166 – Leasing Commercial Space: Tom talks Leasing Space

Episode 166 Leasing Commercial Space
OK I know some of you won’t listen to my advice to screw the commute or maybe you are screwing the commute but need office space for employees.
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Main Event
Leasing commercial space. Now of course I think you are thinking that this topic seems like it is totally against my podcast title of “Screw the Commute”. I really want you working out of your home, but there are times when you need commercial space. Hey, I have a school where I leased commercial space, but I hardly ever go there unless we are having an event or an inspection by the State so I have not violated my vow of always working from my home.
So, let’s look at some of the things you are up against and what you should be thinking about before you go looking to rent an office or warehouse. First what do you need it for? For my distance learning school, I simply needed to comply with the State regulations. I figured if I’m going to bother to rent a place, I should go ahead and get enough space to handle my own small events so I wouldn’t have to go to hotels every time I had one of my Buttcamps or other training sessions. For those of you that don’t know, Buttcamp is one of the longest running Internet Marketing seminars ever. I named it that way because I was sitting on my rear end making lots of money LOL.
Anyway, what are you getting space for? Do you need it because of regulations like me? Do you need it for appearances so you look more professional to prospective clients? Do you need it just because you want to or need to get out of the house to be more productive? Maybe you have a bunch of kids and it’s not fair to them to make them be quiet all the time because you’re on the phone. At any rate you have to figure out why you need to have space.
Another consideration is does the space need to be in an upscale area to impress clients or does that not matter? That will make a big difference in the cost of the space. Next is how far are you willing to …. I have to say that dirty word……commute? How far are you willing to commute to get to your space?
Then, how much space do you really need? Do you just need a desk and a computer? Do you need a couple rooms and reception area? Will you be expanding with workspace for interns or employees? Do you need storage space? And here’s a rule of thumb …I just got it off one of the real estate sites … you have to figure 100-150 square feet per employee or per person that’s going to occupy the space. Now that doesn’t count for warehouse space obviously but that’s just a basic rule of thumb to get you in the ballpark.
Does the building have good facilities for Internet? I’ve switched to FIOS fiber optics and it’s been perfect, but it’s not available in all areas. Are there noise considerations? Maybe you’re doing a podcast or you set up a video studio and you can’t have road noise or noise from another business in the same or nearby building.
How long of a lease are you willing to sign?
Besides the cost of the space how much budget do you have to furnish the space? Are you willing to shop around for used stuff, or do you want to impress with everything being brand new?
Are you willing to put up with yearly rent increases? I finally got sick of it and complained and they took off the increase for that year. Of course, you have more bargaining power if you aren’t a pain in the neck tenant and your lease payment is always paid on time or early.
Let’s talk about terms you will find when it comes to leasing commercial space? Plus, you might see different terms used in different parts of the country so you need to get familiar with the terms used in your area.
Lessor – that the person or company that leases the space
Lessee – that’s you
Common Area Maintenance – These are areas like hallways and walkways that aren’t directly in your lease space, but that everyone shares.
Fully Serviced Lease – that’s where your rental payment includes all kinds of stuff like utilities grass cutting, snow removal etc.
Gross Lease – Landlord pays for all kinds of stuff like utilities, repairs, insurance etc.
Net Lease
Double Net Lease This lease includes taxes and insurance in the lease fee, but you pay maintenance costs.
Triple Net Lease The monthly payment includes taxes, insurance and maintenance.
Gross Square Footage is the total square footage of the building or office being lease and usually includes the common space.
HVAC Heating, Ventilating and Air Conditioning
Build-out/Leasehold Improvements/Tenant Improvements
These are things that need to be done to get the space usable for your purposes. Everything can be negotiated of what you pay for and what the landlord pays for.
Turn-Key means the place will be ready for you to walk in and start your business.
Sub-Lease An agreement with the landlord and another person or business to use part or all of your space. All of your space might mean you want to get out of your lease early and you find someone to take over the payments and occupy the space so you can leave without getting sued for the balance of the rent.
Tenant Improvement Allowance – This is money the landlord is willing to spend to help you get the space ready for your intended use. These funds can be part of what’s called tenant inducements.
Tenant Inducements are things the landlord is willing to do to get you to lease the space. The more vacancies in the area, the more things you can ask for like free rent for several months, cash for moving expenses, upgraded conference room, furniture, rent freeze ….basically if the market has lots of empty space, you can push pretty hard for just about anything you want. If space is hard to find, you won’t find many inducements available because the landlord has people lined up to take the space if you don’t.
Percentage Rent Lease – This is frequently seen in malls and strip malls where the landlord gets a percentage of your sales. It’s doubtful I would ever agree to such a lease.
