5 Lease-Term Questions Facing Every Entrepreneur

Now that you have chosen a space that meets your company’s needs, the next step is negotiating your office lease. One of the most important decisions for a company to make during this process is deciding how long they want to stay in that space.

Prior to starting your space search, and definitely prior to making any commitments on a lease term, ask yourself these 5 questions.

1. Do I anticipate changes that might affect my future space needs? A space that works for your company today doesn’t mean it will work for you a year or two down the road. It’s also important to consider whether the space will be effective in attracting the right kind of talent as your company grows.

As a new company, you might simply be relieved that someone let you lease some space, but recruiting a team is easier in some spaces than others.

2. Will I need to invest in improving the space or is it move-in ready? If you need flexibility in the term of your lease, and the space requires a lot of build out, don’t expect the landlord to pay for that.

Landlords expect to make their money back on any tenant improvement allowance by including these costs in your lease rate or term. Hence, a substantial investment in improvements may force you into a longer-term lease by amortizing the improvements over a longer period of time.

Be prepared to pay for tenant improvements out of pocket for shorter-term leases or expect a longer-term request from the landlord. Tenant improvements are never free.

3. Is the rent likely to increase in the future? Keep an eye on the local office market to get a general idea of rental rate trends. If using a broker, take advantage of their market expertise. Market comps are valuable data that a good broker can get for you.

Ask them to provide comps for the same building and comparable buildings to help you determine the trends. If considerable rental spikes are expected in the future, consider locking in a longer-term lease at the current rate.

4. Exactly how important is location for my business? Although primarily applicable to retail businesses, it’s always worth considering the potential impact of a space’s location. Your location may be important for attracting talent, situating yourself strategically among complementary and competing companies, establishing your brand and so forth.

If the success of your company depends heavily on location, or your company becomes more valuable because customers can find you easily, consider securing that space for a longer period of time. On the other hand, if your business isn’t particularly driven by location, you can be more flexible with the lease term. Finding a comparable space likely won’t be an issue, should the landlord decide not to renew your lease.

5. Will my rent be lower if I sign for a longer term? This is the trick question! Most entrepreneurs think that they must sign a longer lease to get the best deal. While landlords (and brokers) are happy to work with longer term leases, and will reward this with better incentives, that does not mean that this is a better deal for your company overall.

Lease term is one of the most important parts of your lease. Many brokers will admit their clients do not negotiate carefully enough. Ask yourself the right questions early to help you negotiate a term that works for your company’s current and future plans.

To get more information about lease term best practices other tenant-related topics, visit our FAQ.

This article was written by Susie Algard and  originally featured on Entrepreneur.com. See original source here: http://www.entrepreneur.com/article/235894

When Does it Make Sense to Use a Broker to Find Office Space?

With the explosive growth of small businesses in the U.S., more entrepreneurs are finding themselves negotiating and closing leases without the help of a broker. While at times it makes sense to do this, using a broker in the right scenario can greatly assist in securing the best possible lease for you and your company.

Before deciding whether you need extra help, it’s important to understand what motivates brokers and how they can benefit you during a lease transaction.

Getting their attention. Knowing how brokers get paid is important to understanding their motivations — and why sometimes, they don’t return your calls. Most brokers get paid a percentage of your total lease value, which is typically between 3 and 5 percent. However, this often isn’t the full amount your broker will receive, as they usually have to share a percentage of their commission with their brokerage companies.

Getting to a signed lease can be a lot of work. This can involve conference calls or face-to-face meetings, searching for spaces that satisfy your requirements, setting up and attending property tours and actual lease negotiations themselves.

A broker will have to do these steps for a company regardless of if they’re looking for 10,000 square feet of space or 500 square feet of space, but the difference in size means that the amount the broker receives will be significantly different.

This is why you might want to — or have to — represent yourself in a lease transaction for a smaller space. If your space requirements are bigger or more complicated, then there are instances where using a broker may be in your best interest. To better understand the potential costs of working with a broker, check out our FAQ.

Knowing the landlord landscape. It’s tempting for experienced entrepreneurs to think that they can deal with the landlord directly and save money by not using a broker, expecting that the landlord will pass savings on to them. While there may be times when this is true, there are just as many situations where it isn’t necessarily the case.

While you might do a lease transaction every three to five years, brokers do many deals every month. The end result is that brokers are likely to know more about the landlords operating in the local area than you do. They know the property owning landscape well: who is flexible, who is motivated and who will go the extra mile to accommodate a tenant.

