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Good Information = Good Decisions

Check out our simple methodologies and easy-to-understand definitions of basic lease terminology! This newsletter lays out what you need to know about deciding whether to lease or buy, and how to find (and get!) the best site for your business, whether you need a small office or a gargantuan warehouse.

Should Your Small Business Buy, Rent, or Lease?

Many small business owners struggle with the dilemma of deciding whether to buy, rent, or lease office space. If you ask business consultants or real estate brokers, you will get conflicting answers. The key point to remember is this: Each small business brings its own unique situations and concerns to the table, which means the answer will be different for each business owner.

A good place to begin is by examining your company's current business plan and earnings forecast, the credit history, and the local real estate market. Every business idea needs to be carefully researched before making any final decisions. As you are searching for the right answer, keep these questions in mind:

How is your cash flow? As a new small business owner, you may be short on cash, so it will be less expensive to rent or lease a facility when you are just starting out. For example, you can probably lease a building for about $4,000 a month, but if you were looking into purchasing that same property, you would need a substantial down payment. Examine your cash flow projections carefully and then make your decision.

How long will you stay in the building? If you think you will be in that one particular building for less than a few years, it might be worthwhile to rent rather than buy the building outright. (However, if real estate values in your community keep rising, then you really should consider the purchase option instead.)

Do you like the general area? Many small businesses make the mistake of buying a building only to realize later that they do not like the location because of insufficient parking or a continuous decline in real estate property values. Be sure to think about such issues before signing on the dotted line.

Are you ready to take on additional responsibilities? If you decide to purchase a property, you are now responsible for maintenance, security, remodeling, and other management issues. Sometimes it may be more beneficial to let your landlord handle all of those details. Try to compare the costs and benefits of purchasing against the added expense of handling those new responsibilities. If you are losing money, then you have your answer.

How much will your business grow? If your business continues to grow, you may have to hire more employees. Before trying to squeeze them into the existing office space, review your options. You could move to a larger location or start using conference rooms as work areas. Another possible option is to allow some employees to telecommute and work from home: a growing trend in today's business world.

If you are seriously thinking of buying a property, consider these factors:

Asset appreciation. Property can be a great long-term investment, and the building and surrounding land is an asset that almost always appreciates in value.

Fixed overhead costs. Along with payroll, a mortgage is one of the highest fixed business expenses.

Potential to sublet. If the property is too big, you can sublet a portion of it, which can help you pay the mortgage or give you additional funds for your own cash flow.

Commercial Property: Finding the Right Place and Negotiating the Best Price

The process of leasing or purchasing commercial property should be well thought-out, like any major business decision. The cost to lease or purchase is usually one of a company's largest annual expenses, and a site selection process should be implemented in advance to define specific needs, which will minimize wasted time in locating the ideal facility.

Whether a company is searching for office, industrial or retail space, there are specific items that need to be addressed before the inspection process begins.

1st:   Defining Needs

The two most important factors for a business to consider are how much space they require--allowing room for growth, and what geographic location will best serve the company. It is suggested that an internal questionnaire be developed which will shed light on existing and future needs. Items to consider include:

  • Number of current and anticipated employees
  • Number of private offices required with approximate square footage per employee (i.e., sales vs. executive offices)
  • Conference room, training room, kitchen area square-foot requirements
  • Storage, telephone, miscellaneous area square-foot requirements
  • Warehouse requirements - number of pallet positions, ceiling height, loading facilities, etc.
  • Light assembly/manufacturing requirements - number of machines/employees and power requirements
  • Access to labor market and customers
  • Transportation and parking requirements
  • The "image" that a property projects, and nearby services and amenities (restaurants, hotels, etc.)

2nd:   Market Analysis

Once a company's needs are defined, the time involved to identify suitable properties will be greatly reduced. In addition, owners and brokers will view this prospective customer as a serious tenant/purchaser who has taken the time to determine their needs in a professional manner.

Sources to help you find suitable space include real estate brokers, classified advertising, economic development agencies and chambers of commerce. Finding an active, knowledgeable broker with a computerized listing system and internet access will help to streamline this process.

3rd:   Property Inspections

When inspecting suitable properties, ask as many questions as possible regarding landlord/seller responsibilities and expectations. This will help you gather information that can be utilized during the negotiation phase. It is easier to obtain information in a "non-negotiation" environment than at a later time. Specific items to address include: Condition of the premises at occupancy; age of the roof and mechanical systems, and environmental issues.

A professional broker should provide you with data sheets, site and floor plans, general information regarding the history of the property and, if required, a demographic profile of the area.

4th:   Negotiation

A "short-list" of suitable buildings should be pursued simultaneously to create a competitive environment, where landlords or sellers will want to compete for your business. It will also create various alternatives for you that will remove the emotion of focusing only on one property. Having a realtor (who has access to market trends, pricing and comparable) control this process will allow for the maximum negotiation leverage to yield the best deal. By analyzing each scenario, your broker will be able to give you an objective point of view.

Items addressed in the negotiation phase include:

  • Lease terms/purchase terms
  • Rental rate and additional expenses
  • Owner's construction contribution
  • Options to renew, expand and purchase

A comprehensive financial analysis should be performed to determine which opportunities are the most cost-effective over the long-term. Size of available units, lease prices, common area and "add-on" expenses will vary, and a financial analysis will allow for an easy comparison of properties.

Whether it is a multi-million dollar acquisition or a short-term lease, implementing a well thought-out site selection plan will result in a streamlined, economical transaction that will have long-term benefits for a company. If utilizing the services of a real estate professional, ask about their experience and success as it relates to similar types of transactions, as well as their capabilities and technological resources to service your needs.

Commercial Real Estate Leases Numerous Options Defined

A wide range of commercial leasing possibilities exist. Typically, an office lease in a major city and a retail lease in a suburban shopping center will be considerably different.

From a broad perspective, there are a few types of leases commonly found. Within these categories, leases may vary considerably.

Gross lease: The tenant pays a set amount of rent and the landlord is responsible for payment of taxes, insurance and other costs associated with owning the property.

Net lease: The tenant pays the rent plus a portion of the maintenance fees, insurance premiums and other operating expenses.

Triple-net lease: Typically, for a freestanding facility, this type of lease has the tenant paying for all fees and operating expenses associated with the space.

Shopping center leases: The tenant pays a base rate in conjunction with the square footage of the retail facility. Typically, the tenant will also pay some common charges and frequently a certain percentage of the gross sales. The tenant may also be assessed part of the property taxes. A shopping mall lease will often include terms about signage, hours of operations, common areas and deliveries. The landlord may also have the right to relocate the tenant.

Land or ground lease: The tenant leases the grounds and builds on the property. Typically, with a land or ground lease, all improvements on the property, including any building or buildings revert back to the landowner at the end of the lease period.

There are numerous variations on common lease forms. For example a lease may cover both office and warehouse space in one facility with separate rental amounts and separate options.

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