Entrepreneur’s Guide to Renting Office Space
Overview of Guide to Renting Office Space
Are you an entrepreneur that needs a guide to renting office space for your business? Perhaps you are a one-man business that has been operating out of your spare bedroom. Maybe you are just desperate for some human interaction and tired of being cooped up in your lonely home office all day long. Or Perhaps you’ve been using your local coffee shop as your de-facto office and are tired of the disruptions of having to listen to other patron’s drama. Maybe it’s time to consider renting an office for your business. This is a big step and can be a little bit overwhelming. Renting commercial office space is different than renting a residential apartment.
The Entrepreneur’s Guide to Renting Office Space gives you an overview of your options for leasing that are available to you. Independent contractors, small business, and entrepreneurs that are starting out with their first commercial lease will find this helpful. The guide also answers common questions and explains typical commercial lease terms that you will hear when leasing a commercial office.
Commercial Lease vs. Residential Lease
You are now entering the big leagues by signing a commercial office lease. Commercial leases do not have as many consumer protection laws for office leases as there are for residential leases. The reason is that everyone needs somewhere to live and society has determined that they don’t want grandmas, school teachers, poor folks, and others that aren’t educated in real estate law to be taken advantage of and sign an unfavorable lease. Not everyone has to sign a commercial office lease. Honestly, most people shouldn’t sign a commercial lease. Therefore, the assumption with commercial leases is that you are smart enough to understand what you are signing. You are therefore obligated to fulfill your promises.
Types of Commercial Leases
Let’s go over some of the most common types of commercial leases on the market. This list isn’t comprehensive, but it will give you an idea of the most common types of leases that an entrepreneur will run into.
- Co-working lease – This option provides a communal office space and extra amenities that most entrepreneurs couldn’t afford if they rented an entire office space. It also saves you from having build-out the property and provide furniture/fixtures along with paying for ongoing services.
The co-working space is shared by multiple entrepreneurs and independent contractors via separate leases. There are common areas for working and mingling with other entrepreneurial tenants. Typically, there are levels of membership that start with base level membership that just provide access to the common area and a desk all the way up to dedicated office space to those that want to pay a little more. Most co-working leases are short-term and include utilities and Internet in the monthly lease rate which saves tenants money. Since you are sharing the expensive overhead of an office with multiple coworkers this option can be a great option for a stay at home worker that is wanting to network and get a more professional presence for a reasonable price.
- Month-to-Month Lease – This is a short term lease that is automatically renewed each month. It provides the tenant a great amount of flexibility to cancel with only a 30-day notice. On the flip side it provides the landlord the right to terminate the lease with a 30-day notice. So the downside to these leases is that the landlord can increase the rent or move you out with a short notice if they get a better tenant or if you are difficult tenant. Typically, month-to-month leases will only be offered by “mom and pop” landlords as professional landlords prefer the certainty of long-term leases that more experienced tenants require.
- Gross (Full Service) Lease – In this type of lease the rent is all-inclusive. The landlord pays all or most expenses of the property. This includes property insurance, maintenance, utilities, and some janitorial expenses. This allows the tenant to have a known monthly payment that does not vary based on repairs and maintenance making it easy to budget expenses. Lease terms will range from one to five years.
- Single Net Lease – Tenant pays a base rent rate plus a pro-rata share of property taxes. Lease terms will range from one to five years.
- Double Net Lease – Tenant pays base rent plus pro-rata share of property taxes and insurance. Lease terms will range from one to five years.
- Triple Net Lease – This is the most common types of net lease for commercial buildings and retail space. It is known as the “net net net” lease, or NNN lease, where the tenant pays the Common Area Maintenance (CAM), insurance, and property taxes in addition to a base monthly rent. Tenants also pay the costs of their own occupancy, including janitorial services, utilities, and their own insurance and taxes. These leases cause the monthly rent to fluctuate based on actual expenses and therefore harder for tenants to budget rent expense. Lease terms will range from one to five years.
Defining Office Requirements
Now that you understand the different types of leases it’s time to find an office building that is perfect for your business. There are many considerations that go into finding a location that is a fit for your needs. Below are a couple questions to ask yourself when choosing a location for your business.
- Is the property located in a convenient location for my employees and customers? Perhaps the property is super-convenient to your house, but all of your customers work and live on the other end of town and it’s not convenient for them to meet you for meetings without long commutes. Your employees will also benefit from having a location that is convenient to their living space and not suffer through long daily commutes.