For example, let’s say you are a growing company with the stability to sign a long-term lease if desired, but want to retain a short-term lease for greater growth flexibility. In situations such as this, an experienced broker can guide you to spaces with landlords who are not only flexible, but can accommodate you in alternative buildings while under your current lease.

Let’s say you run out of space two years into a five-year lease, you may have the option to transfer your lease terms and move to a larger space in their portfolio. Additionally, as opposed to having to take a large space that is intended to be grown into, a broker may be able to negotiate rights of first refusal on adjacent spaces one or two years into your lease term, saving you from paying that rent from the onset.

Striking a creative deal. A broker may also be able to work out a plan that works best for your company’s financial needs by getting creative with how your rent escalation is constructed. If you are working on a product launch that runs on an 18-month cycle, a broker may work with you to escalate your rent accordingly instead of a traditional 12-month rent increase cycle.

If you are facing a scenario where you may have run out of space completely, they may even be able to negotiate a lease buyout with the landlord so that you can move into their new space without paying double rent.

There are no hard and fast rules on when to work with a broker. Before putting in a lot of work shaving a few percentage points off your lease by saving the landlord from a commission, ask yourself if you’re paying for something that you shouldn’t have to or if there’s any flexibility that is worth more to your company than the rent savings.

These factors could amount to much more savings than the commission saved and passed to you.

This article was written by Susie Algard and  originally featured on Entrepreneur.com. See original source here: http://www.entrepreneur.com/article/235529

Broker Banter – Questions & Answers (The Portland Chapter)

We’re the first to admit we don’t always have all the answers when it comes to the fine details of leasing and all the questions that come with it. That’s when we turn to our commercial comrades to aid with the broadening of our knowledge base.  This week we’ve gone straight to the source to speak with Portland, OR broker Kristi Ricker.

We connected with Kristi to talk shop, and in fact, where to set up shop.

OfficeSpace: What do you think is the most important question a tenant should be asking, that they never seem to ask when looking for space?

Kristi: Zoning, tenants need to learn more out about zoning. There are so many issues in this area and if you’re not aware of this in the beginning it could hurt your chances of securing your ideal space. It’s something you should ask your broker about as they’ll be able to determine how to move forward in narrowing down your search. It’s just not something that’s on the top of your mind when you’re looking for a space and it definitely should be.

OfficeSpace: What is the best tip in negotiating a lease you think all tenants should consider? 

Kristi: The longer the lease, the better you’re going to be able to negotiate, especially if you are going to need anything done to your space. People are nervous with the idea of securing a 5 year lease, they think “What if something happens?” – but they can always put a clause in allowing them to sublease (A lease of a property by a tenant to a subtenant.).

OfficeSpace: What do tenants focus on, that perhaps they shouldn’t when searching for space?

Kristi: Recently, I’ve had clients who have looked at a space and were concerned the buildings around it were being worked on or unfinished. Unfortunately, this doesn’t always paint a pretty picture of the neighborhood, especially when it’s an up and coming urban area. I recommend looking at the bigger finished picture and inquiring about what’s being developed in the area.

OfficeSpace: What area of town would you recommend to a Start-Up in Portland?

Kristi: The inner Southeast, Northeast and North Portland are very hot right now. They were predominantly industrial areas and now they’ve turned into these very creative pockets with great opportunities for startups, restaurants, retail and more.

OfficeSpace: What are you starting to see more of in Portland?

Kristi: Tons of startups, restaurants, breweries, delis – there’s a great food scene here.

OfficeSpace: And lastly, what makes Portland great?

Kristi: Portland‘s so diverse, we have a little bit of everything for everyone. Everything goes here – that’s what I love about it. I see all these new ideas here and they seem to work. If you have a crazy, fun new idea, there’s a great support network for that here. It just seems out of the ordinary things work here more than other places. Nothing is guaranteed but your chances of making it a go seems to have better odds in Portland.

Kristi has over 15 years of real estate experience in the greater Portland area and has recently started her own company.

Need Office, Retail or Industrial Space in Portland? Visit us here – OfficeSpace.com/Portland

Examining the True Costs of Working with a Commercial Real Estate Broker

Post updated on  October 4th, 2018

Finding an affordable commercial real estate lease that will suit both your company’s needs and its budget is certainly a difficult process, but one that’s always made easier with a qualified ally at your side – and that’s where commercial real estate brokers come into play.

