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May 3, 2010 from the ground up

Space probe | Three steps to securing a commercial lease that will help your business grow

After some 20 years of leasing commercial real estate, we have realized that most tenants seeking new space have very limited experience with the commercial leasing process. Navigating this process can be daunting and arduous, particularly if you are unfamiliar with industry terminology and market norms. In an attempt to demystify the process, my colleague, Katherine Allen, and I offer the following column as a beginners guide to commercial leasing.

The space your business occupies, whether it’s retail, office, industrial or medical, is one of the most important assets of the company. The cost of leasing can often account for as much as 25% of your overall operating costs, and choosing the wrong space can cost your business much more. The location, look and layout of your space can affect customer’s and client’s perception of your business, as well as the efficiency and productivity levels of your employees. Given that most people spend more time at work than they do at home, choosing the space your business occupies is an extremely important decision.

Getting started

Whether you are seeking new lease space, downsizing, upsizing or simply relocating, the first step is to determine the general configuration and the amount of space necessary to efficiently run your business.

For instance, we once worked with an office user who insisted they needed no less than 15,000 square feet of space, even though a brief walk-through of their current space revealed glaring space inefficiencies. When all was said and done, they miraculously fit into 8,000 square feet, saving them over $115,000 per year. The use of a space planner during this phase was crucial, and some landlords will even provide a free “test fit” as part of the negotiation process. If not, the cost of the service is money well spent, as it could potentially save you thousands of dollars down the road and can help you design a space that facilitates your workflow and the morale of your employees.

The next step is to determine the ideal location for your business. Location considerations include customer and employee convenience, distance to services utilized by your company, visibility, ease of access and parking availability. For example, a medical practice may need to be within a certain distance of a local hospital but must also determine where most of its patient base is located in order to choose the optimal location.

The next and last step before actually looking at space is to determine your leasing budget, which will greatly affect where you finally decide to locate. It is important to include all of the components of leasing a space, not just the base rental rate. Other expenses can include utilities, building expenses, parking and janitorial fees. Lease structures can vary greatly from building to building depending on how they are managed and how they are physically configured. For this reason, it is important to fully understand what is included in the advertised lease rates and what additional costs will be incurred.

Landlords may use terms such as “NNN,” “modified gross” or “gross” to describe a lease structure. In short, an NNN lease requires the tenant to pay its pro rata share of building expenses over and above the base lease rate plus all of the utilities associated with the space. Generally speaking, a modified gross lease includes the building expenses, but requires a tenant to pay its own utilities. Which utilities can vary from building to building depending on several factors, including whether the utilities have been separately metered for each tenant. A gross lease includes all building expenses and utilities and in some cases can include other amenities such as parking.

Action plan

Armed with your optimal space requirement, your preferred location, a budget and a general understanding of the possible lease structures, you are now ready to start kicking some tires. The easiest and best way to begin your search is to hire a local commercial broker. The commercial broker will have access to most of the available properties in the area you have chosen and can provide an inventory of options that fit the criteria identified in the first three steps of the process. As your agent, a commercial broker will help you navigate the research and negotiation phases of the process and will work specifically with your best interests in mind.

Leasing commercial real estate can seem overwhelming and confusing at first, but once you have completed these simple steps and hired the right commercial broker, the process can actually be a smooth one. The result will be a well-planned and well-thought-out lease arrangement that will help your business reach its full potential.

 

Frank O’Connor and Katherine Allen are brokers with NAI The Dunham Group in Portland. O’Connor can be reached at FOConnor@dunham-group.com.

 

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