Small Business Taxes & Management
Renting for Less
Small Business Taxes & ManagementTM--Copyright 2008, A/N Group, Inc.
Most businesses rent at least some real property. In fact, if you're starting out, one of the best ways to conserve cash is to rent your office, store, warehouse, etc. You avoid the cash outlay required by a downpayment if you purchase the property. You also avoid unanticipated repairs that could prove catastrophic to a business with limited cash reserves. And, while renting is usually more expensive, that's not always the case. Even if renting is more expensive than owning, the difference is often relatively small. Moreover, you can deduct the full amount of the rent. If you own the property you can deduct the out-of-pocket expenses, interest, and depreciation. Nonresidential property is depreciated over 39 years and you get no depreciation on the purchase price allocated to the land. The big disadvantage is you're not building equity. But that may be a small price for the flexibility and cash flow savings.
Startups you always think twice about buying. There's a much higher probability the business will change in some significant way, necessitating a change in location. While it may still be expensive, getting out of a lease is usually a lot cheaper and easier than selling a building.
Buying a property also means you'll usually be adding substantial debt to your balance sheet. That might make it more difficult to finance receivables, inventory, equipment, etc.
Note. The same argument generally doesn't apply to personal property such as equipment, computers, etc. The implied interest rate on leasing or renting personal property is usually much higher.
Renting office or retail space can easily be a substantial part of your monthly expenses. There are several ways to keep the costs to a minimum. Keep in mind that some may have significant disadvantages depending on your business. Here are some tips:
- Space in a strip shopping center is often cheaper than comparable space in a decent office building.
- Look for a place that's been on the market for some time. The landlord may be getting desperate to cover expenses. (Downside? The space may not be attractive or have some other negatives.)
- Consider a short-term lease. Such space may be much cheaper. Weigh the savings against the potential boost in the rent at the end of the lease, looking for new space, moving, etc.
- Just as you should make a cash flow budget for your business, make a square foot budget before shopping for space. Don't buy more space than you need currently plus any short-term additional requirements. If you're worried about potential fast growth, see if you can rent additional space in the same building. The landlord might give you an option on space coming to market. If not in the building, he may have additional space nearby. If the market is very tight, you might have to be more cautious.
- Look for a sublet. The original tenant may offer a good deal just to generate some cash to offset his cost. Make sure the prime tenant's lease allows him to sublet or the landlord approves.
- Ask around for space that's suddenly gone vacant. The former tenant may have gone out of business, moved, etc. with time on the lease. The landlord may not have anticipated the vacancy and a lower offer in exchange for immediate occupancy may get you a good deal.
- Try to get the landlord to agree to an option to renew. It costs you nothing (you don't have to exercise the option) but can result in significant savings. Rent on a renewal option is often less than the market rent or you may be able to extract other concessions on renewal. Remember, the landlord wants the space occupied.
- Consider odd-ball space. Space can be much cheaper of there's no front entrance, auto access is inconvenient, the building layout is strange. There's nothing wrong with such space if you don't have clients or customers (e.g., a software developer, small manufacturer, etc.) visiting on a regular basis.
- Fixer-upper. We're not talking major work (unless you've got connections to a contractor), just minor work or cosmetics. Some spaces will rent cheap because it looks lousy and the landlord won't make any repairs or doesn't want to do so until he's got a signed tenant. Some space may be cheap because it's not class A--it's old, the space is broken up by columns, etc. That may not be a disadvantage to you, but it's often tough space to rent.
- Look for a building that's largely empty. For example, a strip center with 10 spaces, but only a few of them occupied. The landlord may be desperate. Such space can usually be had cheaply because the center won't draw retail customers until there's a critical mass. Of course, if your business depends on walk-ins, you want to avoid this space. Similar space in an office building may also be had at a discount, with less of the disadvantages. CAUTION. Get good legal advice on the lease terms. You don't want to be responsible for more than your share of the costs in a largely empty building. Also, you want to make sure your lease will survive if the landlord sells or a creditor takes the property.
- Need 4,000 square feet of space, but can't find it? Consider several smaller spaces in the same building. The landlord may cut you a deal to get them fully occupied. Get a clause in the lease that allows you to consolidate as other tenants move out.
- Look for space where you can deal directly with the owner. If he doesn't have to pay a broker, you may be able to get the price down.
- If you're just looking for cheap space, don't ask the landlord to make significant improvements before you move in.
- Location, location, location. That's true if you're buying or selling the property, your business is retail, or you have customers that visit the office. If you're designing software, doing research, etc., you may be able to secure cheap space outside the retail or business districts. In some cases space just several blocks from the action can be significantly cheaper. Space a couple of miles outside of smaller towns can result in even bigger savings, often with no disadvantage.
- Split operations. You may be able to get cheap manufacturing or warehouse space 10 miles away while maintaining an office in a prime location.
- Look further away for manufacturing space. If you can, consider manufacturing space in less than prime locations. You may be able to find space 30-50 miles away where not only are the rents cheap, there's plenty of available labor. Even better, you might be able to secure incentives from the town, county or state to locate facilities. Don't forget to take into account your workforce and travel costs.
- Make sure you understand terms and definitions. Like any industry, the definitions of many terms assumed. Some terms are common in just certain markets. If you don't know--ask. Better yet, get professional help.
- Know your market. Commercial real estate is very different than residential. And the market can be very localized. It's not unusual for space 40 miles away to be commanding rents a fraction of a major market. So you can't judge your market by rents and vacancies in a bigger city. Understanding the market will give you an edge in negotiations.
You may be able to come up with additional ideas. But don't neglect other factors. For example, locating operations in more than one building will be detrimental if you can't control the employees. And don't go for cheap space if it's not appropriate to the business. If you need high visibility or convenient location to draw customers, forget that out-of-the-way location. And don't even think about that converted tannery if you've got high profile customers coming to visit the office.
Another point. Make sure you have a professional well versed in real estate. Specifically, you want an attorney who knows real estate law and, if at all possible, one who understands the local market.
Copyright 2008 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISSN 1089-1536
--Last Update 08/28/08