Locating Your Business

Commercial real estate brokers are fond of saying that the three most important factors in establishing a business are location, location, and location. While true for a few types of businesses, such as a retail sandwich shop that depends on lunchtime walk-in trade, for most, locating in a popular, high-cost area is a mistake. For example, if you design computer software, repair tile, import jewelry from Indonesia, or do any one of ten thousand other things that doesn't rely on foot traffic, your best bet is to search out convenient, low-cost, utilitarian surroundings. And even if yours is a business that many people will visit, consider the possibility that a reasonably priced, offbeat location may make more sense than a high-cost, trendy one. Think of it this way: Businesses that pay comparatively low rent have more money to spend on other important aspects of their businesses or can pass some of their savings along to their customers in the form of lower prices.

But no matter what location you choose, never purchase property or sign a lease without being absolutely sure that you will be permitted to operate your business there. If the rental space is in a shopping center or other retail complex, this involves first checking carefully with management, because many have contractual restrictions (for example, no more than two pizza restaurants in the Mayfair Mall). If your business will be located in a non-shopping center area, especially an offbeat one, you'll need be sure that you meet applicable zoning rules, which typically divide a municipality into residential, commercial, industrial, and mixed-use areas.

You'll also need to find out whether any other legal restrictions will affect your operations. For example, some cities limit the number of certain types of business - such as fast food restaurants or coffee bars, in certain areas, and others require that a business provide off-street parking, close early on weeknights, limit advertising signs, or meet other rules as a condition of getting a permit. Fortunately, many cities have business development offices, which help small-business owners understand and cope with restrictions.

Five Ways to Save Money on Office Space
Keeping rent low is a great way to keep your overall costs down. Here are five tips for doing just that, along with a checklist for negotiating the best deal before you sign on the dotted line.

From: Inc magazine | July 1997 By: Christopher Caggiano
Ray Ortega understands why businesses need good space. He just doesn't understand why so many of them insist on paying for it. "People get involved in these long-term rental agreements. Then they can't produce enough revenues to cover expenses, and it kills them," says the CEO of Ortega Travel Services, a $25-million travel agency based in Atlanta. "We don't pay an awful lot of rent. That's how we keep our costs down."

Five of Ortega's nine outlets come to him virtually rent-free. Three of his large commercial accounts furnish space gratis because they want on-site travel services for their employees. Ortega also gets free space at an air force base in South Carolina, in return for providing discount rates to Uncle Sam. He has even finagled space from the competition: he shares his Washington, D.C., office with another agency that foots the rent bill in return for a 50% share of the profits on any business Ortega gets there.

Maybe your customers don't want you on-site. Maybe the government doesn't want to pay your bills. There are still ways you can cut your rent. You could always...

Profit from someone's misfortune. It's the age of downsizing and rightsizing -- and that means empty office space. Even if the downsizing craze passes, subletting is always one of the best sources of discount space. Smart subletters can try for discounts of 25% or more. When he was looking to relocate, Soheil Saadat, CEO of Scientific Software, a $6.3-million software developer in San Ramon, Calif., eyed a swanky industrial park. But at $1.85 a square foot, Saadat decided, such posh digs were more than he could afford. A broker referred him to a large corporation in the same park that was closing its California office and had more than two years left on the lease. Saadat scored a rate of $1.15 a square foot, saving himself 38%.
2. Let yourself be lured. Many communities offer incentives to relocating businesses, and some have economic-development zones, where the city provides tax abatements, low-interest loans, and other amenities to attract businesses. When Patti Penny was looking for new headquarters for the Pen-Group, a $39-million employment agency based in Springfield, Mo., she opted not to rent. Instead, she took advantage of low property values in Springfield's downtown. Penny took over a former savings-and-loan building featuring ample parking and a drive-through window, where temps now can pick up their paychecks. The city fronted $50,000 toward renovation costs at a bargain 5% interest rate.
Share. Roommates aren't just for twentysomethings. Christopher Hedge was running his solo sound-mixing studio out of a small space in Brisbane, Calif. His business, the Magic Shop, provides musical scores for video-production houses. But the closest video studio was a 20-minute drive away. Hedge thought that if he could join forces -- and offices -- with a video- postproduction facility, he could save clients valuable travel time. So in 1993 he approached Aldo Panattoni, CEO of $3-million Total Video Co., in South San Francisco. Today the two companies share a common lobby, a receptionist, a kitchen area, and office machines. For a 12% cut of Hedge's monthly sales, Total Video handles much of the Magic Shop's administrative functions, including invoicing and scheduling. Hedge also pays $750 a month in rent -- just a little more than half of what he used to pay.
Strike a deal. When his company outgrew its first office, Paul Upton turned to a customer with space to spare. The client had hired Upton's company, Precision Computer Service, now a $16-million company in Oklahoma City, to repair and service computer systems. As part of the maintenance contract, Upton proposed a 5% discount in return for office space. Not a bad deal even for 1986: Upton's rent amounted to a whopping $125 a month. This steal of a deal lasted for about 18 months, until the client closed its Oklahoma branch.
Do without. Of course, the thought of paying any rent could make you want to ditch the corporate office altogether. That's what Janet Caswell did. As Caswell pondered space options for her accounting firm, Caswell & Associates, in Bloomfield Hills, Mich., she thought about the staffing and technology changes that were transforming her $650,000 firm. Employees increasingly wanted flexible schedules, and clients wanted specialized knowledge that Caswell could get most efficiently from part-time outsiders. Caswell realized she "didn't need to spend $22 a square foot just to have file cabinets." So Caswell quite literally sent her people home. She gave up the 1,700-square-foot space and set up each employee -- herself included -- with his or her own home office. The cost was $200 to $500 a head for modems and extra phone lines; each new employee also requires a computer and a fax machine, at a per-employee total cost between $2,000 and $3,000. Since the transition, Caswell's phone bills have doubled. But all the costs together don't begin to approach the $3,000-plus a month she used to pay in rent.

Negotiating the Best Lease

Signing a lease? Whatever the condition of your local real estate market, there are still things you can do to get a better deal. Some options to consider:

Get representation. You want a broker and a lawyer working on your side of the table. In his book Tenant's Handbook of Office Leasing, Stanley Mark Wolfson writes that "using a building's broker to negotiate a lease for you is foolish and stupid."
Measure the space. Don't automatically believe the square-footage amounts, or worse, approximations, the landlord tells you.
Put a cap on rent increases. Try to get a fixed percentage rate of annual increase. Or tie rent increases to some real-world index, such as the consumer price index, though doing that could be risky. "It depends on what you think the market will do," says Greg Gunn of Cottonwood Realty Services LLC, in Salt Lake City.
Get a cancellation clause. The landlord wants a five-year lease, but you worry you'll outgrow the space. Gunn suggests negotiating for the right to cancel the lease after three years if you pay for unamortized costs.
Make sure you have the option to renew. Try to lock in the renewal rate, too, says Andrew Johnson, managing director of Johnson Commercial Brokerage in Los Angeles. "If you find the market is lower, you can always renegotiate," he says.
Minimize restrictions on your ability to sublease. If you grow, you want to be able to move and sublease the space. "The 'use' clause should be as vague as possible," says Johnson.