- Does the property match the feel of my business? If you have a high-priced law firm your clients will be more likely to expect you to be in a high end office building in an upscale area of town. The downside is that you will pay dearly to be in a highly desired location. However, if you are a young start-up with millennials as your primary employees there may be a desire for a location that is hip and on the fringe area of town that is up and coming. You won’t need to be in an ultra-expensive location and can save money on rent. Millennials enjoy the collaborative approach to co-working spaces and being able to interact with their coworkers in a less structured environment than workers from the baby boomer generation. So instead of dark mahogany offices, your company could benefit from an open floor plan with fewer offices and more collaborative shared space.
- What are my current and future size requirements? When looking at properties, consider how much space you need to operate your business right now. It’s also a good idea to budget for additional space so you can expand your business and hire one or two more employees without having to obtain a new lease. If your business grows over the course of three to five years what are your options for leasing additional space from your current landlord? If the property has additional space that you can expand into without having to move that’s a bonus. Make sure the office that you choose offers this option so you don’t get stuck with an office space that doesn’t meet your growing needs.
How to Find an Office to Rent
Let’s now turn to finding an office to rent. Below are some common ways to find a commercial office space.
- Agent – Hire a leasing agent (tenant representative) to search for a property and represent you during the lease negotiation. The landlord pays the commission so you don’t directly pay for the leasing agent’s services. However, landlords are less likely to discount the advertised terms of the lease if they are having to pay a commission to bring you in as a tenant. Also, if you are looking for a short term lease or a lease that is not a large amount of rent, a leasing agent will most likely not be interested in representing you since the commission will be small.
- Craigslist – Search Craigslist.com for your town under the “office/commercial” section of real estate. You will see several advertisements for commercial properties from smaller landlords on Craigslist. If you aren’t needing a large space, this may be one of the best search options for you.
- LoopNet – LoopNet provides listings of commercial properties for sale and lease. In order to browse a limited portion of the listings you will need to sign up for a free account. In order to see all the listings a paid account which typically runs about $100 per month is required.
- Newspaper – Search your local newspaper’s classified section. This is not the most popular way for landlords to advertise their property, but a few do still use the newspaper.
- Drive by – Drive around the areas of town that you are interested in renting an office space and look for “For Lease” signs on the property. This is a great method if you have a specific area of town that you want to locate in and have a free weekend and are willing to drive around.
- Word of Mouth – Talk to friends and neighbors and let them know that you are looking for an office space. They may know a location that is open near where they work. They may also know someone that has a property for rent. That person may be willing to rent out at a great rate to someone they know will take care of the place.
Qualifying for a Commercial Lease
Ok, so you have found that perfect office space. It is a great location and the price is reasonable. Now it’s time to apply for the lease. During this phase, the landlord is trying to determine if they are interested in renting to you. What the landlord wants is someone that is going to pay on time, not cause any trouble, and make their life relatively easy for the term of the lease. During the lease underwriting phase, the landlord will be screening you to determine how likely you are to fall into this category. They are going to look at your past performance to determine if they want to rent to you. So how do they determine if you are a good risk?
- Credit Reports – On smaller leases it is not uncommon for a landlord to want to get a copy of your personal credit report. A person’s credit report list all of the financial contracts that a person has entered into and agreed to pay. People with higher credit have demonstrated that when they promise to pay X dollars in return for a service they will pay consistently without incident regardless of the personal circumstances they encounter in their life. While having perfect credit is not absolutely required to be a good tenant it does put you at the front of the pack of applicants.
- Financial Statements – If you have a business that is currently in operation, the landlord will want a copy of your business financial statements to determine if the business will generate enough cash flow to pay the lease. If the business is new or does not generate adequate cash flow, then the landlord will probably ask for a copy of your personal financial statements. This will provide them a snap shot of what you make each month from your part-time job, a spouse’s job, or other sources of income. It will also show them a complete list of your assets (cash, stocks, home, etc.) and liabilities (mortgage, car loan, student loans, etc.).
- References – Landlords may ask for a character reference. If you have someone that has worked closely with you that can speak to fact that you are someone of solid character this will be helpful. Preferably, this person will be a known business person that also has a good reputation. It is always comforting to a landlord if a potential tenant comes highly recommended by someone the landlord already knows and trusts.
- Personal Meetings – Making a good impression with the landlord is very important. Below are a few important intangibles that will sway whether a landlord will choose you over another applicant.
