The costs of starting a business can be staggering. One of the more substantial costs you’ll encounter is the location of your business.
Getting the best deal possible may mean the difference between your business failing and flourishing, so understanding the terms and negotiating the best deal is paramount for any business, especially a startup.
Leases come in different forms:
- The gross lease, sometimes referred to as a full service lease, includes all the property costs in one payment.
- The net lease will include a base rent plus allotments for taxes, insurance and maintenance; called a Net, Double Net and Triple Net lease respectively.
- The percentage lease has a base rent plus a percentage of monthly sales.
Each type of lease is generally used for different types of spaces and businesses.
Once you understand the type of lease offered by a landlord, you’ll then want to negotiate the best rate possible. Understanding market conditions will give you an edge.
Are rates for this area increasing or decreasing?
How do the rates for this area compare with other areas?
Knowledge of these factors will provide leverage for negotiations. Here’s an example of how you might negotiate a lease to work for your business:
Say a landlord is advertising an office space for $1,500 per month for a 5-year lease. Affording $1,500 might be difficult if you’ve just started your business, but as things progress, you may be in a position to afford more.
Ultimately the landlord is looking for a total of $90,000 during the lease period. However, if he allows the new tenant to start the lease at a lower rate, the tenant could afford the initial rate and would be willing to pay higher rates over time.
So you start the lease at $1,000 per month for the first year and escalate the lease each year so that you are paying $1,200 the second year, $1,500 the third year, $1,800 the fourth year and $2,000 the fifth year. The landlord still receives the $90,000, and the tenant gets a more manageable lease in the early years of the business, as needed.
Though rental cost is one of the bigger costs you’ll incur when launching a business, don’t overlook operating costs like utilities and services. You’ll also want to understand any responsibilities you, the tenant, might have aside from any restrictions. Also pay close attention to renewal clauses.
If you need help, a competent realtor who works in this segment of real estate will be able to help with supplying market condition information, knowledge of commercial leasing and negotiating the best rates and terms for your business, saving you thousands in the long run.
Now that your business is on its feet and you are doing well, what about renewing the lease? Next time we’ll discuss options and renewals.
Editor’s Note: The above guest column is presented in association with Grindstone Coworking, a shared office community in Edinburg, Texas, for mobile workers, small businesses, and corporate refugees. The Rio Grande Guardian will be featuring small businesses and entrepreneurs associated with Grindstone’s Hive Effect project in the coming weeks and months.
Editor’s Note: Click here to read a guest column by Hive Effect member Sara Cantu and here to read a guest column but Hive Effect member Angel Melgoza.