and their employees could become your customers or because it may be convenient and efficient for you to be their customer.
Second, look at how they will enrich the quality of your company as a workplace. Does the vicinity have an adequate selection of restaurants so your employees have places to go for lunch? Is there a nearby day-care center for employees with children? Are other shops and services you and your employees might want conveniently located? It’s easier to attract good employees when commuting to work and being able to manage life outside work is easier.
Image and History of the Site
What does this address say about your company? Particularly if you’re targeting a local market, be sure your location accurately reflects the image you want to project. It’s also a good idea to check out the history of the site. Consider how it has changed and evolved over the years.
“There is nothing so useless as doing efficiently that which should not be done at all.”
—PETER DRUCKER, MANAGEMENT GURU
Ask about previous tenants. If you’re opening a restaurant where five restaurants have failed, you may be starting off with an insurmountable handicap—either because there’s something wrong with the location or because the public will assume that your business will go the way of the previous tenants. Everyone knows that one spot where the food was so delicious, but for some reason, the restaurant didn’t last—and everyone points to bad luck; after all, the last two delicious restaurants didn’t make it, either. It could very well be that the rent in the location is not ideal for an inexperienced owner and, therefore, other factors regularly contribute to closures. But the stigma can remain. If several types of businesses have been there and failed, do some research to find out why—you need to confirm whether the problem was with the businesses or the location. That previous occupants have been wildly successful is certainly a good sign, but temper that with information on what type of businesses they were compared to yours.
Ordinances
Find out if any ordinances or zoning restrictions could affect your business. Check for the specific location you’re considering as well as neighboring properties—you probably don’t want a liquor store opening next to your day-care center, even if it’s permissible.
The Building’s Infrastructure
Many older buildings do not have the necessary infrastructure to support the high-tech needs of contemporary operations. Make sure the building you choose has adequate electrical, air conditioning, and telecommunications service to meet your present and future needs. It is a good idea to hire an independent engineer to check this out for you so you are sure to have an objective evaluation.
Growing Places
Incubators are organizations sponsored by public and private investors that assist startup and young companies in their critical early days with a variety of well-orchestrated business assistance programs. Incubators provide hands-on management assistance, access to financing, shared office services, access to equipment, flexible leases, expandable space, and more—all under one roof.
The time your business can spend in an incubator is limited—typically two years—but it can vary. The idea is to get a fledgling business off the ground, turn it into a sound operation, and then let it “leave the nest” to run on its own, making room for another startup venture in the incubator.
Incubators generally fall into the following categories: technology, industrial, mixed-use, economic empowerment, and industry-specific. For more information about incubators and for help finding one appropriate for your business, contact the International Business Incubation Association at (407) 965-5653. For a list of incubators, entrepreneurship centers, and shared workspaces in your state, visit http://inbia.org.
Utilities and Other Costs
Rent composes the major portion of your ongoing facilities expense, but it’s not the only thing that’ll eat up your money. Consider extras such as utilities—they’re included in some leases but not in others. If they’re not included, ask the utility company for a summary of the previous year’s usage and billing for the site. Also, find out what kind of security deposits the various utility providers require so you can develop an accurate move-in budget; however, you may not need a deposit if you have an established payment record with the company.
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To keep costs down, consider sharing space with another company that does not compete with your business—one that might even complement yours. This is known as cobranding, such as when a sandwich chain places a unit in a convenience store. Put your space-sharing agreement in writing, detailing each party’s rights and responsibilities, and give yourself an out if you need it.
If you have to provide your own janitorial service, what will it cost? What are insurance rates for the area? Do you have to pay extra for parking? Consider all your location-related expenses, and factor them into your decision. Use Figure 17.1 on page 283 to help you find the right location.
Room for Growth
Look at the facility with an eye to the future. If you anticipate growth, be sure the facility you choose can accommodate you. Keep your long-range plan in mind even when short-term advantages make a location look attractive. A great deal on a place you’re likely to outgrow in a few years probably is not that great of a deal. Similarly, if there is evidence of pending decline in the vicinity, you should consider whether you want to be located there in five years.
Figure 17.1. Location Worksheet
What Can You Expect to Pay?
Real estate costs vary tremendously based on the type of facility, the region, the specific location, and the market. A commercial real estate broker will be able to give you an overview of costs in your area. You may want to look at historical data—how has the rate for your type of facility fluctuated over the years? Also ask for forecasts so you know what to expect in the future. Understanding the overall market will be a tremendous help when you begin negotiating your lease.
Commercial Leases
If you’ve never been involved in renting commercial space, your first glimpse of a commercial lease may be overwhelming. They are lengthy, full of jargon and unfamiliar terms, and always written to the landlord’s advantage. But they are negotiable. Whether you’re working on the deal yourself or using an agent, the key to successful lease negotiations is knowing what you want, understanding what the lease document says, and being reasonable in your demands.
Especially for retail space, be sure your lease includes a bailout clause, which lets you out of the lease if your sales don’t reach an agreed-on amount, and a cotenancy clause so you can break the lease if an anchor store closes or moves. If you have to do a lot of work to get the space ready for occupancy, consider negotiating a construction allowance—generally $30 to $50 per square foot—to help offset the costs.
