This session will help you to determine the kind of space your business needs, the options you have to get that space, the legal considerations that relate to your choice of business location, and terms to watch out for when renting a space.
- What Kind of Space Do I Need for My Business?
- List of Things to Consider
- What Kinds of Options Are There?
- Retail Space
- Office Space
- Remote Space
- What Homework Should I Do?
- What Should I Look Out for in a Business Lease?
- Business Terms
- Legal Terms
- How Can I Evaluate and Select a Potential Site?
- Site Criteria Table
- Top Ten Do's and Don'ts
- Business Plan
The type of space you need for your business is related to the goods or services you will be offering and the activities you will need to perform. It’s a good idea to make a list of your expected needs before beginning your search for the perfect space. At the end of this session there is a site planning and evaluation form to help you with this exercise. Here are some things to consider:
- Size: How big of a space will you require? Do you need to store inventory or materials?
- Security: Will your business operations require special security, for example, will your business be storing cash, inventory, or other valuable items? Or will you have trade secrets or consumer data on computer systems that should be protected?
- Noise level: Would a busy, noisy location disturb your business operations? For example, if you plan to open a spa you might require quiet surroundings.
- Parking: Will you and your employees or customers need dedicated parking?
- Access to public transportation: This could be especially important if dedicated parking is not available.
- Overall condition of premises: Is the appearance of your business important? Does it provide a pleasant working environment for employees?
- Air conditioning/heating: Are these necessary to make your business environment productive and attractive? Do you have inventory or operations that require a specific temperature
- Public access: Will you have a retail or consumer-facing business? Will your target customers have special needs? For example, if you open a business targeted mostly to the elderly you may not want a location accessible only by a staircase. Some laws may also require access for those with disabilities.
- Closeness to shipping vendors: Will your business receive ongoing shipments of goods? You may want to be close to the vendors to improve efficiency.
- Availability of skilled workers: It may be easier to find and attract the right kind of employees if your business is near the communities where they live, or close to commute routes.
- Need to meet clients on site: Will you be conducting meetings at your business site? This may require a reception area and conference room space.
- Utilities needs: Will you need to use more electricity, water, or internet bandwidth than what would be considered normal?
- Other special needs based on business activities: Consider whether you have other special requirements – below are some examples.
- Labor rates of pay for the area.
- Handling or storing of hazardous materials.
- Handling or storing of food.
- Manufacturing or testing in a "clean room" environment.
- Requirements dictated by a franchisor (see Session 9 Buying a Business or Franchise).
- Caring for children/daycare. Research existing requirements for diaper areas, washing areas, feeding areas and child safety.
- Providing beauty services. You may need special plumbing or electricity depending on services offered.
- Brick-and-mortar (non-internet) retail sales. Each retail and commercial business has its own criteria. For example, a donut shop may want to be located on the "going-to-work" side of the street. On the other hand, a liquor store may want to be on the side of the street with traffic going home from work. Here are some considerations for retail businesses.
- In Session 1 (Deciding on a Business), you analyzed businesses that are similar to the one you chose. Did you analyze where they were located and why?
- Select the appropriate type of center (for example, city street, mall, strip mall). Some businesses may do best in a large center but some, like mini-marts, mail store, beauty salon, coffee shop, and laundromats, may do better in much smaller centers. Others such as florist, nursery or antique stores, may do well located on the street front.
- Demographic data will provide you information about the neighborhood, such as population, number of households, estimated population by race, age, and income level within a one-, two- or five-mile radius. This information can be found on the internet.
- Walk and talk the area. You will be surprised how much you can learn by talking to customers, employees and owners.
- Car and foot traffic counts may be important. These reports may be available from the local traffic department.
- How visible is your store? Usually, the end or corner location is better, which is why the rent for those spaces is higher.
- Be sure you have adequate and convenient parking. Avoid streets with dividers or one-way traffic. Customers prefer stores where the parking is in the front.
- Proximity to the competition. Know where your competitors are located. You can get the names and addresses from an internet search.
- Is there an anchor store (generator) nearby? These are the big national retail establishments. For example, Nordstrom, Walmart and/or McDonald's may help to bring customers near your business.
Depending on where you are in the world, there may be a variety of space options to choose from to meet your needs.
- Retail space: You may be able to rent a single business space within a larger building or structure or a full building depending on your needs. Most likely this will be a lease or rent option, but buildings might be available for sale.
- Office space: If your business provides professional services such as graphic design, website design, marketing services, software engineering, consulting, etc., there are several options
- Incubator space: An incubator space brings emerging businesses together for shared benefits and resources. An incubator might be a perfect option for a brand new company that is in growth mode. Just being around other early stage entrepreneurs can be invigorating. Incubators may provide access to services, educational workshops, snacks and beverages, introductions to potential investors, and rent/services/utilities at a reduced or free rate. While this all sounds promising, it comes at a cost. Some incubators take equity in your business.
