When leasing office space for your business you have a lot of important decisions to make. Whether your company is leasing its first office space, you’ve outgrown your current office, you’re moving offices or expanding into your second, third, or 100th office there are a number of points to consider when picking the right office space to lease.
When leasing office space, you need to look past your company’s current needs and consider what those needs may be in one year, three years, five years, and so on. Most commercial leases are for three to five years, so if you’re company outgrows your space in one year, you may have a problem.
It’s also not a great idea to take on more space than you can currently afford, either.
If you are leasing space in a large office building with multiple tenants you may want to request that, as part of your lease, you get first right of refusal on any spaces that become vacant. Many times your landlord will be happy to let you leave your space to move into a larger one, because you’ll be paying more rent. You also might be able to lease an adjacent suite if it becomes available and combine the two. Some landlords own multiple office buildings so you can potentially negotiate the option to move into a larger space in any of their properties within your lease term. Typically, if the landlord allows this they will require you to sign a new lease so your lease term will be starting over.
In some cases, you may be able to negotiate a “termination clause” that gives you the option to terminate the lease at one specific point in the term, say at 18 months, with a 30 or 60 day notice. In this case, you would have one opportunity to terminate the lease if you need to grow into a larger space. When this is allowed, there will typically be a fee involved. This fee may be equal to any unamortized costs associated with you leasing the space. These costs may be from buildout the landlord provided, commissions paid to a broker for leasing the space, legal costs for preparing the lease as well as any other related expenses. You will also likely be responsible for the cost of preparing the space for another tenant such as carpet cleaning and paint. If there’s one thing to know about commercial real estate leases, is that no two leases are the same.
Depending on your business, you may have employees from all over town, or you may only have a handful of employees that are mostly from one area. Either way, when leasing office space, you want to consider how well the location works out for your employees, or at least your key employees (including yourself). Distance from home is one of the things people take into consideration when choosing their employer. Adding a significant amount of time to your employee’s commute doesn’t do well for moral.
In addition to the office’s distance from home for your employees, you’ll also want to look at what’s in close proximity to the office space. If possible, you may want to choose a place that has restaurants nearby so your staff has choices for lunch. Also look at other services in the area that will be convenient for your employees such as banking, dry cleaning, etc.
Your office may or may not have clients visiting often. If you’re a service business such as financial planning, insurance, accounting, etc. that has many clients visiting your office, you will want to make sure the location is convenient for them. If you’re moving from another office, you probably don’t want to go to the opposite side of town, since that will make it more difficult for your clients to visit. If the office space or office building is hidden, clients may have a hard time finding you. Ideally, when leasing office space, you want to be in a well-known area around other businesses people commonly frequent so that it’s convenient for your clients to visit you.
You will also want to take into consideration the impression people will have of your business based on the office you’re leasing. A run-down, outdated building may have an attractive lease rate, but is that the image you want your business to have? While your business may not require you to be in class A space, you should at least be in a well maintained and clean building when leasing office space.
You’ll want to look at the available parking at an office space you’re considering leasing. Will your staff and clients have trouble finding a place to park, or have to walk a half mile to get to you? Before leasing office space, take a look at the parking lot at different times to see if there’s enough space for your employees and clients to park. If the office you’re looking at is in a downtown area without its own parking, make sure there are parking options nearby, such as street parking, parking ramps and parking lots. See if any of the parking ramps or lots have monthly permits available as well.
This one may be obvious, but you have to be able to afford the space you’re in. Look at your revenue, or projected revenue, and calculate what percentage of your revenue will be going to rent at the office spaces you’re looking at. In general, businesses with smaller profit margins need to keep the percentage of revenue going to rent lower. In most industries it’s necessary to stay below 10%, and most are lower than that.
You will also want to look at the rent escalations. You may negotiate a good lease rate, but in many leases the rate will go up each year. This increase may be a percentage, or a fixed amount. For example, your rent may go up 3.5% each year, or it may go up $0.50 per square foot each year. Rent escalations are common, just be sure that it’s at a reasonable rate that your business will be able to afford.
Before leasing office space, check the market and see what other similar office spaces are leasing for. Don’t pay $20 per square foot if similar offices in the area are leasing for $12 per square foot.
There are different types of commercial leases. Some leases require the tenant to pay their portion of taxes, insurance, and common area maintenance (known as a triple net, or NNN lease). While this is less common when leasing office space than with retail or industrial leases, some landlords may still charge these costs. Most office leases will either be “full-service” or “modified gross”. In a modified gross lease, the tenant pays a flat rental rate with no added NNN costs. However, the tenant pays for their own utilities, internet, janitorial, etc. Full-service leases typically include things such as electricity, gas, and water. Many full-service leases also include janitorial, so they will provide basic cleaning such as vacuuming and trash removal. Some full-service leases will even include internet.
It’s important to find out what all is included so you know what your total cost will be. A full-service lease at $18 per square foot may be a better deal than a modified gross lease of $16 per square foot. That lease rate will almost certainly be a better deal than a lease rate of $16 per square NNN.
Since every business is different, and has different needs, there may be other things to take into consideration when leasing office space for your business besides what we’ve covered here. To make sure that you find the right office in the right area, and for the right price, you should always work with a professional commercial real estate agent that is experienced with tenant representation. A good tenant rep will learn about your business’s needs and help you choose the right location as well as negotiate the best lease rate and terms on your behalf. In most cases, a tenant rep won’t cost you anything out-of-pocket since they receive a commission from the landlord or the listing agent.