Q: We are looking to move into a new office and I have been given the assignment of coming up with our options. I hear it is a buyer’s market out there, but what does that mean? What should I expect?
A:It certainly is true that this is one of the best times in a long time to rent commercial space due to high vacancy rates.
The sort of location you want of course depends upon the type of business you are in; some businesses need to be in high traffic areas and must pay the corresponding higher rents, while others can afford to be in quieter areas and pay less. My dad used to love to put his carpet stores across from malls, figuring he could benefit from the mall traffic. Conversely, an e-commerce business does not need a high drive-by location and need not pay those high rents.
Also consider looking for complimentary businesses – a chiropractor may want to be near a medical office park, a bookkeeper might consider setting up shop near a bank or tax service.
Once you find a neighborhood you like, it’s time to hit the concrete. Walk into nearby shops and find out how business is. What is the good and bad news? Once you are comfortable with a few areas, here are the steps to take:
1. Hire a commercial real estate broker: A broker will show you all appropriate available vacancies in the area. One of the blessings about commercial real estate brokers is that they are paid for by the landlord, but of course, that can also be a curse; you want a broker not tied to any one landlord.
2. Be open and flexible: Have the broker cast a wide net to see what is out there. Moving is expensive, so you don’t want to do it too often. Find a place that you can grow into.
3. Check out the landlord: Once you find a place you really like, it is critical that you find out as much as you can about the landlord. Speak with other tenants especially. Bad landlords fail to fix things, are hard to communicate with, are inflexible, make subleasing difficult, etc. They can make your business life hell.
A horrible landlord will trump the great space almost every time.
4. The art of the deal: Once you find a place you like with a reasonable landlord, it’s time to cut a deal. Many parts of the contract will be negotiable. That is, in fact, why it is also called an “agreement”: Both sides must agree.
Typically, before you see the actual lease, the terms of the deal will be knocked out via a memorandum of understanding. Here are the key things to look out for / negotiate:
- What do you want? Because it is a buyer’s market out there, you hold a lot of cards when looking to rent a commercial space right now, so play them. Do you want reduced rent, or a free month? Do you want a shorter term or improvements? Ask for them. A qualified, interested renter is gold right now – use that.
- Length: Of course, the landlord will want to lock you into a longer deal and will sweeten the pot to do so, but I always say be careful of the long lease. Sure, that reduced rent looks enticing; it is supposed to. But what if your business changes, or something very good or bad happens? What if you must move or close the doors before the lease runs out? You will be stuck, that’s what.
- Improvements: If needed, who will pay for them, and when will they be done? What about down the road – if you want to make improvements, can you?
- Repairs: Who is responsible for what? Have this spelled out clearly.
- Taxes, insurance, etc: A triple net lease is one where you pay rent, all taxes, insurance, and maintenance expenses. Not my favorite.
- Signage: Be sure you are allowed to post the signage you require.
Once all important terms are agreed upon, you will get the lease.
Hire a lawyer to look it over.
Hire a lawyer to look it over.
I say that twice, because this may seem like an area where you can scrimp, but it is not. Contracts have magic words in them that you may not catch. But a judge will catch them. The lease agreement is drafted by the landlord’s attorney for the landlord’s benefit.
A lawyer will protect you.
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