- Co-working space: This can be similar to an incubator, but the landlord typically does not take equity in your business. Co-working space often comes with the ability to use conference rooms and to use the co-working address as your official mailing address. The monthly rent might include other benefits such as workshops. However, inquire about the ability to expand in the space as your business expands and needs more space. The co-working space is full service so all of the costs are included in the rent and don’t change during the lease term.
- Temporary space: Perhaps you just need some space to work on your business for several months while deciding where your permanent space will be. Temporary office space may be a good option if you are able to get a short-term or month-to-month lease, either as a tenant or subtenant.
- Remote space: Perhaps your business does not require a full-time physical space for working, but you need a “location” to establish the business. Here are some options:
- Only mail and conference room services: If you work at home but need a business address and meeting space, look for mail and conference room services, e.g. through co-working spaces.
- Getting a mailbox or a post office box: If you work from home but do not want to use your home address as your business address, you may rent a mailbox. Some business filings (such as with the Secretary of State) require an address for “agent for service of process” that is not a post office box. Therefore, you may want to rent a mailbox that has a physical street address rather than a box at the post office.
- Getting a receptionist service: If you expect that clients/customers/partners might have the need to call your business, you may want to hire a receptionist service that makes it sound to the caller like the receptionist is on-site at your business.
- Miscellaneous: Some businesses fall outside these models. Here are a few more ideas.
- Pop-up shops: There may be an option to try out your retail or food business model in a temporary location before buying or renting a longer-term space. For example, rent a tent at a farmers market or fair. A dinner-only restaurant might be willing to rent to a business wanting to try out a brunch menu in a neighborhood.
- University housing: If you are living in university-run housing, check the written policies regarding whether you are permitted to run a business out of your room. Also, be aware of university intellectual property policies relating to ownership of inventions made using university facilities or equipment.
- Working from a laptop: Many businesses can be formed and operated using a laptop and internet connection. Be aware of your surroundings if you are working in public. Others can be eavesdropping on your phone conversation, looking over your shoulder at your laptop, or snooping on your email traffic through a public Wi-Fi connection.
- Working from home: Be sure that you are allowed to run the business from your home (see permitting and zoning considerations in Section 3 Home-Based Businesses). If you plan to write off a portion of your home expenses (such as mortgage, utilities) as a business expense on your income tax return, you should discuss with your tax advisor.
Where to search for properties
Below are some ideas:
- Paper or internet classified ads (such as Craigslist).
- Local Chamber of Commerce.
- Web or mobile app-based services targeted at finding business spaces.
- Brokers or agents that specialize in helping tenants find space.
- Walking the neighborhood and looking for signs in the window.
Buying versus renting a space
There can be tax advantages to owning your space rather than renting; however, you may want to consider putting the money used to buy a space into your business instead. Consult with a tax advisor.
Before officially leasing or buying your business space, find out if you are allowed to operate in that space and what permits or licenses are required. On some occasions, a landlord will agree to a clause in the lease that allows for termination and a return of the security deposit if the permitting is not received. Without this language in the lease, you do not have the ability to get out of the lease if you are prevented from operating your business or unable to get permits.
- Check with Chamber of Commerce: They often have information about local zoning and permitting requirements, historical uses of the property, and competitor businesses.
- Investigate zoning and permits: Zoning refers to restrictions that are placed on the building or property as part of a city planning process, and can be obtained from City Hall. Certain areas of a city may be zoned only for housing and no businesses are allowed. Other parts of the city may be zoned only for retail uses. Even if there does not appear to be any zoning restriction, you may be required to obtain permits from the city to operate your business in that location.
- Investigate additional restrictions: Some regulated industries such as food-related businesses, child care businesses, businesses using hazardous materials, or adult industries, may require additional permits or licenses.
- Find out how to obtain a business license: At a minimum, most businesses will need to get a business license to operate their business in the location. Check with the local city government.
- Check the potential lease: A lease agreement may have restrictions on the business operations of the tenant. For example, if a strip mall already contains a coffee shop, you might be restricted from selling coffee drinks at your ice cream shop.
- Check your property title for covenants if working at home: Even if there are no zoning restrictions preventing you from operating a business out of your home, there can be covenants associated with the title to the land. If you are renting your home, check with the landlord or homeowner’s association.
