I already bought commercial property for my business. What can I do?
Consider a sale-leaseback agreement, in which an entrepreneur sells commercial property only to lease it back from the new owner for an extended period of time. The arrangement allows real-estate-rich firms to free up assets and reduce debt while taking advantage of the soft rental market. "It's good for us because interest rates are still favorable," says Jeff Rosenblum, an acquisitions asset manager at Time Equities, a New York City real estate investment firm that buys space. One of Rosenblum's firm's recent transactions involved a manufacturer in Queens, N.Y. "We thought about moving at first," says the business owner, who spoke on condition of anonymity, "but we've put a lot of money into forming the space exactly how we wanted." Through the sale-leaseback agreement, the manufacturer says he got a great price on his building and was subsequently able to finance a growth spurt without piling on debt.
Should I take responsibility for the initial buildout of the space or leave that in the hands of my landlord?
Control freak that you are, you may be tempted to take charge of the buildout yourself. Don't.
Control freak that you are, you may be tempted to take charge of the buildout yourself. Don't. Most landlords have special deals with contractors. Plus, building materials like steel, cement, and lumber have gone up in price recently, owing in part to a building boom in China. Add to that the cost of demolition, rewiring, and installation fees for IT infrastructure and phone lines, and you can bust the budget quickly if you don't know what you're doing.
Pat Cooley of RelianceNet IT Experts, a tech firm in Annapolis, Md., learned that lesson the hard way. He was feeling pretty smug when he convinced his landlord to double his tenant improvement allowance to $30,000, with Cooley assuming responsibility for managing the buildout. It didn't seem like such a great deal when the final cost hit $60,000.
Assuming you leave your landlord in charge of completing the buildout, make sure he has every incentive to finish on time. "You can't leave the lease silent about the consequences," says attorney Chan Stroman, of Landlord Counsel LLC in Madison, Wis., which advises both tenants and landlords on commercial lease agreements. If construction needs to be finished by a certain date, insist that for every day the work runs over, you get two days' worth of rent credit. "The prospect of losing that rent money is usually a good incentive," she says. If you expect the project will take several months, set deadlines (and monetary penalties) for various milestones in the process to deter late starts. Also, if you and your landlord agree to a set price per square foot for the buildout, make sure that he's contractually obliged to cover any costs incurred above that amount.
What other hidden costs should I watch out for?
Ed Dintrone, president of NETexponent, a search optimization firm in New York City, says that in addition to the rent he pays for his 1,600 square feet in Manhattan, each month he also pays $80 for water, $80 for sprinklers, $100 for garbage collection, $150 for cleaning, and $50 for a doorman during regular business hours. Dintrone recommends that you have utility bills mailed directly to you, rather than letting a landlord pay them and invoice you. You should also ascertain whether you will be held responsible for HVAC repairs. When Dintrone was leasing space for another company in 1997, the building he chose had a very old central air conditioner. When it conked out in the middle of July, Dintrone was stunned to discover that, according to his lease agreement, he was the one responsible for fixing it. Not only did the repairs cost a few thousand dollars, but Dintrone had to rent several large fans in an attempt to cool himself and his suffering employees while the system was down. Now, before he signs a lease, he always asks how old the central air conditioner is and who is responsible for fixing it if it fails.
Cairo Corp.'s old lease specified that Alba Aleman pay a percentage of the building's total maintenance costs, which fluctuated along with building occupancy. "Several tenants left the building, so more of the operating costs were being shifted to us," says Aleman. "There was hurricane damage that caused flooding in the basement, and we were having to pay for that." The charges eventually added 8% to the rent bill.
Some landlords also try to slip a bogus escalation clause into a lease that allows them to increase rent gradually. It's often tied to an outside economic benchmark like the consumer-price index, which has little to do with actual real estate prices. Reject it.
My company is small. Should I consider subleasing office space from someone else?
Like factoring your receivables, subleasing space is a concept that exists to help small businesses, yet it paradoxically engenders great skepticism among them. Diana Pisciotta, managing director of communications consulting firm Denterlein Worldwide in Boston, says that when her firm's five-year lease recently ended (for a 2,500-square-foot space on the fifth floor of a six-story historical building), she wouldn't even consider subleasing, no matter how much cheaper the prices were. "I don't want to be the smallest tenant in the building, sharing a space with a big corporation," she says. "The landlord has no incentive to take good care of you." In June, she signed a new lease with the same landlord to take up an entire floor in the building she was already in.
