Lease Office Space

Leasing office space is a big step towards establishing your business. By having office space, you are providing potential customers with a physical location to visit. Knowing what you are looking for in potential office space is very important as you begin shopping around and researching how to lease office space.

Steps

Making Plans

1. Figure out how much space you will need. Considering your business's needs, figure out roughly how big of an office you need. This will narrow down where to look when you're exploring your leasing options.
   • Obviously, you need a rough sense of the number of offices you need. Also consider the type of work you'll be doing and how much of it occurs in the office itself. Some activities might require a large amount of personal space while others can be conducted in a smaller cubicle. Do not forget to consider conference rooms and other places to conduct meetings.
   • Consider whether clients will be visiting the office; if not, you'll have a lower cost for fewer amenities.
   • Be realistic when considering space. It's not a good idea to rent more space than you need. A larger amount of your limited resources will go into paying rent and you don't want to pay for unused space. If you anticipate expansion, a solid floor plan can help create a roomy environment even with limited floor space. You can also work something out in the lease that allows for expansion or relocation if your business begins to grow.
2. Make a budget. You can't begin the process of leasing an office space without first creating a budget. In order to find listings in your price range, you need a solid sense of what that price range is.
   • Consider moving expenses. If you need to move office equipment into the space, you'll likely have to pay for a moving service.
   • Consider utilities. Things like gas and electric are often not included in office space leases. Try and estimate how much you might be paying per month. Some say to budge for $1.50 per square foot, but this depends on the age of the building. In old buildings, you might have to pay more. Once you find a few places of interest, you could request the landlord send you previous billing statements or provide you an estimate of utilities cost.
   • You will also need to pay for Internet and phone. You can talk to providers to ask about monthly rates. Also, be sure to inquire as to installation costs in case you need additional equipment, such as a phone jack, installed in your office.
   • You will need to pay insurance on the office space you rent. Most landlords require tenants pay a certain amount for insurance per month. Try to get a sense of the average insurance costs in the area.
   • Maintenance and janitorial costs should also be taken into consideration. Not all office space leases cover maintenance issues, and if you want to hire a janitor you should get a sense of how much that employee will make per month. You might be a more self sufficient type of office, where cleaning is done by the staff. If so, take costs of supplies into consideration.
3. Select an area. You should narrow your search to a specific area that works for you and your employees. Have an area chosen before you begin looking through listings.
   • There are three factors to consider when selecting location - your clients, your employees and the price. Make sure you select a place that is easily accessible to potential clients, does not inconvenience anyone working for you, and is still within your price range.
   • Customer convenience and traffic patterns should be your biggest concern, as customers bring revenue. Find an area that's easy to get to driving or via public transportation and that's not off the beaten path or difficult to locate.
   • Make sure you find a relatively safe neighborhood with a low crime rate.
   • Also, people tend to flock to areas where a lot is going on. If you want to attract customers, aim for a place with coffee shops, restaurants, bars, and other establishments that attract crowds. This isn't an important factor if you're just using the the space as an office.

Finding Your Space

1. Familiarize yourself with different classes of office. Buildings are broken down into a class system related to their quality. A building's class designation can give you some idea of whether or not you would consider renting that space.
   • Class A is the highest class of office. These are generally expensive buildings with architecture and amenities designed to impress high-profile clients. Class A buildings are usually only 1 to 2 years old, operate 24 hours, and include luxury fixtures like fancy elevators. If you're targeting high earning clients, a Class A building may be worth the investment. Otherwise, aim lower. For the average business, a Class A building does not have much advantage over lower class offices.
   • Class B buildings come in two types. The first type is a Class A office that has recently been downgraded. This is usually for minor reasons, such as the building showing signs of age and wear or fluctuating market values. The second type of B-grade building is a structure built specifically for holding office space. Both types of Class B buildings are generally as functional as class A buildings but are simply older and less fancy.
   • Class C buildings are downgraded A/B buildings. This is usually due to age. If a building is more than 5 years-old, for example, it will probably be downgraded to Class C. Class C buildings are just as functional as other types but might not look as nice and some technology may be outdated. Class C buildings can be a good investment as they're significantly cheaper, but you may have to account for the possible cost of renovations. You also need to take aesthetics into account. You do not want to rent an office that looks broken as this might put off clients.
   • While looking through buildings, see if they're furnished or not. If a building does not include basic amenities like desks, counters, and cubicles you need to account for that cost when making decisions about renting. Most buildings are not furnished unless you are talking about an executive suite.
2. Find available spaces to rent. Now that you have a sense of what you're looking for, you can begin searching for office space. There are a few different routes you can take to locate property.
   • You can go through a broker in your area to find office space. A broker has invaluable expertise and may be able to find spaces for rent before they're officially put on the market. A experienced broker will know the area well and be able to give you informed advice on the best places to rent, as well as representing you when it's time to make the transaction. Brokers work on commission; once they help you secure a space, you pay them a fee.
   • A variety of websites can help you locate buildings. Craigslist is the go-to for many, but there are sites specifically designed to find office space. You can try Loopnet.com, which specializes in commercial real estate. Costar.com is another site with commercial listings.
3. Tour spaces and work on narrowing down possibilities. You can now begin the process of touring spaces and narrowing down your search to make a selection.
   • Don't bother touring spaces you know are out of budget. Make sure you get a sense of price per square foot, considering all factors including utilities, internet, phone, etc. If you can't reasonably afford it, pass it up for now.
   • Make a list of pros and cons of each space, considering a number of factors. How far away is the space from public transportation? Is there a lot going on around the area? Is it safe? Is the building in good quality? Can it provide you with all your needs as a business? If there are any deal breakers, such as no wi-fi connections, you can easily eliminate certain establishments from your list.

