Even if you're just starting out in business, you're most likely going to need to find some sort of office space, and generally, you will begin by renting. Many however aren't really prepared for the lease costs as well as the associated expenses. With newer companies, it is so important to understand going in what you'll be paying, what will be expected and how you can more effectively navigate the office rental process. In this article, we review the basics of what's entailed cost-wise when renting office space.
Pros and Cons of Renting
First off, you have to ask yourself if renting is, in fact, the right move for you. If getting a real estate loan and securing office space that way is a feasible option, then it may be worth checking into over renting. This way you'll have some equity as far as your real estate investment and you also have more flexibility than you would with rental spaces.
That said, renting does have its advantages. From the start, it's going to be less expensive as you're not having to come up with a relatively substantial deposit. You're not paying property taxes. And you're also not having to pay out for repairs or maintenance as these will be the responsibility of the building owner.
Comprehending the Cost of Renting Office Space
The cost of commercial space is going to vary. Depending on your industry, location and the structure of the lease among other factors, the rent price will differ accordingly.
There are primarily three types of leases: Full service, meaning landlord pays for all but rent. A Net lease, which involves you paying rent as well as a portion of taxes and maintenance and then there's Triple Net—this is where you pay rent, plus all taxes, insurance, and maintenance.
Base Rent
The bulk of your monthly cost will be the rent itself. This is the base rent. Generally, this is calculated by multiplying the square footage by property value, so for example: if it's $60/ sq ft and there are 1000 sq ft, this would work out to 60k per year.
Common Area Maintenance (CAM/)
The CAM depending on what type of lease agreement you have could be part of your monthly cost. This essentially is what the landlord pays to take care of and maintain the property. So things such as lawn care, snow removal, parking lot upkeep and so forth. In some instances, this can be as much as thirty percent of your total lease cost.
Utilities
These will likely fall upon you to pay. From the water to gas, to electric and cable, you need to be aware of these costs going in and factor them into your monthly budget when planning to rent space. For some, depending on where you are, utilities can average as high as $700/month.
Property Taxes and Insurance
The landlord may deem you responsible for these. If you're in a building with multiple offices, you will have to pay your portion. And again, these can certainly add up over time, so do keep this in mind prior to signing your lease.
Coming Up with a Rental Budget
Before you go out and find that ideal new space, you really want to take the time to come up with a rental budget, taking into account all of the aforementioned elements. This will help give you an idea of what exactly the company can afford by way of rent.
A rule of thumb is to allocate somewhere between 5 to 15 percent of revenue on the actual rent costs. So you're going to need to sit down with your financial statements and other such documents to get a good handle on where the business stands. If you have an accountant responsible for these things, all the better. Also, you definitely want to go back a few years when reviewing these documents, as you want to get an idea of patterns and trends versus just viewing a single year.
How to Find the Right Office Space
What's the Right Size
You need to make sure that your space requirements are met. Moving into something too small doesn't make sense. And renting too much space is just a waste of money. For a smaller, office-based business, generally speaking, around 150-200 sq ft per person is suitable. Again though, take into account the nature of your business and its space requirements.
Layout
Will you need a conference room? Areas for cubicles? Storage space? Think about the types of spaces you'll need within your new building. Especially for instance for someone in retail, you will need ample storage for inventory. Make sure that whatever space you decide to rent can accommodate this.
And then also take into account the exterior features and amenities. How is the parking situation? Is it secure? Security is so important. You don't want customers and employees feeling unsafe in the area directly around your new office space.
Location, Location, Location
Location is going to be a huge determining factor when it comes to cost. A somewhere high profile like Boston or LA is going to come with a much heftier price tag than office spaces in smaller cities or towns. Some of these can get as high as $200-300 per sq ft or even more. So be prepared if this is the type of locale you're searching in.
Finding a high-traffic area is always a good idea. Especially if yours is a company that does depend on foot traffic to thrive. This is where sound market research comes into play. Study an area's demographics, the nearby competitors. Get a feel for any gaps that a location might have that need to be filled.
Where is Your Ideal Rental Space?
You can start an online search. Sites such as LoopNet and Showcase do spotlight commercial properties that are currently for rent. In fact, some have thousands of listings depending on the area.
Remember to sit down first though and create that budget. You want to know exactly what you can afford and what you have to spend on the other factors beyond just rent itself. Making smart decisions and proceeding with caution when it comes to renting a new office space is the best advice we can give!
At First Union, we have funded many small businesses for their office space. Call today to find out how we can help you!