Be sure you clearly understand the difference between rentable and usable space. Rentable space is what you pay for; usable is what you can use and typically does not include hallways, restrooms, lobbies, elevator shafts, stairwells, and so forth. You may be expected to pay a prorated portion of common area maintenance costs. This is not unusual, but be sure the fees are reasonable and that the landlord is not making a profit on them. Also, check for clauses that allow the landlord the right to remodel at the tenant’s expense without approval, and insist on language that limits your financial liability.
Agent Avenues
Unless you have a significant amount of experience in shopping for commercial real estate, it’s a good idea to use a qualified real estate agent. Whether you are buying or leasing, an agent can help by prescreening properties, which saves you time, and by negotiating on your behalf, which can save you money.
Typically, the seller or landlord pays the agent’s commission, which may raise some questions in your mind about the agent’s loyalty. However, keep in mind that the agent doesn’t get paid until a deal that satisfies you both is negotiated.
You may opt to use a tenant’s or buyer’s agent whom you pay yourself. In the real estate world, that’s called tenant (or buyer) representation. Especially in tight market situations, it may be to your advantage to invest in an advocate who will negotiate on your behalf. For more information about tenant representation and for help finding someone to assist you, contact the Society of Industrial and Office Realtors at (202) 449-8200, email membership@sior.com, or visit www.sior.com.
Shop for a real estate agent as you would any professional service provider: Ask for referrals from friends and associates; interview several agents; be sure the agent you choose has expertise in the type of property or facility you need; check out the agent’s track record, professional history, and reputation; clarify how the agent will be compensated and by whom; and draw up a written agreement that outlines your mutual expectations.
Leasehold Improvements
Leasehold improvements are the nonremovable installations—either original or the results of remodeling—that you make to the facility to accommodate your needs. Such improvements are typically more substantial when renting new space, which may consist of only walls and flooring. Often existing space will include at least some fixtures. Get estimates on the improvements you’ll need to make before signing the lease so you’ll know the total move-in costs and can make a fair construction allowance request.
Speaking the Language
Following are some of the leases you may come across:
Flat lease. The oldest and simplest type of lease, the flat lease sets a single price for a definite period. It is generally the best deal for the tenant but is becoming increasingly harder to find. (Caution: Avoid a flat lease if the term is too short; a series of short-term flat leases could cost you more in the long run than a longer-term lease with reasonable escalation clauses.)
Step lease. The step lease attempts to cover the landlord’s expected increases in expenses by increasing the rent on an annual basis over the life of the agreement. The problem with step leases is that they are based on estimates rather than actual costs, and there’s no way for either party to be sure in advance that the proposed increases are fair and equitable.
Net lease. Like a step lease, the net lease increases the rent to cover increases in the landlord’s costs but does so at the time they occur rather than on estimates. This may be more equitable than a step lease, but it’s less predictable.
Cost-of-living lease. Rather than tying rent increases to specific expenses, this type of lease bases increases on the rises in the cost of living. Your rent will go up with general inflation. Of course, the prices for your products and services will also likely rise with inflation, and that should cover your rent increases, so this type of lease can be very appealing.
Percentage lease. This lease lets the landlord benefit from your success. The rent is based on either a minimum amount or a base amount, or a percentage of your business’ gross revenue, whichever is higher. Percentages typically range from 3 to 12 percent; most come in around 7 percent according to various lease negotiation experts. With this type of lease, you’ll be required to periodically furnish proof of gross sales; to do this, you may allow the landlord to examine your books or sales tax records or provide a copy of the appropriate section of your tax return. Percentage leases are common for retail space.
Negotiating the Lease
The first lease the landlord presents is usually just the starting point. You may be surprised at what you can get in the way of concessions and extras simply by asking. Of course, you need to be reasonable and keep your demands in line with acceptable business practices and current market conditions. A good commercial real estate agent can be invaluable in this area.
Avoid issuing ultimatums; they almost always close doors—and if you fail to follow through, your next “ultimatum” will not mean much. Consider beginning the process with something that is close to your “best and final offer.” That way, your negotiations will not be lengthy and protracted and you can either reach a mutually acceptable deal or move on to a different property. The longer negotiations take, the more potential there is for things to go wrong.
Essentially, everything in the lease is subject to negotiation, including financial terms, the starting rent, rent increases, the tenant’s rights and responsibilities, options for renewal, tenant leasehold improvements, and other terms and conditions. You or your agent can negotiate the lease, but then it should be drawn up by an attorney. Typically, the landlord or his attorney will draft the lease, and an attorney you hire who specializes in real estate should review it for you before you sign. Use the checklist in Figure 17.2 on page 288 to make sure all your bases are covered.
It Still Comes Down to You
Technology and statistics are important elements of your site selection decision, but nothing beats your personal involvement in the process. Real estate brokers and economic development agencies can give you plenty of numbers, but remember that their job is to get you to choose their location. To get a balanced picture, take the time to visit the sites yourself, talk to people who own or work in nearby businesses, and verify the facts and what they really mean to the potential success of your business.
Figure 17.2. Business Lease Checklist