As an up-and-coming entrepreneur, you probably have your hands full. There are seemingly infinite hurdles in the first few years that could mean the life or death of your startup. And starting your own business isn’t for the weak – Elon Musk equates it to chewing glass. Yikes.
With so much on your plate, finding the perfect location with reasonable lease terms should be the least of your worries. That’s why we put together this short guide on what startups should consider when leasing commercial space.
How monthly costs affect you in the long-term.
This seems pretty obvious; however, a 25 cent difference in rent on a 5,000 square foot office lease over a five year lease term equates to $75,000 in total savings or $15,000 per year. Wouldn’t you rather invest this money into growing your company?
“Grossing up” operating expenses.
When you sign a lease, you are also agreeing to reimburse landlords for a portion of the building’s operating expenses, such as real estate taxes, casualty insurance, maintenance, and utilities. Before signing the lease, you want to make sure the landlord has “grossed up” these expenses.
What does “gross up” mean? “Grossing up” means the landlord is calculating your portion of the operating costs based on at least a 95 percent occupancy rate – even if the building has a 20 percent vacancy rate at the time. This may sound more beneficial to the landlord than to you, but if costs aren’t “grossed up”, you could end up paying more and more each year.
It’s also wise to specify that only variable, not fixed, operating costs should be “grossed up”. Fixed operating expenses are the set costs of ownership, such as property taxes and insurance, whereas variable costs are dependent on occupancy rates. For example, utilities and janitorial services increase as the number of spaces occupied increases. Why pay more than your share of fixed costs when it’s the landlords responsibility to keep their buildings full?
How is the floor space measured?
Landlords should be measuring rentable floor space using the standards set out by the Building Owners and Managers Association guidelines. As rent for commercial spaces are calculated based on square footage, you want to make sure landlords aren’t including non-office space, such as balconies, terraces, or external corridors, in their price.
Also, beware that landlords can change the square footage set out in your lease terms. For example, if you sign a lease for space in a building currently under construction, the actual square footage may differ than the measurements set out in the blueprints. Make sure you include a clause in your lease agreement to protect you from such a situation.
Watch out for holdover provisions.
Holdover clauses simply state the cost per month to remain in the commercial space beyond the time frame agreed upon in the lease terms. Even if you are occupying the space on amicable terms, the rate could be three times your monthly payments under the long-term lease agreement. If you think might want the option of going month-to-month after your lease expires, make sure you negotiate this price from the get go.
Don’t negotiate alone.
For landlords, negotiations are tilted in their favor as this is their business – they deal with occupants and would-be occupants on a regular basis and have the know how to maximize their profits. That’s why you need a real estate agent on your side to maximize your savings. And not just any agent, but one who specializes in obtaining commercial spaces at reasonable prices for their clients – a tenant’s advocate.
If you are on the hunt for a commercial space that meets your startup needs, please call Mazirow Commercial, Inc. at 805-449-1945 or fill out our Information Request Form. There is no cost-savings to you if you choose to go it alone, as our services are paid by the Landlord whether you are represented or not.
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