Lease and rent expenditures often represent an enormous financial commitment for small businesses. Unfortunately, unless commercial real estate is your core business, you may end up overpaying or not getting what you really need.
"If a business owner walks into the building directly, he's talking to the broker who represents the landlord. The broker's trying to get the best deal for the landlord, not for the tenant," says Howard Ecker, president and CEO of Howard Ecker + Company. Ecker is a 40-year veteran of the commercial real estate industry and an expert in representing startups.
To help you avoid potential headaches down the road, Ecker offers these small business tips on getting the right digs.
How to Get the Best Commercial Real Estate Rates
Choose the right lease
You'll find different types of lease agreements, and they're generally broken down into gross leases and net leases. "A gross lease is where the tenant pays a flat rate; the square footage multiplied by the gross rent," Ecker says, adding that phone, Internet and electricity are usually extra.
The square footage rates of gross leases are typically higher than those for net leases. The reason? Net leases require the tenant to pay more than just rent. "On top of the rent, the landlord amortizes any construction, plus the operating expenses—janitorial, air conditioning, etc.—and the real estate taxes," Ecker explains.
While a net lease looks cheaper up front, it may cost a lot more money in other services every month, and Ecker encourages startups to go for the gross lease in most cases.
Know the power picture
Many factors affect whether a space fits your business's needs. Size and location are often primary drivers, but be sure to examine the other features or services you require. Ecker cites a common example. "It's very important that the building you plan to occupy can provide you with the Internet and electrical power that you need."
If your business depends on significant bandwidth capabilities, or will house a lot of servers or other power-hungry equipment, take a deeper look at whether the space can fill those needs. You may not have the option to increase those services later, or it may be prohibitively expensive.
Maximize capital improvement dollars
If a space is move-in ready just the way it is, great. If not, be sure you know how much the landlord will kick in for capital/tenant improvements. "When a landlord quotes a rent, there are all sorts of things embedded in that figure, including tenant improvement [TI] dollars," Ecker says. "But unless you know to ask for it, it has no value."
Landlords may hold out on offering up all the TI dollars they've built into the lease rate as a way to maximize their profit. "Landlords calculate the rent based on the amortization of TI. They're not giving you that money, they're charging you for it," Ecker says. Make sure your negotiations get you all the capital improvement funds you're paying for.
The growth curve for a small business is rarely set in stone. No matter what you think will happen in the future, it's important to be ready for as many scenarios as possible. "Small businesses should look for the most flexible lease terms possible," Ecker says. That means investigating your options for increasing or decreasing the amount of space you're paying for as time goes on, and asking about early termination options should those become necessary.
Julie Knudson is a freelance writer whose articles have appeared in technology magazines including BizTech, Processor, and For The Record. She has covered technology issues for publications in other industries, from foodservice to insurance, and she also writes a recurring column in Integrated Systems Contractor magazine.
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