Operating on a commission basis, the terms of their payout aren’t always clear at the outset. However, especially if you’re seeking smaller office spaces, it can be difficult to find and retain a trustworthy and reliable broker. To better understand how commercial real estate brokers operate (and how they get paid), read on:

How Commercial Real Estate Brokers Get Paid

Brokers usually get paid a percentage of your total lease value. What that percentage is varies from region to region and depending on individual markets, but it’s typically between 3 to 5%. However, brokers typically have to share a percentage of their commission with their brokerage companies. This percentage can also vary, but let’s use a 60/40-commission split as an example with 60% going to the individual broker.

To get to a signed lease, there’s a major amount of time, energy, and effort that goes into the process. There are calls or in-person meetings, searching for available spaces that meet your requirements, calls to set up property tours, the actual property tours, and lease negotiations. All of the steps above are the same for a company looking for 10,000 square feet of space or 500 square feet of space. In addition, most companies looking for smaller spaces are unsure of what their space needs will be in the next year or two so they are only looking for shorter term deals whereas companies needing larger spaces tend to look for longer lease terms. Here’s what the math looks like in both scenarios:

500 square foot space x $30/square foot per year = $15,000 in annual rent

Lease term is 1 year: 1 year lease value $15,000 total rent (for ease of calculations, I’m assuming no rent escalation)

Brokerage company’s commission 5% = $750

Broker’s commission 60% of brokerage company’s commission = 60% x $750 = $450

VS.

10,000 square foot space x $30/square foot per year = $300,000 in annual rent

Lease term is 3 years: 3 x $300,000 = $900,000 in total rent

Brokerage company’s commission 5% = $45,000

Broker’s commission 60% of brokerage company’s commission = 60% x $45,000 = $27,000

Why Securing a Commercial Real Estate Broker May Not Be Easy

Every deal is unique, but the numbers don’t always make sense for brokers with smaller spaces. This doesn’t even take into account the number of times brokers work on a deal where they’ve put in their time and the deal goes dead for reasons outside of their control. Spending the same amount of time for $27,000 versus $450 is rarely an attractive option in any profession, so finding someone qualified and experienced to handle your office search may not be an easy prospect. In the meantime, shared office spaces, co-working services, and executive suites could be a viable alternative while you seek a first time (and more permanent) office space.

How Commission Splits Work – and Who Gets Paid

Landlords and property owners budget about a 4-6% commission for the listing agent, which is split between the listing agent and the tenant representation broker once the lease is complete. However, while many commission splits are 50/50, there are lease agreements that dictate a split as wide as 90/10 in favor of the leasing agent. This is more common in competitive markets where prospective tenants are many and available space is scarce, therefore making things even more difficult for companies struggling to find office space.

It doesn’t hurt to ask a prospective broker how much they’ll be earning on the transaction. While they won’t have much say (it’s up to the landlords to determine commission splits), it’s good to know what level of service to expect. The higher the commission split, the more motivated they’ll be to get the deal done on your behalf.

How Much Will I Have to Pay to Work with a Commercial Real Estate Broker?

Most brokers will tell you their services are free, as landlords and property owners budget a commission percentage for each lease agreement. And due to this, it’s very rare that a business owner could negotiate a lower lease rate by dealing directly with the landlord – the entirety of the commission would simply go to the listing agent. While a successful business owner may need to expand to larger space every 3-5 years, a commercial real estate broker handles real estate transactions like this every month, lending more know-how and market experience to the transaction to the benefit of their client.

If you can land a broker, their work on your behalf is an invaluable asset, as it allows your company the flexibility to focus on your business and take a look at prospective properties as they become available, sending you listing information, setting appointments, and accompanying you on tours. And because they’ll be involved with the transaction throughout the terms of the lease, they’ll be able to negotiate any changes or even a lease buyout should you run out of space completely.

In markets where tenants are at a premium and landlords are rushing to get their spaces filled, a tenant broker’s commission split may be higher, meaning landlords may try and find ways to make up for that gap in other areas of the lease. While you likely won’t end up paying higher rent due to other options in the marketplace, there’s a greater chance that you won’t see tenant improvements to your liking – but your tenant rep is there to make sure that doesn’t happen.

Should I Just Find Office Space Myself?

It makes sense that a listing broker working on behalf of the landlord would agree on lower lease terms by working directly with a prospective tenant, as they’d secure the entirety of the commission as a result. While this could work in smaller office spaces or in short team and subleases, listing agents work for the landlords, so bringing in below-market deals may upset their clients. Expect average market level deals using this avenue; after all, no one likes upsetting their boss.

No matter the size of your business or the limitations of your budget, working with a commercial real estate broker can be a genuine ace-in-the-hole for business owners seeking their first location or in need of an expansion. While the process isn’t always straightforward, you should be better equipped to discuss your options with whichever tenant rep broker you consider bringing on board to assist you in your search.

