Top tips
Owners, experts share advice for making smart space deals
by Beth Ewen Upsize asked real estate experts and small-business owners to share their ideas for making the best use of their work space. Here are 10 top tips.
No. 1: Everything’s negotiable.
Well, maybe not everything, but there are many more negotiable points in a real estate lease than price, points out Phil Kluesner, principal of Gannett Peak Partners, a commercial real estate consulting firm in Edina.
For example, you can ask for a cap on operating expenses.
You can ask for a portion of your security deposit to be reimbursed to you, say after the third year rather than when your lease ends.
You can negotiate your holdover clause, or the typical 20 percent of rent that landlords charge if you stay beyond your lease, down to 15 percent or so.
You can negotiate for more flexibility in your assignment/sublease article, such as cutting your notice dates from six months to three. Or, you can reduce the amount that goes to your landlord if you manage to sublease your space for more rent than you’re paying.
“These can all be points of discussion,” Kluesner says, a fact that some small-business owners don’t realize. “The smaller tenants tend to accept what a landlord provides.”
He and other real estate experts tick off many more negotiable points as well. One even points out that the broker’s commission is among those items. They agree: You’ll never get it if you don’t ask.
No. 2: No. 1 is true even if you want to stay put.
When it comes time to renew your lease, most tenants want to stay where they are. You should never just check the rent price and sign the lease again, however, because you’re missing a chance to get better terms on all the points above and more.
“The tenant’s posture should be, I could stay or I could leave,” Kluesner says. “It’s not about kicking the landlord. I don’t believe in that. I believe in making a fair and market deal.
“The only way to get a fair and market deal is to shop around.”
Once you or your agent has some deals to compare, you can go to your landlord and say what you want the price and terms to be.
And if you’re a good credit tenant — that is, one who pays the rent each month — your landlord wants to keep you. Make the landlord sharpen the pencil to do so.
No. 3: Start early.
Every expert interviewed for this article mentioned this as a top tip. They recommend starting at least 12 months in advance of your lease end, and possibly 18 months in advance if your company is large, your space needs are complicated, or if you think it’s likely that you will relocate.
Most tenants sign the lease and put it away until year 4 1/2 of a five-year lease. “You’re a pretty sophisticated tenant if you come to your landlord 12 months before your lease expires,” Kluesner says.
When you realize it takes a month or two to look at options, a month to negotiate the lease, two to three months for tenant improvements, just for a typical deal, you can see why the time is needed.
“Doing it early is the No. 1 thing,” agrees Brian Woolsey, a broker with Colliers Turley Martin Tucker in Minneapolis.
No. 4: Flexibility, flexibility, flexibility.
You’ve heard the real estate maxim that says all depends on location, location, location. For small-business owners, though, flexibility often trumps location.
That’s because smaller companies, with fewer than 100 employees, tend to be volatile and lack the cash cushion or deep-pocketed corporate umbrella to manage ups and downs.
“Everybody’s business changes,” says Woolsey, with Colliers Turley Martin Tucker. “You need to have the ability to flex up and flex down.”
For example, he’s worked with one tenant who was looking for about 4,000 square feet, and that includes a large storage area that they completely filled up right away.
However, they think they might need that storage space for work stations in a year or two, so Woolsey negotiated for an ongoing option to use 500 square feet of storage space in the building’s basement, for about half the cost.
Another smart idea is to talk to the landlord about your neighbors, and get the first right of refusal to take their space when their leases come due. If business has grown at that point and you need it, it’s yours. If not, no problem.
“We did that with a medical company,” says Paula Anderson, founder of Square Feat LLC in Eden Prairie and a commercial broker. “We had rights on the space next door, but in a year and a half they didn’t need it.”
She also recommends negotiating an “out” in every lease, such as the ability to get out of the lease in year three, with a six-month rent penalty, for example.
Business owners recommend holding out as long as possible before adding space, because it’s expensive, even if that means employees are squished for a time.
Just don’t wait too long, because employees can and will get crabby (and unproductive) if they’re too crowded for months on end.
No. 5. Be creative.
The president and chief operating officer of AllRegs, Jeff Hoerster, just signed a lease in Eagan where employees will share work stations, and come to the office to use them on alternating schedules.
One department might come in Mondays and Tuesdays, for example, and another Thursdays and Fridays, and the rest of the time they’ll work at home offices.
He figures the arrangement will save him about 2,000 square feet, or about $28,000 a year. Plus, the flexible arrangement is an attraction for employees who wouldn’t otherwise want to commute to Eagan every day.
The owners of Tank Goodness in Minneapolis, Anne and Dennis Tank, searched for about six months for a commercial kitchen to bake their chocolate chip cookies, which they deliver warm to customers.
They finally called the owner of Michelangelo’s Pizza, which opens at 4 p.m. and closes in late evening. The Tanks come in at about 4 a.m. and wrap up by late morning.
