Work Space

Five ways to save money on office space

Ray Ortega understands why businesses need good space. He just doesn't understand why so many of them insist on paying for it. "People get involved in these long-term rental agreements. Then they can't produce enough revenues to cover expenses, and it kills them," says the CEO of Ortega Travel Services, a $25-million travel agency based in Atlanta. "We don't pay an awful lot of rent. That's how we keep our costs down."

Five of Ortega's nine outlets come to him virtually rent-free. Three of his large commercial accounts furnish space gratis because they want on-site travel services for their employees. Ortega also gets free space at an air-force base in South Carolina, in return for providing discount rates to Uncle Sam. He has even finagled space from the competition: he shares his Washington, D.C., office with another agency that foots the rent bill in return for a 50% share of the profits on any business Ortega gets there.

Maybe your customers don't want you on-site. Maybe the government doesn't want to pay your bills. There are still ways you can cut your rent. You could always...

1. Profit from someone's misfortune. It's the age of downsizing and rightsizing---and that means empty office space. Even if the downsizing craze passes, subletting is always one of the best sources of discount space. Smart subletters can try for discounts of 25% or more.

When he was looking to relocate, Soheil Saadat, CEO of Scientific Software, a $6.3-million software developer in San Ramon, Calif., eyed a swanky industrial park. But at $1.85 a square foot, Saadat decided, such posh digs were more than he could afford. A broker referred him to a large corporation in the same park that was closing its California office and had more than two years left on the lease. Saadat scored a rate of $1.15 a square foot, saving himself 38%.

2. Let yourself be lured. Many communities offer incentives to relocating businesses, and some have economic-development zones, where the city provides tax abatements, low-interest loans, and other amenities to attract businesses.

When Patti Penny was looking for new headquarters for the Pen-Group, a $39-million employment agency based in Springfield, Mo., she opted not to rent. Instead, she took advantage of low property values in Springfield's downtown. Penny took over a former savings-and-loan building featuring ample parking and a drive-through window, where temps now can pick up their paychecks. The city fronted $50,000 toward renovation costs at a bargain 5% interest rate.

3. Share. Roommates aren't just for twentysomethings. Christopher Hedge was running his solo sound-mixing studio out of a small space in Brisbane, Calif. His business, the Magic Shop, provides musical scores for video-production houses. But the closest video studio was a 20-minute drive away. Hedge thought that if he could join forces--and offices--with a video- postproduction facility, he could save clients valuable travel time. So in 1993 he approached Aldo Panattoni, CEO of $3-million Total Video Co., in South San Francisco.

Today the two companies share a common lobby, a receptionist, a kitchen area, and office machines. For a 12% cut of Hedge's monthly sales, Total Video handles much of the Magic Shop's administrative functions, including invoicing and scheduling. Hedge also pays $750 a month in rent--just a little more than half of what he used to pay.

4. Strike a deal. When his company outgrew its first office, Paul Upton turned to a customer with space to spare. The client had hired Upton's company, Precision Computer Service, now a $16-million company in Oklahoma City, to repair and service computer systems. As part of the maintenance contract, Upton proposed a 5% discount in return for office space. Not a bad deal even for 1986: Upton's rent amounted to a whopping $125 a month. This steal of a deal lasted for about 18 months, until the client closed its Oklahoma branch.

5. Do without. Of course, the thought of paying any rent could make you want to ditch the corporate office altogether. That's what Janet Caswell did. As Caswell pondered space options for her accounting firm, Caswell & Associates, in Bloomfield Hills, Mich., she thought about the staffing and technology changes that were transforming her $650,000 firm. Employees increasingly wanted flexible schedules, and clients wanted specialized knowledge that Caswell could get most efficiently from part-time outsiders. Caswell realized she "didn't need to spend $22 a square foot just to have file cabinets."

So Caswell quite literally sent her people home. She gave up the 1,700-square-foot space and set up each employee--herself included--with his or her own home office. The cost was $200 to $500 a head for modems and extra phone lines; each new employee also requires a computer and a fax machine, at a per-employee total cost between $2,000 and $3,000. Since the transition, Caswell's phone bills have doubled. But all the costs together don't begin to approach the $3,000-plus a month she used to pay in rent.