- Consider getting a site inspection: Before you commit to your business location, you may want to get the property inspected, including the ground surrounding the property. If there are hazardous substances in the building or ground contamination, potential liabilities may arise
- Inquire about insurance: If renting, you should understand what sort of insurance is required by the landlord, and at what policy limits. Even if not required, you may want to obtain insurance for your business property (equipment, inventory, etc.). If buying the space, find out if particular insurance is required (e.g. flood or fire).
If you are renting a space for your business, the most important thing to remember is that everything must be in writing. While there are often laws that exist to protect residential tenants, these laws may not exist for commercial tenants. The lease language should have all considerations and assumptions, and all promises that were made to you by the landlord. Consider getting a lawyer to assist you, especially if this is your first lease negotiation.
- Business Terms: These are some of the most important and common “business” terms that specify what you are getting from the landlord in exchange for your rent payments.
- Description of premises: There should be a description in detail including approximate square footage, and sometimes an exhibit containing a floor plan.
- Parking rights: Ensure the accuracy of the parking rights your business receives along with the lease and who is responsible for towing unauthorized vehicles.
- Potential expansion: If your business grows, you will want the opportunity to expand. Consider negotiating a lease for a portion of the available space with the option to take over the remaining space in the future. Expansion options must be in the lease document.
- Permitted uses: There should be a section that specifies what the space will be used for. Be sure that all your desired uses are listed here. For example, if you want an office space that also has a laboratory space for testing, make sure this is specified.
- Initial work/build out: If modifications need to be done to the premises before you move in, this is called the “build out.” The build out work should be described in detail as well as who will pay and when it will be completed. What happens if the landlord doesn’t finish by the completion date? Do you have the ability to terminate and get a refund of any deposit or rent paid? Can you hire construction workers to finish the job?
- Signage: Does the landlord provide signage, and if so, by when will it be updated? Are you permitted to put your own signs on the building, and if so, where can they be placed? Must you get the landlord’s approval?
- Regular business hours: The lease may specify a range in which your regular business hours must fall.
- Term and termination of lease: The term of the lease should be specified with particularity. Can it be renewed, and if so, what is the timeframe and procedure to renew the lease? Can you terminate? Can the landlord terminate? Do you remain “on the hook” to pay the rent for the entire term even if you vacate the premises? Consider renting for a shorter term with an option to extend the lease at your option.
- How expenses are handled: “Full Service” refers to all additional expenses being included in your rent payment. The opposite of full service is “triple-net” or “NNN.” For this type of lease, the tenant is responsible for paying its share of property real estate taxes, insurance, and common area repairs.
- Utilities: What utilities will be provided by the landlord? Are there limitations on your usage? For example, a lease might state, “tenant will only use the amount of water consistent with usage of the restrooms included in the site.” Do you require more water usage for your business?
- Adjusting the rent: Can the Landlord adjust the rent during the term? How often? Are there limits; e.g. is there a formula/cap? Do you have the right to terminate the lease if the rent is adjusted to a level you cannot afford?
- Security deposit: How much is the security deposit, and does it get adjusted if the base rent is adjusted? Most importantly, what items can be deducted from the security deposit? As a best practice, the lease should provide for a walk-through with the landlord at the beginning and the end of the lease term to jointly agree upon items that were broken before move-in, and those that will be deducted from the security deposit after move-out. Also, the lease should specify when the security deposit must be returned to the tenant along with a statement of deductions.
- Equity: Is the landlord requesting some equity in your business, such as stock or LLC ownership? The amount of equity should be set forth accurately in the lease, but also the landlord should sign a stock agreement to address, e.g., transferability of the shares and voting rights.Legal terms.
- Legal Terms: These are some of the most common “legal” terms, dealing with legal risks.
- Guarantee: In Session 5 Business Organization, you learned that one of the benefits of setting up a legal entity such as a corporation or LLC is that as an owner, you can enjoy limited personal liability. However, a guarantee can impose personal liability on the owner. If your business is new, a landlord may require that an owner of the company personally guarantee the lease, meaning that if the company is unable to pay the rent, the owner must pay. It would be preferable to not have such a guarantee if you can avoid it
- Lease submit to permitting: If your business requires getting a permit or license, ask for a clause in the lease that states the lease is “subject to” receiving the permits and licenses (and allows for termination and return of the security deposit if the permitting is not received).
- Landlord entering premises: Landlords will usually insist upon the ability to enter the leased premises. You can often negotiate the limited conditions under which the landlord can enter (such as emergencies or a reasonably suspected breach of the lease) and the amount of notice you must be given ahead of time.
- Subleasing: If your business needs change and you no longer need the space, or as much space as you originally rented, then subleasing can be an effective way to offset some of the cost of your rent. Under a sublease, you act as the landlord to a subtenant. Often times, the landlord requires consent to sublease, use of a specific form of sublease, and/or sharing some of the rent you receive from the subtenant.
