Every seasoned business owner knows that location can make or break their business. How easily your customer can find you, and how they perceive your office or retail space, will leave a lasting impression – for better or worse. Considering your lease costs or purchase of an investment property will also be one of your company’s biggest expense items, it’s crucial that you spend the time and effort to make the right decision for you and the future of your firm. I meet a wide-variety of business owners every day at Chamber events, speaking engagements, and entrepreneur centers, and all of them tend to have issues with their lease.
I’ve seen many business owners look at their lease or purchase as if they’re moving out of a dorm into a real apartment for the first time. They tend to have a flippant attitude about the signing of a twenty-page legal document and feel that their counterparts are looking out for their (the business owner’s) best interests. However, landlords and investors aren’t playing Monopoly – they’re professionals. If you want to play on a level field and not lose your entire hand on Boardwalk, you need to educate yourself. I’ve said it many times in the past and I’ll continue saying it to every entrepreneur I meet – You don’t know what you don’t know. And that will get you into trouble.
Here’s what you need to know so you can lease like a pro.
Your Next Location
It is good practice to make notes on each property you view so that you can compare them at a later time. You may not be able to see every space in a single day, and the more spaces you see, the more they tend to blend together. Here are the specifics of your physical location that you need to get right.
Visibility/traffic Depending on the type of industry you’re in, your visibility is either the most or least crucial item on your list. If you’re opening a high-end boutique, you’ll want as much storefront as possible to attract your target market’s attention by advertising your wares. On the other side of the coin, if you’re a tech startup and you don’t need the walk up traffic, then you could pay much less for an office on the 7th floor in a Class B building. No need in paying for the eyeballs if you don’t need them. However, traffic is crucial for retail and even some service (think: dentists, mortgage brokers) industry businesses.
Cotenants & the Market Why should you spend all your time and money researching the market when behemoths like Target and Bridgestone have done that for you? If you have a retail business that caters to women, it would massively benefit your business to sit next-door to a retailer like Target. These companies have done all the research necessary to justify spending millions of dollars purchasing land, constructing buildings, and stocking locations where their intended customer base will be. See how landlords and investors view co-tenancy here.
If you are in a professional services business, you’ll also want to pay attention to the movers and shakers in your sector. Bridgestone recently elected to retain its headquarters in Nashville after doing research on a handful of much larger markets that were offering larger incentive packages. Why did they decide to stay? Their research showed that Nashville will continue to attract a younger, educated workforce over the next decade – precisely the group that Bridgestone wishes to continue to employ. Let some of the biggest companies in the world do all the work for you and show you why you need to be in a certain location. Cotenants and the future of your market will impact your growth.
Parking/Accessibility The market doesn’t care how amazing your locally sourced coffee is if they can drive a quarter mile further down the road for a more easily accessible coffee shop. If I have to turn across three lanes in the middle of rush hour traffic, you can bet I’ll be making the easier decision to go a little further down the street and take the simple right turn. Your customers will always take the path of least resistance. If your target market is stopping by to grab breakfast or coffee on the way to work, consider being on the right side of the road headed to the business district. Vice versa – if they’ll be stopping by your store on the way home from work, find a space on the right side leaving town.Nothing is more frustrating when visiting a business than having to cruise around the parking lot fighting with other cars over parking spaces. Customers will intentionally avoid visiting businesses that have parking issues – whether there are too few parking spots or parking is just difficult (think parking garages with tickets) – and it will leave a less than satisfactory impression upon them. Before deciding on a location, be sure to review the parking clauses in the lease to ensure that there will be enough space to accommodate your employees and your clients. It also wouldn’t hurt to spend some time during peak business hours watching the flow of traffic and how the lot fills up. Don’t just take the landlord’s word for it – do the research yourself.
Proximity to Infrastructure If you’re servicing clients in the downtown core, it wouldn’t be a good idea to locate your business 20 minutes outside of town. Yes, your rent might be lower and you may be able to have a bigger location, but is that worth the 20 minutes to town and 20 minutes back that you’ll be spending in the car? Or paying a technician for 40 minutes of drive time? It’s best to locate yourself near to your customer base so that they can find you and so that you don’t have to drive all over town to see them. Remember. . . the Path of least resistance!
Once you sign that lease, you are legally obligated to fulfill every. single. word. in that document. You need to completely read through it and make sure you understand the implications of each line. One added word in a legal clause can shift the intent and favor the landlord, not you. Here are the major points of the lease.
