Once you’ve decided to lease a new commercial real estate space, what is the next step? Whether you are a startup of expanding to a larger location or even downsizing. The decision to lease has many concerns and considerations.
- Review your business
First, take stock of your business to figure out your real estate requirements. Plan your space needs for the next several years. If you’re growing quickly, you may want to sign a short-term lease a 3-year lease vs a 5-year lease or 10-year lease.
Know the square footage of your needs not only today but what may be in the future.
Narrow the area of the City you wish to locate in. Highway Access and Public Transportation and even the location to City’s Airport and Train Station.
- Get advice
Discuss your needs with your business partners speak with a commercial real estate broker. You may want to have a discussion with your banker about any financing needs you’ve identified during your lease budgeting process. Find a commercial real estate broker to help you search for space.
It’s also useful to talk to business associates, suppliers and others about their leasing experiences. Find out what worked for them and what they’d do differently.
- Explore your options
As you start your search for space, be flexible. Your initial expectations about locations, types of spaces and rent may have been unrealistic and could need adjusting. A good agent will help educate you about the market and your best options.
You may need to expand your search or adjust your budget. For example, a more remote location may offer better rents. You could also consider renting a larger space than you need, then subleasing part of it to help pay the rent. (If you do this, be sure your lease allows you to sublease.)
Once you’ve found a promising space, don’t just sign whatever lease the landlord offers. A lease is usually open to negotiation. Before signing, understand all your costs, including such incidentals as property tax, insurance, utilities and maintenance. Ask the landlord to provide tenant inducements—for example, a one months rent free or help with the cost of fixturing or setup.
You should also discuss leasehold improvements. For example, are you allowed to build an extra bathroom or install needed machinery? Clarify who will own the improvements when you move out. Unless otherwise specified in the lease, anything attached to the building usually becomes the property of the landlord—meaning you can’t take it with you when you move out.
Hire a good commercial real estate lawyer to go over the lease to make sure your business is protected and there are no surprise expenses.
- Get financing
With a lease in hand, go back to your banker to talk about financing. Explore and understand all your financing options. Many businesses make the mistake of using their working capital to pay for leasehold improvements and moving expenses.
“Businesses tend to underestimate how much a move drains their cash,” says Jenkins. “If you have a cash shortage after your move, it could hamper your ability to ramp up production, buy inventory or hire a couple of new sales reps. That means you won’t be able to use your new space to its full efficiency.”
Financing options to help defray leasing costs can include the following.
Leasehold improvement loan
A short-term loan (usually amortized over five or six years) that can help cover the cost of renovations to prepare a leased space for your business. You may be able to negotiate a principal holiday for the first six to 12 months of the loan, which could help you absorb transition costs.
Depending on the value of the improvement, a bank may accept the improvement as collateral for the loan, which could result in a lower rate than that for an unsecured loan. Many leasehold improvements don’t have tangible value in a banker’s eyes. Bankers generally want to see that your business has a history of profits and solid cash flow, with promising cash flow forecasts.
“Bankers like their clients to have a healthy balance sheet, a strong management team and business plan, succession planning, and projections for how the new space will benefit the company,” Jenkins says.
Working capital loan
Another short-term loan (also usually amortized over five or six years), meant to help you pay for investments in growth. Working capital loans are generally unsecured. Bankers will ask you to provide the same information as for a leasehold improvement loan.
Line of credit
A short-term, flexible loan that you can tap quickly to cover temporary cash flow shortages.
Allen Mayer, Commercial Real Estate Broker
416-918-7979
broker@allenmayer.ca