- Timeliness – Show up on time to appointments with the landlord.
- Appearance – Dress appropriately to meet the landlord. You don’t have to wear a suit, but don’t wear old gym clothes or anything that could be considered offensive. Ex. T-shirts with images or messages that could be offensive. Conduct yourself professionally and speak clearly and avoid using slang or other language not commonly used in professional business settings.
- Desperate Tenant – You should be interested in the property, but not desperate for the lease. If you are interested in the property, let the landlord know you are interested and you’d like to pursue applying for the lease. This is not junior high where you need to play it cool and not let the girl you like know you are interested in her. On the other extreme, don’t come across desperate. It’s a major red flag to a landlord when a potential tenant that is offering to sign a lease agreement and pay a large deposit that day if they can get the property. Responsible tenants that fulfill their contracts don’t jump into long-term contracts without fully considering their options and determining if the lease will fully meet their needs and they will be able to honor the financial commitments of the lease. If a tenant is changing locations, then they probably need 30 to 60 days of notice to their prior landlord before they can move locations. Moving locations is a lot of work and takes lots of lead time to do it correctly. Only tenants that are being evicted or being encouraged to move from their current location will be moving on short notice.
- Personal Guaranty on the Lease – I want to give folks that have just formed a Limited Liability Company (LLC) a reality check. I often hear new entrepreneurs say I just formed an LLC for my business and I’m going to put all my loans, leases, debts, in the name of the LLC so I don’t have any legal liability as an individual. While it’s true that the LLC is a separate entity from you and that if you get your debts, leases, and contracts signed only in the name of the LLC the other party does not have recourse to come after you to pay back the obligations…. In the real world it doesn’t work out this way. Why is that? It’s because no bank, landlord, or anyone else that has any business sense is going to enter into a contract with a newer LLC without getting a personal guaranty from the individual behind the LLC. A personal guaranty says that if the LLC doesn’t pay up, then the personal guarantor (you) will pay the debt.
If you have a well-established business that is incorporated as an LLC and you have financial statements that show a long period of profitability, then you have the ability to enter into lease negotiations without signing a personal guaranty on the lease. So for now, just assume that the landlord that you are signing the commercial lease with is going to require a personal guaranty from you. If the landlord doesn’t ask you to sign a personal guaranty, don’t offer. Just consider yourself fortunate.
So what types of insurance am I required to carry with an office building lease? Most commercial leases require the tenant to maintain liability insurance indemnifying (secure against legal liability) the property owner from liability at a minimum. Some leases will require the tenant maintain property insurance for fire and other property damage. It is best to discuss insurance requirements with your landlord prior to signing a lease as the amount of insurance you are required to carry can greatly affect the cost of your office space.
Leasehold improvements are alterations that a tenant makes to their commercial leased space to customize the property to their needs. It is the responsibility of the tenant to pay for these improvements. However, as part of lease negotiations, landlords often agree to pay for a portion of the leasehold improvements through a tenant improvement allowance. This provides the tenant a set amount of money that the landlord will pay toward these modifications. If the tenant incurs expenses above the set amount, then the tenant is responsible for covering the balance. Typical leasehold improvements include painting, changing flooring, moving/building interior walls, and/or new light fixtures.
Repairs & Maintenance
So who is responsible for the repairs and maintenance of the building? This will depend on the terms of your lease. Be sure and discuss these terms during lease negotiation and read the lease. For the most part, commercial leases require the tenant to pay for repairs to anything on the interior of the building. Examples of repairs that are the responsibility of the tenant include the following. Interior electrical issues, light fixture repairs, HVAC system repairs, damage to windows and walls.
Now you have the basic information to begin the search for the perfect office for your business. The above guide to renting office space should serve only as an informational guide and shouldn’t replace professional help in areas that you aren’t an expert or need a better understanding. A real estate broker or lawyer can really help out as you negotiate your lease. They will help you understand the requirements of the lease and save you some long-term headaches.
Be sure to think long term when selecting a property to lease and if you don’t understand something about the contract, ask questions. Don’t worry about looking dumb in front of the landlord or realtor. It’s much better to ask basic questions and fully understand what you are signing up for than to assume incorrectly and have to pay additional fees for service you assumed were included in the lease. Best of luck in your entrepreneurial journey! If this guide to renting office space was of helpful feel free to share. I just ask that you provide a link back to the Chandler Properties website (chandler-property.com) or Facebook page.