Signing a Lease

1. Consider certain factors when signing a lease. Make sure you know the different terms of a lease and how certain factors affect you as a renter. You should never sign anything without fully understanding the terms.
   • Pricing models vary from lease to lease. With a Triple Net lease, you pay a lower rate to the landlord for rent and pay additional expenses separately. With a gross lease rate, all operating expenses are including in monthly rent. A modified gross rate falls in the middle of these two. Some expenses, like those for shared building commodities, are not the tenant's responsibility but you do have to pay for any utilities you use.
   • Pay attention to sections regarding maintenance, cleaning and trash removal. Make sure you understand what types of repairs you are financially responsible for and what types your landlord will take care of. Maintenance is one of the number one causes of disputes between landlords and tenants and you want to avoid misunderstanding.
   • Pay attention to anything regarding the landlord's right to break the lease. Know what conditions give the landlord the right to ask you to move your business elsewhere. Also, know what your landlord's liability is in the event of building issues that affect your business.
2. Negotiate your lease. Landlords are very eager to earn profit from tenants and may ask for more than a space is truly worth. Always negotiate a lease and do not settle for the advertised price.
   • Mainly, you should aim to negotiate a limit for rent increases. If your business is successful, you may want to stay in the same area longterm. Aim to cap the rent increases at 2 to 3% as landlords sometimes hike rent as much as 8% each year.
   • Give it time. Negotiating with a landlord can take weeks and people often panic and settle for less. Allow yourself adequate time to make sure all your needs will be met by the building before signing a lease.
   • If you're inexperienced in the business or renting world, negotiation can be tricky. It might be best to hire a broker for representation rather than attempting to fend for yourself.
3. Take proper precautions against worst case scenarios. Even if you're a responsible business owner, extenuating circumstances can sometimes cause misfortune. Always be prepared for the worst when signing a lease.
   • Be careful when signing a personal guarantee. This is a document that assures, even in the event of a business collapse, you are personally liable for rent payments. Make sure the terms of your personal guarantee are fair and be sure that personal guarantees can be discharged in a personal bankruptcy. Also add language protecting you if the landlord goes bankrupt or fails to meet lease commitments.
   • Make sure you have the right to assign the lease to someone else or sublet the space. In the event of business failure, you will not need to pay the rent in full yourself. Also, in the event you want to relocate this can minimize the costs.
   • A death and disability clause is an important document. This assures that in the event you die or become permanently disabled the terms of the lease will terminate.
4. Prepare for best case scenarios. Unforeseen circumstances are not always a bad thing. Your business could grow quicker than expected and you might outgrow the buildings needs before the lease terminates. In addition to preparing for the worst, prepare for the best.
   • Make sure there is a relocation/expansion clause in your lease. This should give you the right to terminate the agreements made in the lease in the event your business needs to relocate. Specifics vary and these can be negotiated between you and the landlord.
   • A right of first refusal gives you the right to claim adjacent spaces before they are lent to different tenants. The landlord will have to inform you if he is renting to someone else and you have the right to request that space for yourself.

Tips

• Pay close attention to the parking situation by the property you plan to lease. Determine if your employees and potential customers will have easy access, especially if you're operating in an area with little public transportation.
• If you only need a small amount of office space, you may be able to save money by looking at existing businesses that want to sublet some of their office space.

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Sources and Citations

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