Benchmark
Where the Deals Are--and Aren't

How tight is the real estate market? It all depends on where you are---and the kind of space you need

1996 Office-Vacancy Rates in Selected U.S. Real Estate Markets
HIGHS
Los Angeles/South Bay Region, CA 26.3%
Westchester County, NY 23.8%
Shreveport, LA 23.2%


LOWS
Gainesville, FL 3.3%
San Mateo, CA 2.3%
Monroe, LA 0.9%
Source: 1997 Comparative Statistics of Industrial and Office Real Estate Markets, Society of Industrial and Office Realtors, Washington, D.C.
1996 Industrial-Vacancy Rates in Selected U.S. Real Estate Markets
HIGHS
Montgomery, AL 27.0%
Rockland County, NY 25.0%
Pittsburgh, PA 17.2%


LOWS
Nashville, TN 1.0%
Chattanooga, TN 1.0%
Des Moines, IA 1.0%
Source: 1997 Comparative Statistics of Industrial and Office Real Estate Markets, Society of Industrial and Office Realtors, Washington, D.C.
1996 Retail-Vacancy Rates in Selected U.S. Real Estate Markets
HIGHS
Corpus Christi, TX (downtown) 83.0%
Knoxville, TN (downtown) 50.0%
New London County, CT (downtown) 44.0%


LOWS
Albuquerque, NM (midsize malls) 0.50%
Jackson, MS (large malls) 0.0%
Billings, MT (large malls) 0.0%
Source: New America Network, a commercial real-estate-services provider in Hightstown, N.J.

Checklist
Negotiating the Best Lease

Signing a lease? Whatever the condition of your local real estate market, there are still things you can do to get a better deal. Some options to consider:

  • Get representation. You want a broker--and a lawyer--working on your side of the table. In his book Tenant's Handbook of Office Leasing, Stanley Mark Wolfson writes that "using a building's broker to negotiate a lease for you is foolish and stupid."
  • Measure the space. Don't automatically believe the square-footage amounts--or worse, approximations--the landlord tells you.
  • Put a cap on rent increases. Try to get a fixed percentage rate of annual increase. Or tie rent increases to some real-world index, such as the consumer price index, though doing that could be risky. "It depends on what you think the market will do," says Greg Gunn of Cottonwood Realty Services LLC, in Salt Lake City.
  • Get a cancellation clause. The landlord wants a five-year lease, but you worry you'll outgrow the space. Gunn suggests negotiating for the right to cancel the lease after three years if you pay for unamortized costs.
  • Make sure you have the option to renew. Try to lock in the renewal rate, too, says Andrew Johnson, managing director of Johnson Commercial Brokerage in Los Angeles. "If you find the market is lower, you can always renegotiate," he says.
  • Minimize restrictions on your ability to sublease. If you grow, you want to be able to move and sublease the space. "The 'use' clause should be as vague as possible," says Johnson.

Christopher Caggiano (chris.caggiano@inc.com) is a staff writer at Inc.


Resources

To find out more about office-space leasing, a good first step would be to read The Commercial Lease Guidebook: Learn How to Win the Leasing Game! by Thomas G. Mitchell (MacOre International, 800-888-4741, 1992, $19.95). It's a little too enthusiastic for its own good (note the exclamation point in the title), but it's pretty short, inexpensive, and chockablock with bad jokes (if you're into that sort of thing).

More advanced prospective renters might want to check the local library for Tenant's Handbook of Office Leasing, by Stanley Mark Wolfson. (The book is out of print.) It's long and relatively joke-free. But it has lots of good tips from the tenant's perspective. It's well worth it if you do a lot of lease negotiation.

For retail businesses, there's also Location, Location, Location: How to Select the Best Site for Your Business, by Luigi Salvaneschi (Oasis Press, 800-228-2275, 1996, $19.95). Written by a guy who has selected sites for McDonald's, Blockbuster, and KFC, it contains more information than you probably care to know about the subject, including lots of helpful charts, maps, and checklists.

If you're looking for industrial space, there's Guide to Industrial Site Selection, by the Society of Industrial and Office Realtors and the National Association of Industrial and Office Parks (SIOR, 202-737-1150, 1990, $25). Basically just a series of checklists, it's a bit skimpy for $25 (only 38 pages), but it seems to cover all the key points. It's also available through the SIOR Web site ( www.iarc.com/sior/publications.html).

CASWELL & ASSOCIATES, Janet Caswell, P.O. Box 187, Bloomfield Hills, MI 48303-0187; 800-540-9160, ext. 0616; fax, 800-552-1591 119

MAGIC SHOP, Christopher Hedge, 432 N. Canal St., South San Francisco, CA 94080; 415-583-3632 119

NEW AMERICA NETWORK, P.O. Box 950, Hightstown, NJ 08520; 609-448-4700, ext. 211 119

ORTEGA TRAVEL SERVICES, Ray Ortega, 3652 Shallowford Rd., Suite A, Atlanta, GA 30340; 770-455-1014 119

PEN-GROUP, Patti Penny, 447 South Ave., Springfield, MO 65806; 417-831-6888, ext. 124 119

PRECISION COMPUTER SERVICE, Paul Upton, 4344 Charter Ave., Oklahoma City, OK 73108; 405-943-3900 119

SCIENTIFIC SOFTWARE, Soheil Saadat, 3000 Executive Pkwy., Suite 350, San Ramon, CA 94583; 510-244-6622 119