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Do you need an office for your business?
If you need a communications hub for operations, or better visibility to attract customers, then it's probably time to find office space. Like any other decision you make for your business, the office should generate revenues that equal or exceed the cost of running the office. If that's not the case, then perhaps you should consider becoming, or remaining, a home-based business.
The first time you look for an office, you will be faced with many options, and confusing new terms. You may wonder how long the lease will be, and what it will cost. Since there is no one source of information about what might be available in your area, this article will help you understand how to find a good office.
Most startup businesses lease office space, so we'll concentrate on that topic, and discuss building or buying an office complex in later issues.
The most common questions asked about office space are:
How do I find office space?
How much space will I need?
How much will it cost?
How long are typical leases?
One question which many people neglect to ask is How long will it take to set up an office? Many business owners seeking an office only allocate a month or two for finding a space, signing a lease and moving in. This is rarely long enough. We strongly recommend that you budget at least 3 to 7 months, and sometimes longer, to go through the entire process, including locating and purchasing furnishings and equipment, and having telephones installed.
Getting a 'temporary office' with the intention of moving into a better one later can be a costly error. The cost of moving phone lines and changing stationery, not to mention the disruption for employees, and loss of business, is much higher than most people realize. It's usually better (and cheaper) to take one or two extra months to find the right office, than to go through the cost and disruption of moving.
How to Find Office Space
There are four main sources of information about office space:
Leasing agents
On-site signs and posters
Print advertising (for rent ads, real estate guides, etc.)
Business colleagues and friends
Be aware that leasing agents have a responsibility to represent the interests of a particular individual or firm. Most leasing agents earn their living by attracting potential tenants, in return for a percentage or flat rate fee. A leasing agent is similar to a real estate agent, and you may not even meet the owner of the building in which the office space is located, with the leasing agent serving as a go-between for offers and contracts. We have found most leasing agents to be courteous and willing to assist you in finding suitable space.
For Lease Signs
The second best source of information is the ubiquitous For Lease sign propped in a window, or taped to a door. If there aren't many For Lease signs in your town, it may be a sellers' market with a high occupancy rate. If that's the case, allocate extra time and ask colleagues or leasing agents to let you know if something becomes available. The best way to find these signs is to drive to the area in which you would like to locate your business and walk around with a notebook, jotting down the phone numbers and names of leasing agents.
Print Advertising
Most inexperienced business owners turn to the classifieds to see what's available to lease, even though this is not usually the best source of information. Nevertheless, classifieds are worth perusing to give you a general idea of the going rates, usually expressed in dollars per square foot or monthly payments.
Business Colleagues
Friends and business colleagues are often good sources of leads, since many spaces are not advertised until other people in the same building have been informed of the vacancy. It is a common and understandable practice for a leasing agent or building owner to tell existing tenants with good payment histories about potential vacancies. Ask your colleagues to let you know if they hear news of space being vacated.
Calculating Your Space Needs
There's no simple formula for calculating space. We've seen extremes from one person every 1000 square feet, to a single 12' x 12' room with 15 people crowded into it. A rough guideline, when you're starting out, is about 150 - 200 square feet per person. This number includes common areas and reception, but not storage and washroom facilities. When selecting a space, you should ask the building manager about future availability of adjacent offices. If you think your business might grow, it's often better to take over an adjoining space, than to move the entire operation to another site.
Be sure to ask how square footage has been calculated for the offices you are investigating. There are different formulas, some of which include common areas, hallways, and some which do not
How much will it cost?
Once you know how much space you need, it's easier to calculate the monthly costs. When there are many vacancies, rates will be lower, and leases shorter. Rural offices are cheaper than urban ones. A 500 square foot rural office might rent for $300 a month, with the same type of office costing $3,000 a month, or more, if it is located in an urban office highrise.
Office prices are usually described as a monthly rate, or as a rate per square foot. The per square foot rate can confuse people, since it's often mistaken as being the same as a monthly rate. If the space you are leasing is 1,000 square feet at $10 per square foot, multiply $10 times 1,000 and you get $10,000. Obviously, this number is too high to be the monthly rate (unless it's a penthouse in New York). The number actually represents a yearly total, so divide $10,000 by 12 months and you get $850, a much more reasonable number in a typical town.
Lease prices are usually expressed as gross or triple net. A gross lease means utilities and other costs are included in the stated rate. More frequently, though, the rate will be expressed as $10 per square foot plus triple net (sometimes written as NNN), it means you will pay $850 per month plus an additional fee to cover utilities and maintenance, and sometimes taxes, as well. The triple net amount may not be required monthly. Sometimes it is paid out in a lump sum once or twice a year. Triple net is sometimes based on your usage, and is sometimes averaged out over the building, according to square footage, with other tenants. Make sure you ask if there is a triple net fee, or any cost for utilities which are not included in the posted rate.
How long are typical leases?
Every business owner wants to know how long to commit to a lease. Although some offices can be rented month-to-month, most require longer commitments. If occupancy rates are high, you may have to sign for three or five years, or more. On the other hand, if vacancy rates are high, you may be able to request a six month or one year lease. Moving a business is not usually a good idea, unless your needs substantially change. Assuming that you want stability, and that you have found space that will work for several years, or longer, if the lease is at an attractive rate, you may wish to commit to five or ten years or more. Since lease rates tend to rise in relation to real estate prices and rent, in five years you may be paying only 2/3 of the going rate; this is good for your balance sheet.
What if you have a long lease and you find you must move? Some owners will allow you to buy out a lease. That is, if you pay up a half year or year of the remaining lease and the owner is confident that a new tenant can be quickly found, you may be able to work out an exit arrangement. Not all owners will agree to this, and may require you to pay out the entire contract, whether you are occupying the office space or not. Sometimes you can help the process by locating a potential tenant. The building owner is justified in wanting the lease contract honored for the amount of revenue that was expected on the leased space. If you can find a way to make sure there is a new tenant or other way to continue the revenue flow to the landlord, you will have an easier time buying out a lease.
Improvements
What if you find office space that almost meets your needs, but the carpet is the wrong color, or the walls or fixtures need to be rearranged? Often you can ask for changes, if you commit to a longer lease, or if the vacancy rate is high. However, landlords are reluctant to make improvements to a property if you lease for a year or less. It usually takes them two to three years to recoup their remodeling costs for any work they do on your behalf. Nevertheless, it's worth asking, especially if the space is being leased out by a contractor who has the staff and materials to make the improvements.
Professionalism
When you tour office space, you should be mindful of the fact that the leasing agent is evaluating you as much as you are evaluating the property being leased. Landlords and their agents want tenants who are responsible, clean, respectful of their property, and punctual in their payments. Since many startup businesses fail, they may even request copies of your financial statements to see if you can meet your obligations. If you do not present yourself as a professional, you may lose a good opportunity to someone who made a better impression to the person showing the property. It is also important to remember that everything you do and say reflects on your business.
Summary
Finding an office is like finding an apartment. It will take longer than you expect; it will cost more than you budgeted; and you may not find 'the perfect space.' Nevertheless, we hope the above information can help you get started, so you will have more time and funds to devote to your operations and customers.
Other articles in this issue:
The Online Store: Setting Up Shop on the Web
The Alternative Office: From Garages to Sailboats
Point to Point: The Illusion of Free Enterprise
Promoting Your Mousetrap: An Anecdotal Look at Consumer Buying Habits
Selling Your Software: Even if You Hate Doing Business
Book Review: Launching a Business on the Web
Suggested Web sites for information related to this article:
The Victor Company Glossary of Useful Terms for Tenants
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