Shopping for a new space is often rife with challenges ranging from understanding the language of commercial real estate to the many variables involved in commercial purchase and sales agreements and leases—all of which often need to be negotiated on tight time frames. For those new to buying and leasing commercial property, whether they are owners, managers or executive assistants tasked with getting a lay of the land, it can be daunting. How do you get started?
Map It
Start by mapping all of your employees and seeing how far each of them commute. If you have access to it, map your current customers or distribution partners where appropriate. Also consider other factors such as future employee and customer growth. All of this will help to narrow your geographic focus.
Now that you know where you are looking, you need to drill down into your space needs. For retail users this may be based on how much inventory your have or how many customers you want to serve. For warehouse users, the best suggestion is to go back to your high school geometry days and map out your warehouse for an ideal layout. It is hard to find that perfect fit, but knowing the dimensions of all of your racking will help you calculate how much space you need.
For office space, it is often hard to find the ideal layout with your exact number of offices, conference areas and break rooms. A quick rule of thumb for your search should be 200 to 300 square feet per person. This normally gives enough space for bathrooms, storage and hallways. If you are below six people, this scale does not work as well because it would lead to tight quarters after common areas are factored in. That said, trends are moving downward. A well-known insurance company just moved into a new building in Worcester, Mass. and reduced its footprint by 30 percent without losing a single employee. It did so by creating more shared work spaces and reducing the number of private offices. While these are guidelines to help narrow your search, before signing a lease, hire a space planner or architect, or ask if the landlord has one available to you.
The Search
Next consider whether to lease or buy. Lease payments can be written off your taxes, are typically more flexible, can be negotiated so that major expenses such as roof and HVAC are the landlord’s risk, and typically are more readily available.
Purchasing a property has its own benefits though, including writing off interest and depreciation on taxes. Business owners may get appreciation or a “retirement plan” out of the investment if they eventually sell the business but keep the real estate for its income. Additionally it provides an asset for future negotiations with lenders for other things such as lines of credit. In the end, the important consideration is whether you will make more money on your business or your real estate. Sometimes those dollars spent on a down payment to buy a property are better spent on a new employee, new software or other investments.
The Terms
In leasing, one of the key variables is how your rent is quoted. Triple Net, Modified Gross, and Gross are common lease terms in the industry that someone new to the market may find confusing. (See glossary for definitions.) If you are confused, think of it as a spectrum with one end as Triple Net, where the tenant pays for all of the real estate expenses, and Gross on the opposite side where the landlord covers everything. Modified Gross is anything in between where some expenses are paid by each party.
However, just because the landlord is paying all the expenses does not mean your overall occupancy costs are lower. Obtain all the costs on the building prior to signing a lease to determine what terms would be best. The real difference is how averse you are to expense variables. In a Triple Net lease, if there is a heavy snow year, the tenant’s expenses may go up. However, they get the benefit if it is a milder snow season and less maintenance is needed. The same is true for taxes and other expenses.
Another critical factor to consider when leasing space, as well as in some condominium purchases, is the common area and how much of it you pay for. For example, if you lease 10,000 square feet in a large building, that is known as your usable space. However in your lease you may be charged for 11,500 square feet as your rentable space. The difference is the common lobby, hallways, stairwells, elevators, etc. When comparing spaces ask what the common area factor is, so that you can compare apples to apples.
Before Signing
Always consult with an attorney before signing a lease or a purchase and sales agreement. While every clause in these agreements should be reviewed, here are a few often overlooked but important ones.
In a lease agreement, double check what the holdover will be (the clause in the lease that defines what happens if the tenant stays beyond the initial term). When your lease is up, this clause will tell you how much your rent will be and how long that will be in effect for. The surrender clause is another end-of-lease event. Review this to find out what condition you should leave the space. Also, if you are moving or considering moving from your existing location, check these clauses to find out what your obligations are to your current landlord.
The purchase and sales agreement is the document that will dictate everything about your purchase. In commercial real estate these agreements can be more complicated than their residential cousins. An important item to review is your deposits and when they become nonrefundable. Also, check to see if they are applicable to the purchase price.
Know the time frame you are dealing with to break the purchase and sales agreement if contingencies of the sale are not met, including town approvals, inspections and financing. Take out a pen and paper and count out all of the days of the P&S. It is important to ask your attorney to help count. What was the effective day of the document? When counting days, are weekends included? What happens if a contingency date falls on a holiday? While these same questions arise from residential documents, there typically are more variables on commercial documents so it’s best to review prior to signing.
Build a team of an attorney, a tenant or buyer representative realtor, and any other parties to help with the transaction, such as a contractor, architect or lender. Most real estate searches begin six to 12 months out. While deals get done in much shorter time frames, make sure you can time your real estate around your business and not the other way around.
Glossary
Common Area Factor: The difference in square footage between your usable and rentable square feet. Often quoted as a percentage. Also referred to as efficiency or load factor.
Common Area Maintenance (CAM): All of your non-tax, non-utility real estate operating expenses. Can include building insurance, cleaning of shared spaces like restrooms, and landscaping or grounds maintenance.
Gross: A type of lease where the landlord pays all of the expenses.
Holdover: A clause in the lease that defines what happens if the tenant stays beyond the initial term.
Modified Gross: A type of lease between a triple net and a gross lease. Tenant and landlord each agree to pay for certain expense line items.
Surrender: A clause in the lease that defines the condition that the tenant should leave the space when they move out.
Triple Net (NNN): A type of lease a tenant pays as base rent reach month. In addition they are responsible for their share of the operating expenses, such as common area maintenance, taxes and utilities.
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