- Landlord consent: There are often terms in the lease that require landlord consent (such as subleasing and tenant improvements). Wherever there is a clause requiring landlord consent, ensure that the landlord may not “unreasonably withhold or delay” consent. Also, include a procedure to obtain the consent in a timely manner, e.g. the landlord has 10 days to consider a request for consent.
- Ordinary wear and tear: The lease should state that the tenant is not responsible for “ordinary wear and tear” in using the premises. For example, if a tenant occupies a space for several years and upon moving out, there are scuff marks on the front doorstep, the tenant should not be responsible for repair costs needed to remove the scuff marks.
- Repairs and maintenance: The lease should be clear about which party is responsible for repairs in which portions of the building. There should be a procedure under which the tenant can require the landlord to repair or maintain items that are the landlord’s responsibility, and if not, that the tenant can take over the repair work and deduct from rent.
- Quiet enjoyment: It seems obvious that the tenant should have the right to use the premises for its business purposes that are stated in the lease without interruptions caused by the landlord (such as excessive construction noise, or landlord equipment blocking your doorway). However, this “quiet enjoyment” must be written into the lease. This is in the form of a warranty, covenant, or promise by the landlord that the tenant will be entitled to quiet enjoyment of the premises.
- Assignment and change of control: Typically, the assignment and change of control clause is favorable to the landlord but not the tenant. Often, the lease gives the landlord a right to assign the lease to another entity without a tenant’s permission. If so, does the landlord have to notify you and by when? Likewise, you may want to ensure you have the ability to assign the lease. For example, if you are an early stage company, you may want the ability to assign the lease to an acquirer in a “change of control” situation.
- Exclusivity: If you are entering into a lease for a space within a shopping center you may be able to negotiate exclusivity for your type of business. For example, if you are opening a nail salon, the landlord may agree not to lease any other spaces in the center to a nail salon.
- Exhibits: Exhibits are considered part of the lease, and therefore should be read carefully for accuracy. For example:
- Site plans
- Landlord or tenant initial build-out obligations
- Signage requirements
- Form of sublease
- Subleasing: If you are subleasing from a current tenant, you should not only review your lease for the same Business Terms and Legal Terms provided here, but also understand how the original lease might affect your sublease. Ideally, your sublease would contain a warranty by the tenant to you, stating that the tenant has received the landlord’s consent to the sublease, and that there are no material terms in the original lease that would have an affect on your sublease.
Below is a “Site Criteria Table” to help you plan for, and objectively evaluate locations for your business. During the planning stage, assign different values to the factors that are most important for your particular business in the “Weight” column on a scale of 1-5 (5 being most important). Then, each location can be evaluated against these measurements in the “Grade” column, on a scale of 1-10 (10 being highest).
Multiply the grade by the weight to determine the points for each factor. Add up the points to get a total score. Repeat this process for each site to gain an objective, comparative analysis.
Real estate dealmakers concerned with buying, selling or leasing all require possession of expert negotiating skills. Since it has been determined that negotiating is a learned skill and not a natural one, our Session 5 Develop Negotiating Skills in Business Expansion is recommended.
|Site Criteria Table|
|Site being evaluated:|
|Factors:||Weight 1-5||Grade 1-10||Points|
|Access to Public Transportation|
|Overall Condition of Premises|
|Closeness to Shipping Vendors|
|Availability of Skilled Workers|
|Accommodates Meetings or Clients on Site|
|Other Special Needs (fill out below):|
THE TOP TEN DO'S
- Consider which type of space makes sense for your business at this stage – would a co-working or other temporary space make sense
- Talk to your city hall planning and zoning department before signing a lease to be sure your intended business can be operated in your intended location.
- Create a Site Model Criteria for your particular business.
- Look at many locations to establish comparable values for rent and location potential.
- If a retail business, order demographic data to provide information about your customers.
- To minimize your risk, negotiate for a short-term lease with options.
- Provide terms in your lease for potential expansion requirements.
- Have every agreement put into writing.
- Ask that no other similar business be allowed in your shopping center.
- Retain a lawyer to assist in negotiating your lease or purchase.
THE TOP TEN DON'TS
- Be hasty in making a real estate decision. (There is no such thing as the last good location.)
- Don't judge a location entirely on rent.
- Permit a potential landlord to dictate all the lease terms.
- Personally guarantee your lease if possible.
- Sign a purchase or lease document without the approval of your lawyer.
- Depend on the advice of a landlord's leasing agent.
- Submit to unreasonable conditions.
- Depend on any verbal agreements with landlords or sellers - get it in writing.
- Open the second store until the first one is proven and profitable.
- Sign a lease without the condition that it is subject to securing all permits and licenses.