Taking Up Space: How to House Your Business
Congrats, fellow boss lady! You’re ready to create a physical space for your business. Luckily, there are a variety of options available for new business owners, ranging from co-working to traditional leases to buying. This post is an introduction to the variety of options that are available and will kick off a series about taking up physical space that complements hustle and doing so in a way that protects you legally and financially. Without further ado, let us introduce the applicants.
Once you begin thinking about where to house your business, be sure to consider the following items:
What do you need the space for primarily? Retail? Office space for your team to operate? Meeting space? A mailing address? Industrial warehousing space? Training space?
What is your budget? How do you plan on financing your acquisition?
Are you handling the acquisition on your own, through some sort of corporate or LLC entity, and/or with partners?
How much time do you plan to spend in the space? What kind of work is going to be needed to make any space unique to your business vision?
Where do you want to be located?
What other items of overhead and equipment do you need to consider for your business, and how will you finance the purchase or rental of those items?
With these considerations in mind, here are the primary options for commercial real estate that most buyers confront when thinking about space for their business:
1. Purchasing a Commercial Property. Buying your real estate is one of the most traditional ways of acquiring space for business and commercial purposes.
Purchasing commercial real estate is a different process than buying a home. It requires detailed negotiations, thorough due diligence to investigate the Seller’s liabilities and the state of the business and/or assets, working closely with a lender if you’re financing your purchase to make sure you qualify for the type of financing you need, and working with a lawyer to make sure you’re protected. Certain types of issues that don’t commonly arise in residential transactions, such as extensive due diligence, government and licensing approvals, sales tax concerns, construction-related financing, come into play when you buy commercial property.
Some business owners are able to buy from the property owner in less conventional ways, such as through seller financing and installment contracts. While I rarely see Seller financing in residential transactions, it is not uncommon in commercial transactions for a Seller to sell property and take back a mortgage from the buyer until the buyer can secure traditional financing.
Purchasing real estate comes with the benefits of full ownership, excepting any relationships with a building association and can build your business’s equity in a key business asset. On the other hand, that makes you solely responsible for the property taxes, property insurance, and the accompanying liabilities of property ownership. I will spend more time talking about the in’s and out’s of buying commercial property later in this series.
2. Leasing commercial real estate. The traditional commercial lease is another method of obtaining real estate for your business. Commercial leasing can be complicated for the first time commercial tenant, largely because commercial leasing comes with lots of fun legal-ese lingo.
While I will save the specific glossary of terms for the leasing specific post to come later in this series, it is key to understand the two main types of commercial leases: “gross leases” and “net leases.” A “Gross Lease” is not a smelly piece of paper, though it sounds like it. A gross lease can be quite favorable for a tenant as the rental amount includes tenant’s complete contribution to taxes, insurance, and maintenance costs. I know, you’re thinking, “Hey, lady, I don’t pay taxes and insurance for my apartment lease.” Well, commercial real estate is a different beast, and it is common for commercial leases to require the tenant to share in the tax, property insurance, and property maintenance costs. Such leases are known as “net leases,” and pass a majority of the financial burden for operation of the rented property to the tenant.
Almost any commercial landlord will require a background and credit check. If you’re thinking about leasing, it is important to carefully consider your needs before you sign the lease. Be sure to clearly dialogue with your potential landlord about what your business will be doing in the space and what changes will be needed to make the space work for you and your business. You’ll also want to be sure to engage an attorney to ensure that the lease protects you in the event that your landlord becomes difficult or if ownership changes and you need to enforce your rights or the landlord’s obligations to you. Commercial leasing is a viable option for business owners that want to avoid surprise costs associated with ownership, such as replacement of mechanical systems, increases in property taxes, or unexpected repairs. Of course, with a lease, your business is not building equity in an asset as it would with a purchase, and you are bound by the landlord’s turnaround time for handling property-related issues.
3. Co-Working Spaces. We are in the age of co-working. Between spaces like WeWork, Novel, Serendipity Labs, and Regus, entrepreneurs have their pick of co-working spaces. While co-working makes sense for many business owners, it is not without drawbacks. Business owners license a limited space within a larger business center or the right to work in open co-working space for a monthly fee.
Co-working spaces offer business owners flexible options when it comes to their business space, ranging from simple mailbox only virtual office, co-working memberships providing access to open work space and general amenities (think lots of snacks and coffee), or private offices.
Operating a business out of a co-working center can provide many benefits, such as the aforementioned snacks, organic networking opportunities to meet other business owners, and a sense of community when you’re working on your own. Many co-working spaces do not require a credit check, but instead charge a hefty set-up fee or a security deposit. The problem with co-working spaces is that they are CO-working spaces. Just like your freshman year at college, you don’t get to pick the people in your hall of the dorm. You don’t get to know your neighbors before you move in, and you don’t know what the center’s management will be like until you spend time and see how personalities match. You will share center resources with other members of the space, and it tends to be first come, first serve. Certain spaces emphasize amenities, while others abide by a more traditional office model. Buying into a co-working space often means buying into a certain work style, be it new-age millennial or old school style.
With the range of pricing options and the ease of getting in the door, co-working has become the non-work space work space for many young professionals starting their own hustles. If you choose to go down the co-working road, be sure to read the tiny, tiny print in the licensing agreement and ask questions before you sign. Many co-working agreements stick their members will evergreen renewal provisions, little negotiation room when things don’t work, and hide extra fees for service at the space.
As a fellow entrepreneur and as a seasoned commercial real estate attorney, I know from my own experience, as well as the experiences of my clients, that the decision of where to place your business can feel like you and your business are jumping off a cliff into the unknown, so I urge you to consider your options with careful and comprehensive research as well as dialogues with your business partners and stakeholders, your lawyer, and your financial partners.
We will be back soon with Part II of our Taking Up Space series with a discussion of the nuts and bolts of buying commercial real estate.
Until later.