Everything’s Negotiable Unlike that apartment lease that you signed back in college, everything in a commercial lease is negotiable. Even if the landlord claims to have a “standard” or “boilerplate” lease, almost every single section can (and probably should) be negotiated. Think about it – your landlord has likely spent years and a hefty pile of cash with attorneys crafting the perfect lease to suit his specific needs. Landlords aren’t going to draft a lease with the tenants’ best interests in mind, but as long as you know that going into the negotiations, you’ve already got a step up. You’d be surprised (or maybe not, if you’ve done it yourself) at how many business owners take their landlord’s word for it and sign the original lease that was sent to them.
Base Rent vs. Additional Rent Base Rent is exactly what it sounds like – the rent you’ll be paying to the landlord in order to lease the space you’re occupying. But what the hell does “Additional Rent” mean? Well, not all the costs of your space are included in your base rent. These additional costs are separated out because they can fluctuate and are essentially a “catch all” for the landlord to ensure that you as the business owner pay all of the costs of occupying the location. These expenses can include taxes, property insurance, utilities, improvements to the shopping center or building, even items like snow removal. Landlords will typically foot the bill on these items and then pass it on to you, therefore making it the additional rent. Unless you’re signing a full-service lease, chances are you’ll be paying additional rent. Be sure to review your lease and include the chance to audit the actual additional rent expenses at the end of each year. Additional Rent is not a chance for the landlord to profit; You may overpay and you deserve to have that money returned to you!
Full Service vs. NNN, etc. That leads us to the following questions – what is a Full-Service Gross lease and what other types of leases are there? Well, there are two main types of leases: Full Service and Net. Full service means your base rent covers every cost associated with your presence in the space: utilities, taxes, parking, etc. Net leases mean that each expense is being passed on to the tenant to cover. The majority of leases you will encounter will be some form of these two leases, which can also be broken down into Full Service Gross (FSG), Modified Gross (MG), Industrial Gross (IG), Net (N), Double Net (NN), and Triple Net (NNN). You can find more on those terms here.
Impress the Landlord
Having a good relationship with your landlord is crucial – you never know when you may need to call in a favor. If the landlord doesn’t seem like someone you’ll get along with (or you’re already butting heads while trying to negotiate), then move along. You and the landlord are in this thing together; you might as well look at each other like business partners. They are putting up a very valuable asset and often times investing money into tenant improvements for the space and they expect to get a return on that investment! Remember: they are business owners too, and it’s better for everyone to feel like they’ve walked away with a win. When scouting properties, I recommend having your financials prepared (you can find a download on what financials to have prepared here) so that you can quickly hand them over during negotiations. Not only will this impress the landlord and demonstrate how serious of a contender you are, you will also cut in line in front of any tenants that are negotiating on the space that haven’t provided a single document. From my experience being on the landlord’s side of a transaction – not having financials prepared or not being able to turn financials over (read: not willing) will make the landlord nervous and likely to turn you away. They can’t take the risk of the owner or the business not having any money!
Inside the Space: Once you’ve decided you like the location of a property, you need to consider what it will take to get the interior in the ideal condition for you and your business. You can certainly negotiate to have the landlord pay for these renovations, but keep in mind that that is a trade-off. Would you rather have a lower rent and pay for the improvements yourself, or higher rent and not out of pocket costs for the build-out? Either way, you decide to go (or however the deal is presented), I highly recommend that you take the build-out into your own hands. Don’t rely on the landlord and the landlord’s contractor to perform the build out – they may try to cut corners and save money when you need it done right and professionally. Sometimes, the landlord may not allow a third party to work inside the space, but if you have the option of using your own contractor, do it! You’ll be able to choose the right one for you and make sure they build what you need on your timeline.
Wrapping Up: Whether you’re looking for 1,000sf or 10,000sf, you need to understand the leasing process well enough to avoid the common pitfalls. Unfortunately, I see too many businesses that either didn’t know the ins and outs of leasing or worked with an inexperienced broker (or even worse – a residential agent!) and they ended up in a terrible location, without their target demographic nearby, forcing them to shut their doors. You have too much on the line to be flippant about one of your business’ highest expenses, so you need to know what the leasing process entails and have the right professionals on your team. My team and I help business owners in the Nashville area navigate the leasing process: from helping them determine what their needs are to coordinating build-outs and beyond. Think of us as your real estate department: we’re here to remove the burden of the search, the negotiations, and everything else the leasing process encompasses off your shoulders so that you can focus on your business. Call Tyler today.Want to dive even further into leasing? Check out my book, Quit Overpaying Your Landlord: The Small Business Owner’s Guide to Leasing Commercial Real Estate.