Starting a Business FAQs | Renting Business Space FAQs

Frequently Asked Questions

FAQ’s for Renting Business Space

Q: I am just starting my business and I want to conserve cash how do I get the best deal on rental space?

First let’s establish that the best deal is a function of the return on investment not necessarily the price you pay. Your location will depend on the type of business that you are starting. If you are involved in retail that depends heavily on foot traffic you want to locate yourself in areas that create substantial foot traffic such as malls, outlets, shopping centers, or places frequented by your target markets. No matter how good your offering is, if it is not where customers can easily access it then your sales will suffer.

On the other hand, if you are in a construction business then you may wish to locate in the geographic center of your service area. Assuming that your work is evenly disbursed, you will minimize operating costs by lowering the travel times to and from the work sites. If you run a professional services /consulting business, with limited client site visits, the closer the office is to your own home the better from a tax and personal perspective as you can deduct travel costs as business expenses once you leave your primary office. You cannot deduct commuting costs to and from your home to office. You also reduce un-billable travel time which can be used for more profitable purposes.

In every case, you must comply with local zoning laws. So with that said, you should first start by comparing potential sales volume from different locations and then move on to evaluating the operating costs in addition to rent that will result from a given site choice. If at all possible evaluate a business incubator as these facilities add value to your enterprise in the form of business management help, marketing assistance, and many other shared services that allow you to not pay for full time use to have them available. In some cases, incubators also have funding programs available or offer professional services as part of the rent which means that you can lower your other operational costs.

Q: Are all rental rates comparable in a given market?

NO! Every property will have unique characteristics that landlords will understand and charge for. Mall retail properties with large volumes of foot traffic cost more than an unassuming strip shopping center in a rundown section of town. Posh high-rise offices with Italian marble everywhere are far more expensive than one in an older renovated property that is brick and block construction. In addition, rents are not always quoted the same. For example: If you get a quote of $10.00 square foot NNN (triple net) for 500 square feet of space this means that you will pay $5,000/year plus you will be responsible for all utility costs, proportional property taxes and insurance, and property repairs. There are also common area maintenance fees (CAM) that may also be assessed.

At the other extreme are full service leases. If the above rate for space was quoted as a full service lease then the landlord absorbs the costs of utilities, taxes and repairs. You would only pay the $5,000 for the space. This makes budgeting for rent expense much simpler as you know exactly what your cost will be. Typically property owners like triple net terms because they can advertise an attractive base rate and the other expenses are shifted to the renter. When analyzing a triple net lease you must do some research to find out the historical costs of operating the property. Knowledge of these costs will make you a better negotiator. Typically, many landlords wind up with modified NNN leases after all negotiations are completed and the contract is signed.

Q: Why do landlords want such long contracts for too much space? I only need a third of the space now but I expect to grow. I don’t want to waste money on space I do not need but I also want to be sure I have the space when I need it. What if I outgrow the space before my contract is up?

Obviously, landlords would like to have clients locked in to a lifetime contract to reduce marketing costs for the property. Landlords know that costs or the value of the property will rise over time but they cannot be exactly sure how much. This is why you only see very long term contracts on unimproved land.   The reason why contracts usually range from 3 – 10 years and typically have a minimum sub-dividable size is that they must recover the costs associated with whatever build-out – remodeling costs for the tenant – they provide.

For example, take a 1000 square foot property with a base rate of $10.00 NNN using a short one year contract. If the build-out cost is $20.00 per square foot for only new carpet and paint, then the price would the base rate of $10.00 plus $20.00 plus the landlord’s costs of capital. If the cost of capital for the landlord is 15% the rental rate would be $33.00/square foot for the contract because he/she must recover the costs of the remodeling from the tenant. By creating a three year contract, the build –out cost would be spread over three years and the rental rate could drop to a more competitive $17.76/square foot. The longer the amortization term of the build-out, the lower the cost is per square foot. The landlord has to consider the possibility that after the term is up the lessee will relocate and she/he will have to remodel again. If you sign a three year lease as above you have considerable bargaining power when it comes time to renew unless you ask for a substantial remodel.

In this example we used only carpet and paint. Consider that more extensive construction will require other professionals such as architects and engineers to draft plans for the space. The larger the space under construction the lower is the cost per square foot for these professional services. For the reasons above you can begin to understand why landlords put a floor on the minimum amount of space that can be rented and the length of term.   If you need a highly flexible lease and do not require built-to- suit space check out the local business incubator. These facilities are designed specifically to address that issue.