It’s more work than having your own space, says Anne Tank, because they have to keep all their equipment in the basement on carts and move it in and out of the space each day. But the cost is much more reasonable and the space gets used almost around the clock rather than sitting empty for hours.
A med-tech company, a client of Anderson’s, wants to upgrade to Class A space to improve his company’s image, and needs about 4,000 square feet. Anderson points out that he might be better off buying a building, taking part of it for his own company and leasing out the rest.
She says she knows many husband-and-wife teams who will buy a building for their own investment purposes and lease it back to the company.
Many other examples exist: People who trade products or services for their real estate space; people who use space in their homes for office work; people who buy condos with work spaces on the bottom and living spaces on top; people who occupy buildings with common conference spaces and receptionists, thus sharing such expenses.
Such ideas can be especially smart during times of uncertainty.
No. 6: Respect the math.
Whenever Anderson of Square Feat scouts for options for clients, she prepares a spreadsheet for them comparing all the pertinent costs and features for the life of the leases.
She includes items such as the base rent, the common area maintenance costs, a 3 percent increase in those costs each year, the total over the lease term and the average cost per square foot.
“It’s really a shocker for them, because even a small business will pay out $500,000 to $700,000 over seven years.”
It’s important to do the math on real estate options for a practical reason: to compare costs. It's also important to realize how expensive space is. For most companies, space is the second-biggest expense after employees.
Anderson suggests it’s a small-business owner’s responsibility to aggressively manage the expense. “The best thing you can do is, go to the landlord and say, ‘I like you, but it’s my obligation to look at the market value. It’s just part of my job.’ ”
No. 7: Be willing to move.
It’s miserable to move, anyone who’s done it will agree. But if you don’t consider it as an option, you’re eliminating one of your best negotiating tools.
“If you’re a good credit they’re always going to come back and do what they can to keep you,” Anderson says about landlords.
Woolsey at Colliers Turley agrees. One of his downtown Minneapolis tenants needed lower rent because business had declined, but wanted to stay in the building. The landlord wouldn’t move on price. Woolsey went to two other buildings, which began competing for the new tenant, and the original landlord moved nicely, offering six months free rent.
A client of Anderson’s had been in the same location for a couple of decades, and did not want to move. Anderson got a new lease at a new location that saved the tenant thousands of dollars. “Don’t be lazy,” Anderson says.
No. 8: Don’t get emotionally attached.
Just as they do with houses, people get emotionally attached to office spaces they see. Real estate experts say it’s best to remain cool. Have two to three options that will work just fine.
And don’t be lured by incentives or amenities, if the location or the terms aren’t going to be best for your business.
Dana Olson is president of Ecodev, a Bloomington company that helps clients find sites around North America to expand. Those deals always include incentives from economic development agencies.
But he counsels to focus on the business needs first: where your labor is coming from, or whether you need to be near suppliers and vendors. Otherwise the incentives are too quickly gone and you’re left with an unworkable location.
No. 9: It’s not just four walls and a floor.
Your office space conveys a lot about your company: Is this a place where employees you want to attract want to be? Is this a place where customers can easily visit? What will they think when they walk into your space?
Kluesner, of Gannett Peak Partners, says those are the types of issues that smart business owners consider when they look for space. “What I see more and more is tenants looking at those components,” he says.
No. 10: Don’t do it yourself.
Scouting real estate takes a lot of time. Negotiating leases does, too. Find someone who knows the market, knows your type of company, knows the landlords, knows how to figure out your business interests.
Experienced agents know which landlords really need to fill their buildings because they’ve just lost a key customer or two.
They know how to get excellent deals, such as one that Anderson negotiated where her client will get 11,000 square feet, but pay for only 8,000 of it the first year. Anderson knew that the spare 3,000 had to undergo expensive remodeling to work, and so proposed the arrangement.
They gossip about which plum tenant is shopping around at which prime location, word that inevitably gets back to landlords.
You’ll save a lot of time and get a better deal, says Jeff Hoerster, the president and chief operating officer of AllRegs: “I would advocate using a real estate broker,” he says.
[contact] Paula Anderson, Square Feat LLC: 952.886.7088; paula@squarefeat.us; www.squarefeat.us. Jeff Hoerster, AllRegs: 651.289.4851; jhoerster@allregs.com; www.allregs.com. Phil Kluesner, Gannett Peak Partners: 952.929.5000; pkluesner@gannettpeakpartners.com; www.gannettpeakpartners.com. Dana Olson, Ecodev LLC: 952.944.0012; dana@ecodevllc.com; www.ecodevllc.com. Anne and Dennis Tank, Tank Goodness: 612.824.8265; info@tankgoodness.com; www.tankgoodness.com. Brian Woolsey, Colliers Turley Martin Tucker: 612.347.9308; bwoolsey@ctmt.com; www.ctmt.com