This is by no means a comprehensive list of items. I highly suggest you get an attorney to go over any kind of lease either commercial or residential you are thinking about signing. There are tons of clauses that certainly favor the landlord that could bite you in the butt if you just go ahead and sign because you are excited to move forward. DON’T DO IT! Make sure you think it through and have other competent professionals explain each clause in the lease.
I want this podcast to help you and give you things to think about, but this is a really important step and absolutely needs professional input before you plunk down your deposit.
I’ve provided lots of links in the show notes.
There’s a really good article by Property Metrics called “10 Boring Boilerplate Commercial Lease Clauses You Should Understand”
Please just read as much as you can because it could save you tens of thousands of dollars or even more over the course of your lease.
https://www.propertymetrics.com/blog/2016/12/09/10-boring-boilerplate-commercial-lease-clauses-you-should-understand/
https://www.nolo.com/legal-encyclopedia/common-commercial-lease-terms-29716.html
https://www.bdc.ca/en/articles-tools/money-finance/buy-lease-commercial-real-estate/pages/13-terms-you-need-to-understand-before-signing-your-commercial-real-estate-lease.aspx
https://www.thebalancecareers.com/glossary-of-commercial-leasing-terms-and-definitions-3515440

OK. So, let’s get into some tips.
I’ll say it again. Do the best you can researching on your own, but ALWAYS involve an attorney familiar with commercial leases in your area. Yes, you could call your brother in law who lives 2000 miles away, but he probably doesn’t know the local norms in the market you are in. You should find someone local and try the best you can to make sure they aren’t buddies with the landlord. I would even ask them if they have any business or personal relationship with the landlord or the landlord’s company.
Cost Per Square Foot
Here’s something that has always been confusing to me. It’s actually Understanding cost per square foot. You’ll see ads that say something like $22.00 / square foot. What that means normally 22.00/square foot per year. So, if you divide that by 12 months in the years that’s $1.83 / square foot per month. If you didn’t know that you would figure out your rent let’s say for a 1000 square foot office at $22,000.00 / month YIKES. When it’s actually $1833.00 per month…….but wait. There’s more.
Is it really $1833.00 per month or is it more or less?
That figure may be designed to suck you in and it refers only to “base” rent. It probably doesn’t account for other fees for maintenance, maybe lobby and communal bathroom areas, doorman, security and whatever else the landlord can throw at you.
Also, you have the topic of rentable square footage vs. usable square footage So what does that mean?
Rentable Square Feet: This is the entire space you lease as if you put a tape measure around the complete perimeter of the space and that includes spaces you can’t even use like space taken up by interior walls and such.
Usable Square Feet: This is the space you lease that you can actually use.
So, this brings up the topic of loss factor.
Loss factor is the difference between the “rentable” are and “usable” area
So, if you need 2000 square feet, you might have to lease and pay for 3000 square feet. Now, I’m just making these numbers up, I’m hoping you get the idea that a lowball figure for the lease, may have very little to do with what you will pay every single month of the lease.
https://www.squarefoot.com/leasopedia/dollars-cents-much-cost-rent-office-space/
https://www.squarefoot.com/leasopedia/what-is-loss-factor-commercial-real-estate/
Another thing you should do is check around the best you can to see if the asking rent is normal for the area you are considering. Stop into related businesses and introduce yourself. See if the business owner or manager is willing to talk to you about their experience leasing from this landlord. Maybe they’ll slip up and tell you how much they pay. Maybe you can tell how much the landlord is asking and see if they agree that the amount is reasonable or the same they are paying. A little honest hello how are you research can go along way.
Maybe they tell you the A/C is always broken. Maybe the halls and bathrooms are always dirty…..and you might be paying extra for maintaining those areas. You can learn a lot from current tenants.
Drive by the property at all hours day and night. At nighttime is there adequate lighting? Are there unsavory characters hanging around the building?
At peak traffic times is it easy or difficult to get to your space.
Is there a back-up generator for the property?
Look at the ceilings and see if there’s evidence of roof leaks.
Are the locks adequate or will you have to change them? Are you even allowed to change them?
What about the ADA American’s with disabilities act? If the building is not compliant you might have large costs involved in getting your space compliant or face potential lawsuits and shutdowns.
Check out how the lease is terminated. How is the leased breached by either party?
Here’s something to think about? How about a competitor clause, where the landlord has to clear it with you before renting to a competitor? Or the landlord just agrees in writing not to rent to a competitor. Just make sure it’s clearly outlined what a competitor is so the landlord can’t easily rent to anyone he/she wants to claiming the other entity was not competitive.
How about renewal clauses if you want to stay past the term of the lease? These are all things you have to consider and why you should have an attorney review any agreement before you sign.
I could go on and on, but the bottom line if you decide to ignore my idea of screwing the commute and you’re going to rent space, just remember how serious this is and do it right by reviewing as many resources as you can and get a competent local attorney.
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