Do your homework before signing a lease

Succeeding in small business

December 24, 1990|By Jane Applegate

For 10 years, whenever insurance agent Jack Houston looked up from his desk, all he saw was traffic chugging along the busy JTC street in front of the strip shopping center where he worked in Woodland Hills, Calif.

"I wanted to get away from the smog, traffic and graffiti," said Houston. "I needed a change."

He wanted a new office that would not only be closer to home, but located in a more professional setting for serving his State Farm insurance clients.

A new retail and office building in Calabasas with a pastoral view of rolling hills caught his eye. After friendly negotiations, including the tenant improvements he wanted and five free months of rent, Houston signed a five-year lease.

"When you are looking for space, it's important to think about the future," said Houston. "My business wants to grow and I can move to a bigger office within this building."

Since rent is probably your biggest expense after payroll, knowing how to negotiate the best lease for your business can save you thousands of dollars over time. And being a savvy negotiator will also reduce your anxiety about moving, according to leasing experts.

After deciding whether your particular business belongs in a retail, commercial or industrial space, find out what kind of conditions the landlord has for leasing the property. Ask about all pass-through costs, reimbursement for tenant improvements and options to renew.

In many areas of the country, the real estate market is soft and business owners should be able to obtain several rent-free months, especially in a new building, said John Van Trigt, a partner in the Los Angeles accounting firm of Parks, Palmer, Turner & Yemenidjian.

"And if you talk to your accountant about structuring the lease properly, you can still take a tax deduction for the free rent period," advises Van Trigt, who specializes in real estate matters.

Most landlords expect you to sign a business lease ranging from three to five years, often with options to renew. Ask the landlord if you will be responsible for paying any real estate taxes and be sure these kinds of costs have set limits before you sign the lease.

Be sure to ask if tenants are responsible for paying management fees if the landlord relies on an outside firm or person to manage the building. These fees should also be capped at a certain point.

Determine exactly how many parking spaces go along with the office space, where those spaces are in the lot or garage, and whether or not you can put your company's name over the spaces. Ask, too, if you can add more parking spaces as your company grows.

Even the smallest buildings usually have signs on them, and having your name on the building is an excellent form of free advertising. If some other firm's name is on the building, Van Trigt suggests asking the landlord for an option to put your company's sign up if the other tenant leaves.

Once you've decided you like the location of the building, the space and the terms proposed by the landlord, visit similar offices in the building to see how other business owners have built out the space. If it's a new building or changes have to be made, find out if the landlord can recommend a space planner to help you design the office.

Before you sign a lease, make sure there is enough power to run your computers, telephones and other equipment. And ask the landlord if additional space might become available if your operations expand.

"The bottom line is everything is negotiable," said Van Trigt.

Making sure you have an option to renew at a predetermined rate rather than the market rate is also important, according to Ken Hoffman, president of Retail One, a San Francisco commercial real estate brokerage that specializes in helping retail stores find space.

"Find out if you can assign the lease or sublet the space so you can bail out if it doesn't work," advises Hoffman. "Leases do have value and can be sold if the landlord permits it."

Jeff Johnston, vice president of The Johnston Group, which owns the Malibu Canyon Plaza building where Jack Houston leases space, said that at times, small tenants are tougher to deal with than large ones because they are less sophisticated.

Johnston, whose family firm owns and leases about 500,000 square feet of space, suggests small business owners carefully check out the area they want to move to. This way, they will know what other landlords are charging and have a realistic point to begin negotiations.

Business owners can usually get a better deal on office space than on retail space which is generally more expensive.

Like most landlords, Johnston requires an updated financial statement and references from past landlords.

"The better your credit is, the more clout you have in the negotiation process," said Johnston.

Remember, before you sign anything, be sure to have your accountant and attorney review it.

Negotiating a lease

* Determine the market rate for similar space in the area.

* Don't be afraid to ask for free rent.

* Find out exactly what month or annual costs will be passed through to you.

* Ask if you must pay any building management fees.

* Find out how many parking spaces are included.

* Determinee whether you can sell the lease or sublet the space.

* Find out what kinds of tenant improvements the landlord will provide.

* Make sure there is adequate power to run your equipment.

* Set clear and specific options to renew.

* Have your attorney and accountant review the lease before you sign it.

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