Getting the best space for business
In previous chapters we briefly discussed topic of space and importance on figuring out what type of business model and space fits best in what you are trying to do.
Let’s assume that you have already figured out:
- Type of space you need, (retail/office/industrial/etc)
- Area
- Size and shape
- Budget
Let’s get into details, assuming that you are looking for a retail or light industrial space. (Other types of spaces will also follow 90% of the same path to getting it done, but we will focus on these 2 cases.)
Things to consider when looking for a space to lease:
1.Utilities.
One of the most important things to consider, is what you are looking for in terms of use.
For example, if you are looking for a restaurant, you will need gas for cooking, and not just any gas. Depending on how many stoves and heaters you will need, gas pipe requirements change drastically.
Single stove pizza place may get away with 3/4 inch gas pipe, compared to a 4-5 stove top + oven may require 2 inch pipe supply.
Building must already have enough gas supply to fit your needs, otherwise you are looking at a very costly construction project, that will cost in hundreds of thousands of dollars and will last 6 - 12 months just on getting proper utilities in place.
Main 6 utilities are:
Electricity, Gas, Water, Sewer, Fire Suppression, HVAC.
Before you decide to start searching for the actual space, you need to know exactly what type of utilities your business requires. Consider getting advice from experienced commercial real estate broker or someone who already has a similar type of bubusiness
2. Budgeting and Financials
Be prepared to put at least a 3 months deposit and 1 month rent when signing the lease.
Your financial situation must also be sound. Most commercial brokers will require your credit score to be in 700+ range and for you to provide pay stubs proving you have a substantial personal and business income, as well as last 6 months of bank statements showing a good amount in sasavings.
3. Searching for the space
Now that you have covered preparations, lets get down to the actual search.
This is usually the most exciting part of the process. I usually pick specific areas on the map i want to focus on and start with the craigslist.
Many brokers still use craigslist for commercial listings since it’s free to advertise.There are many other websites that have large amounts of listings to browse.
I will always walk the area on foot, looking for potential store fronts that don’t advertise online. 2 out of 7 spaces I found on foot.
Schedule an appointment to view the space. Try not to use brokers to set an appointment for yourself, most landlords already have a broker that represents them and they want to deal directly with the business owner.
4. Make an Offer
If you liked the space and it fits your needs. Never agree to the price it’s listed. I always place an offer for 20%-25% lower than advertised.
Most landlords will counter offer you somewhere in the middle, that’s 10%+ savings on rent.
5. Term and Exit
It’s good to lock in the longer term, since you will require some investing into the actual space.
However always request a “good guy guarantee” clause, that will allow you to get out of the lease if you need to. Otherwise you are liable to keep paying for space till lease is ended.
Many businesses and business owners had to declare bankruptcy simply because of signing leases they couldn’t pay and couldn’t get out of.
Ask for a few months free to renovate and setup the space for business. It’s usual to get 2-3 months free.
6. Legal Help
Once price and term is negotiated. Request to see the draft of the lease. Most landlords use the same lease for every tenant. One that fits all their requirements, it's more efficient that way.
You will need to do a deep dive into it to make sure it works well for you and your business, and doesn’t put any liabilities on your business beyond normal risks.
It’s always good to have a commercial real estate attorney look and negotiate your lease. I have never signed the lease in it’s original form, since usually it’s made to protect landlord in every aspect, fair or not.
Once it’s signed, there is no going back.
Some of the things to look out for:
- Real Estate Tax (it must be proportionate to the % of total building space, if you are renting a store that is only 10% of the total building space, you need to pay 10% of the real estate tax increase)
- Business interruption (you must not keep paying rent if business is interrupted due to extreme circumstances, such as flood, hurricane etc. and if interruption happened due to the landlord causes)
- Utilities (who pays for them, are there meters already in place, do you need to do any more work?)
- Hours allowed (some buildings limit hours allowed to be open). And some landlords don't like when business is open at night.
- Signage (not every space allows signs and some require specific size or style of the sign to match the exterior styling)
- Insurances (try to limit liability insurance amount if you can, landlord is interested in highest amount of protection possible, your job is to keep it to a reasonable amount, otherwise your insurance cost could be substantial)
- Personal guarantee (you will most probably be required to personally guarantee the lease, try to ask them to remove it, or limit it rent guaranteed or number of years till guarantee expires)
7. Final Steps
The lease is signed. Now you must receive keys and all the important information with it.
- Where to mail rent payments and who should it be paid to?
- Contact information of the property manager and building super. Who to contact in case of emergency.
- When is the first day you need to make a rent payment and how much. (not every lease starts on the 1st of the month). When does late rent penalty occur and how much is it?
Once you got the keys, it’s time to setup Internet, Electricity, Gas and Water accounts with appropriate utility companies.
Let's summarize everything we've covered in this chapter.
- Utilities
- Budget
- Search for a space
- Offer
- Term and exit
- Legal help
- Final steps
Congratulations. Now you are well equipped to find the ideal place for your business.