The #1 Mistake Many Startups Make When Managing Growth. Remember the Garage?

In a galaxy far, far away…

In the beginning, most start-ups follow a certain pattern:

  • Inspiration leads to the “killer” idea
  • Bootstrapping
  • Sourcing Capital
  • Recruiting an A-Team
  • Product Development
  • Building an Infrastructure
  • Iteration
  • Managing increasing Costs
  • Growth

There are many versions of the story but in my own career and listening to the anecdotes of many other entrepreneurs, most folks like you and I have sang and are singing the same song.

Boot Strappin’ 

In the early stages, everyone including founding members are wearing many hats.

  • You may be starting your empire from the confines of your garage.
  •  You may be able to delegate certain tasks to your founding team of two.
  • You may want to hire or outsource but the cost benefit may not make sense at this time.
  • This may not be most efficient but it’s cost effective.

Everyone is burning the midnight oil to get to market as quick as possible and the Agile Development model is adopted. Your development team is furiously taking feedback and the products and business models evolve. You and your team have proof of concept now and the future looks bright.

Your first two revenue models don’t produce as you hoped they would, so you scrap them and finally find a revenue model that works for you.  Soon, the revenue grows from a trickle to a stream and it looks like it will be a steady stream. Life is good and all the blood, sweat, and tears seem to be paying off. Team morale is high and even the instant noodles taste infinitely better!

You Did What With My Money???

Depending on your cash situation, this may be the time you seek additional funding. You’ve proved your concept, generated revenue, and now you’re looking to scale that model. I won’t go into valuation models, capital structures, or optimal equity distribution, but another major attribute that most investors want to see is fiscal responsibility.

When I talk about fiscal responsibility, I don’t mean extreme conservatism, as say an accountant would, but more of a prudent balance of risk, reward, and stewardship. There will be a certain amount of cash burn related to the Agile Development process as some features will be pushed to the side or scrapped all together, but cash burn that locks you into long term contracts that increase your fixed cost structure that may not contribute to the business are things to look out for. This may be one of the most overlooked aspects of the start-up life.

Pre-Y2K Hysteria

In the early go-go internet days, many companies got to this stage and proceeded to secure prime Class A office space with room to spare for their burgeoning venture only to find out that they over estimated the growth that they would experience. This left many start-ups in a precarious position, after all, most start-ups aren’t experts in commercial real estate.

There are many more practical options for office space nowadays. We will always have the garage to start out in, move to a shared or co-working space, perhaps graduate to an executive suite space, or look for a screaming deal on a sublease space offered by perhaps some of the less fiscally prudent start-ups out there.

Your Space Says A Lot 

Many successful entrepreneurs look fondly on their days of bootstrapping:

  • Remember when we had to float all our credit card balances to pay for the gear?
  • I miss those days all 5 of us were huddled on top of each other in the basement working 14 hour days.
  • It’s lunch time, 7-Eleven or the Gas Station?

Another common thread among many successful entrepreneurs is balancing image from reality. From the type of marketing spend to the type of office they lease. Don’t be fashionable, be fundamental. If you just raised money, it can be difficult to justify contracting for prime office space when you’d rather hire more people to get you to your goal.  Not only will your investors appreciate this, so will all other equity stakeholders.

For all you start-ups out there, the sublease space may provide you with the most flexibility and lowest cost to leasing office space. Unfortunately, this market is underserved and is sometimes difficult to find. Many brokers also aren’t very helpful in this type of space search as they have to put in the same amount of time as a normal search but only get paid a fraction of their commission rate, on a sublease.

Craigslist is the most common place to find the smaller sublease spaces out there and they do a great job of aggregating those spaces. However, as many of you are familiar with, the craigslist experience is not for everyone, especially those that don’t have much time to spend on sifting through endless ads. Let alone setting up tours and other logistical tasks.

As you can guess, I work for a start-up called OfficeSpace.com and we focus not only on larger spaces, but smaller spaces and sublease spaces as well. We are looking to solve the small and sublease space problem and we’ve launched our Beta in Portland.

Stay tuned for my next article, where I will share an example of another start-ups’ experience. All the best to the brash, brave, and entrepreneurial companies out there. All comments are welcome!

Image credit: http://creativehomeoffices.com/wp-content/uploads/2012/02/Basement-Before-e1328914683809.jpg

Image credit: http://www.lifeknowledgefm.com/what-is-bootstrapping/