Look Before You Lease

How you search for a business location can spell success or failure. Here's the scoop on negotiating a deal that won't foil your firm

upon rental, the rental rate, fee for security deposit, a breakdown of operating costs, the starting date and the length of the lease.

Most real estate agents advise leasing a space for a period of three to five years, but some deals are cut for 10 years. Consider your growth plans when determining the length of your lease. “It’s important to understand what your likely space requirement is going to be over the term of the lease so as not to rent too little space,” says John I. Williams, president and CEO of Biztravel.com, an Internet- based travel company in New York. “You don’t want to have to find additional or alternative space well before the end of the lease term,” he says.

In theory, all terms of a lease are negotiable. However, just how far you can negotiate depends upon economic conditions. In areas where vacancy rates are high, you may get a cheaper deal per sq. ft. than in locations where less space is available. Stewart advises that when looking for space, hone in on hungry landlords. “If you have a building that is totally occupied or 85% occupied, the landlord is not cutting any deals. But if you have a building that is 50% occupied, he’s going to cut a deal to get you in there,” says Stewart.

You should also pay special attention to newly constructed office buildings. In most cases, landlords must pre-sell units to obtain financing for construction. Some lenders require that a new building be 70% pre-leased before the foundation is laid. This presents another oppurtunity to get a good deal. “It’s like pre-sells on condominiums,” says Stewart. “You come in first, you get a better rate. But if you come in after it’s built, they are going to charge you more.”

To attract tenants, many landlords offer a package of rental concessions (or incentives). In soft markets, these benefits can include a year’s free rent and build-out of the space at the expense of the landlord. The average cost is $35-$40 per sq. ft. and a typical build-out from scratch can take anywhere from three to four months. Of course, the landlord’s willingness to pick up the tab will depend on such factors as the length of the lease, the condition of the building, your type of business and whether improvements will be useful to a future tenant. You will need to work with an architect to create drawings of how your space is to be renovated.

You can build-out the space yourself. This creates a bargaining chip to negotiate a lower rental rate. “But most tenants don’t want to take on the construction costs and the responsibility for contractors,” Martin says.

Other points of negotiation can include rent bumps — increase in rental rate — and your security deposit. The Consumer Price Index (CPI), the measure of inflation, can affect the cost of operating a building. Landlords will often indude in the lease an increase in rent after a specified period. You should negotiate a cap on how

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