Negotiating a Commercial Lease with Ease
With vacancy rates sky-high in so many cities, you’d think getting a great deal on leasing commercial space would be easy. But many small-business owners are not taking advantage of the bargains out there because they don’t understand how the complex leasing process works.
“The funny thing about leasing is that most people don’t realize you can structure things any way you want--nothing is set in stone,” said Andrew M. Johnson, author of “Tough Times-Tough Tactics,” a how-to guide aimed at helping small-business owners “even the sides” in a lease transaction.
Renting commercial space is much trickier than renting an apartment. A commercial lease is a complicated and binding legal agreement that should not be taken lightly.
Even if you are working with an experienced real estate broker, you should be well informed and know what to expect, Johnson says.
The first step is to figure out what area of town is best for your business.
* How accessible do you want to be from the airport, train station, freeway, subway or bus stop?
* Is the area safe for employees and visitors?
* Are there restaurants, service businesses and shops nearby?
* How long is the commute for most employees?
* How much traffic will you encounter during rush hour?
Next, compute how much space you’ll need. According to Johnson, a good rule of thumb is 150 to 200 square feet per employee, plus 15% for traffic flow. He recommends renting storage space in the building for files and supplies, rather than storing them in expensive office space.
Rita Bennett, founder of Bennett & Associates in downtown Chicago, is one entrepreneur who’s been following the advice in Johnson’s book. Bennett, who followed her lawyer husband around the world, began her multicultural training and relocation business at home about three years ago.
“My husband’s law firm provided almost no support when we moved,” she said. “I learned the hard way what it’s like to go abroad with no support.”
Bennett’s firm helps Americans prepare for every aspect of life in a foreign land, ranging from how to shop for groceries to how to set up an office. With business booming, she and her staff quickly outgrew her home. About a year ago, they moved into a shared office suite and began looking for permanent quarters. Because they serve mostly Fortune 500 clients, the small firm has to maintain a professional yet accessible image. They need spacious conference rooms as well as individual offices for employees and the 80 part-time trainers and associates who fly in for training sessions.
A few weeks ago, after signing a letter of intent to lease a “perfect space,” Bennett gave notice to her landlord. At the last minute, Bennett’s deal fell apart.
“The greatest frustration is the amount of time it’s taken to find places, being led to the brink and then having deals fall through,” said Bennett.
But, her agent has found another space that looks promising, and Bennett hopes to be settled in new quarters by spring. Meanwhile, she and her relocation team have marked up page after page in Johnson’s book.
“Wendy, my office manager, has read it cover to cover, and it’s really been helpful,” Bennett said.
Here are more of Johnson’s tips: Compile a list of building managers to survey over the phone. Ask if they have available the amount of space you’re looking for and what rental rate is being quoted. Ask what kinds of concessions are being made to new tenants. Many landlords offer one month of free rent for every year of the lease term.
Once you narrow down your search, begin making site visits. Bring a notebook to record all the details. As you approach the building, check out the neighboring buildings to see if the area is well maintained. Does the building have “curb appeal?”
Park in the parking structure, if there is one, to see if the parking area is well lit and well marked. Look around when you enter the building: Is the lobby clean and attractive? How do the elevators work? Do they take forever to reach the lobby? Is there a directory of tenants?
Once you get to the floor, visit the bathrooms and note the neighboring tenants. Find the emergency exits and check for fire escapes and sprinklers.
If you are planning to make an offer, be prepared to present the landlord with detailed financial information.
And, remember, before you sign a lease, always have a real estate attorney review the lease.
For those looking for retail space, Johnson reports on a trend that has many small-business owners negotiating a lower base rate by offering their landlord a percentage of sales.
“If you’ve got a newer product or you are not quite sure what your cash flow will be, try to get a lower base rent and offer a percentage of gross sales, maybe 5% to 6%,” Johnson said. Be prepared to open your books to your landlord and set a limit on the percentage to protect yourself.
“Tough Times-Tough Tactics,” sells for $39.95, plus applicable California sales tax. The 59-page book features a glossary of real estate terms and sample lease agreements. To order, call (800) 270-4848, or send a check or money order to: Johnson Commercial Brokerage, 4121 Camino Real, Suite 100, Los Angeles, CA 90065.
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An all-day succession planning seminar is scheduled for Jan. 10 at the Red Lion Hotel in Glendale. The session is sponsored by the U.S. Small Business Administration and Connecticut Mutual Life Insurance Co. Key issues to be covered include transition planning, business valuation and retirement planning. The fee is $75 for the first person and $50 for each additional family member or employee. For registration information, call (213) 852-8100, ext. 630.
