BWSmallBiz -- Real Estate August 22, 2008, 5:00PM EST

Getting a Better Deal on Commercial Real Estate

(page 2 of 2)

Browse Issues

Story Tools

Waiting out a softening market helped Payne get into his Hannig Row office, but getting a new broker was important, too. The new broker—a college pal of Spacial's head of business development—got to know Spacial's business and, consequently, had a better grasp of what the company needed. That's no accident, says Davidson. If a prospective broker seems more interested in talking up his credentials than getting to know your business, move on.

MATCHMAKING BROKERS

A broker's relationship with landlords and property managers is also important. When it's time to negotiate the lease, some landlords prefer to give concessions up front—allowances for tenant improvements, a short grace period that is rent-free—rather than lower the rent that appears on the lease, says Rick Wolfe, a managing partner with the commercial division of Keller Williams Realty. Others are reluctant to spend money until they can be sure you're going to stay in your lease and pay the rent on time. Inform your broker of your priorities so he can match you with like-minded landlords.

While the broker is contractually obligated to put your interests first, he'll have a better shot at finding the right fit if he's on good terms with landlords. That, says Payne, proved key when it came to finding precious office space in an area that caters mostly to clubs and restaurants. A month after switching brokers, Payne had leads on about a dozen offices in the area. The space in Hannig Row, he says, "was exactly what we wanted."

Although Payne's head count is growing, many of his workers are based overseas. For other entrepreneurs, growth means finding ever bigger space. Evan Blaustein and his wife, Cecile, ran their startup, mimoco, out of their home in its infancy. The company, which makes flash drives in decorative cases, was born in their one-bedroom apartment in Brookline, Mass., in 2005. When they moved to a two-bedroom condominium in 2006, the business moved with them. The price was right, but space was tight. "In our condo we couldn't hire more employees," he says. After an 18-month search, Blaustein moved mimoco into a 1,900-square-foot space on the outskirts of Boston in early 2007.

By summer they'd outgrown that space and started eyeing other offices in the building. "The Web developers next door had more space than they could afford," he says. "So we took over half of their space and eventually hired the Web developers to work in-house [for us]." The 18-employee company, which did $2 million in sales last year, could very well outgrow its 3,400 square feet in the next year. At that point, says Blaustein, they'll probably need to relocate. "The next time we move," he says, "I think we'll be in a pretty good position to negotiate." He thinks the real estate market will still be soft but expects his business' finances to be stronger.

A TENANT'S MARKET

When the market was tilted in landlords' favor, leases were typically three years, minimum. That's not ideal for a business in growth mode. You don't want to pay for more space than you need, but you also don't want to be stuck in space that you've outgrown.

Now you may find that you can have it both ways. "Landlords are more open to flexible options now," says Gates. If your business is growing, ask for a shorter-term lease with an option to extend. Payne, for one, signed an 18-month lease with a first right of refusal on any space that opens up in the building. Gervait inked a 60-day lease on her office with rent fixed for one year. "We expect to double our number of employees in the coming months," she says. To the extent it can, the company will encourage employees to telecommute and use shared desk space when they're in the office. But should it need more space, Agile won't be locked into a long-term lease.

When it's time to negotiate price, you'll want to consider immediate savings vs. recurring savings. If you're short on cash but your company's growth prospects are strong, it might make sense to ask the landlord to foot the bill for tenant improvements or give you anywhere from a month to three months of free rent. "You might also be able to negotiate smaller rent increases early on, followed by higher increases down the road," says Davidson.

If you're more concerned about containing your monthly costs for the next few years, focus on reducing your monthly rent, even if it means forgoing up-front freebies. In the case of a net lease, where you pay a la carte for utilities, cleaning, insurance, and the like, look beyond the base rent, says Jay Butler, director of realty studies at Arizona State University's Morrison School of Management. You might have better luck chipping away at these other expenses or, at the very least, capping their annual increase, reducing the chances that you'll have to go office hunting—again—in the near future.

For more, go to businessweek.com/go/sb/realestate

Back to BWSmallBiz August/September 2008 Table of Contents