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Street SmartsSM:
Look before you lease: Tips for expanding businesses

By Michael Nardy

The growth of any successful business is an incredible thing to watch as well as experience first hand. Over the years, The Green Sheet has featured numerous success stories about growing companies, executive appointments, new agents, sales milestones, new partnerships, technical breakthroughs and moves into new quarters.

It's fun to read the articles and know that your business is doing equally well. It's even more fun when your company is the subject of the article.

As any company's numbers grow, so too does the need (I use the term "need" almost in the same sense as we require oxygen to breathe) for new employees, enhanced telecommunications and Internet bandwidth, and most of all, more space.

When you start a company, there's no sense procuring space you don't use. But when you grow, finding the right space for the right price and terms can mean saving tens of thousands of dollars. Here are some tips on getting into a new space for the right price.

Net versus gross leases

Let me throw out some terms: gross, net, double net, triple net and net of utilities. These terms have distinct meanings in the world of leasing, and they can be very confusing. Understanding them is almost as essential as knowing the square footage of the space you are about to lease.

A gross lease is what often comes to mind when thinking of leased property. Under this type of lease tenants remit rent to landlords, and landlords are responsible for all property expenses. Tenants are only accountable for their own utility and telecommunications costs.

Expenses that landlords (or lessors) pay for under a gross lease scenario are normal expenses for which any property owner would be responsible. These include taxes, maintenance, repairs, build-outs and insurance.

When net leases are in effect, tenants pay for some property expenses. This type of lease comes in a few flavors: net, double net and triple net.

Under triple net leases, landlords rent space to tenants, and tenants pay for almost all expenses on the property. These include taxes, maintenance, garbage, telecommunications, gas and utilities, landscaping, building improvements, and insurance.

Double net leases are similar to triple net leases but involve somewhat fewer expenses to the tenant. Under double net leases, tenants pay for taxes and insurance, while building owners cover maintenance and repairs.

Of course, tenants are still responsible for their utilities and communications bills. (Sometimes these fees may be bundled in tenants' total lease expenses. More on that later.)

Finally, net leases are leases in which tenants pay for all expenses that the property incurs. Net leases include those expenses outlined in a triple net lease. They also include utilities and other expenses not outlined in a triple net lease that a building owner may incur.

Sounds like a lot, huh? It can be. For example, a lease might start out at $10 per square foot, but because of the extra money spent due to a triple or double net lease, the price per square foot can really add up.

Essentially, any net lease is a lease under which the lessee pays for the expenses associated with the ownership of a property. Gross leases are those in which the landlord or property owner pays for those expenses, and tenants are only responsible for the utilities.

Don't get slammed with CAM charges

When leasing space, common area maintenance (CAM) charges might be charged monthly, in addition to your lease cost. CAM costs are shared proportionately by tenants in the building and can quickly add to your base rent cost.

CAM expenses are those that building owners incur to mow lawns, clean hallways and bathrooms, maintain elevators, remove snow, and water plants. Essentially, the property owner is passing maintenance costs on to tenants. A gross lease with CAM charges can easily become more of a triple net lease.

To bundle or not to bundle

In office buildings, utilities are often metered separately for each tenant. However, in buildings with high tenant turnover or those with new office build-outs done to accommodate tenants' special needs, utilities are sometimes bundled in a cost-per-square-foot calculation.

This can hurt or help you, depending on your situation. Let's say you're a merchant level salesperson with a computer, fax and some telephones.

If you are in a tech-heavy building with an Internet service provider or some type of architecture or design firm using numerous servers and computers, the cost to power the building's utilities may be unfairly passed to you, even though your utility usage might be significantly less than other tenants.

On the other hand, my company, Electronic Payments Inc., is in a building that bundles our utilities into a monthly cost-per-square-foot calculation. So, we pay our electric and other utility bills as a portion of our monthly lease expense, because it is bundled into our base lease price. Our servers, computers, printers, faxes, etc. are all paid for under our lease.

The cost per square foot allotted for electricity may be as low as $1.50 or as high as $3 or $4. Let's say you are leasing for a base cost of $15 per square foot and are charged $2.50 per square foot for utilities.

Now your lease price per square foot is $17.50. Add to that CAM charges of $500 per month on a 2,000 square-foot office, and you are actually leasing the property at $17.75 per square foot, or a total of $35,000 per year.

Term limits

Lease term is important: You may incur a tremendous expense to move your offices. Most commercial leases are for five or 10 years, some even last longer. Knowing how the lease term is structured is a crucial part of your lease due diligence. A five-year lease with an option for a five-year renewal is much different than a three-year lease with a two-year renewal.

Imagine the expense of moving just yourself and a few employees. Now imagine moving 20 employees. The shorter your lease's term, the harder managing the growth of your company may be.

Shorter lease terms may be attractive to potential tenants, but landlords like stability in their tenants just as you want to make sure the space you occupy won't be taken away from you at the end of your term.

Don't be surprised if you have to pay more for the lease each year. Leasing costs rise the same way property taxes, utilities and the overall costs of doing business rise. As you review a lease before signing, you may see a 4% or 5% increase built into the lease cost.

This is entirely negotiable. If you are signing a net or triple net lease, you may be able to secure a flat price for the lease with no increases.

Don't go it alone

Before you sign on the dotted line, get a real estate agent. Hire an advocate who will work to put you in the best space possible. A broker or agent is often paid a fixed fee to negotiate a lease, regardless of what the cost per square foot ends up to be.

So, unlike a home purchase wherein a broker often receives a percentage of the sale price, a commercial lease tends to involve less pressure and more room to discuss options with the landlord or owner of the property.

Moving into a new space is exciting and challenging. I hope some of these tips have given you some insight into the process.

Michael Nardy is Chief Executive Officer of Electronic Payments Inc. (EPI), a founding sponsor of the National Association of Payment Professionals and one of The Green Sheet magazine's Industry Leaders. EPI is one of the nation's fastest growing privately held payment processing companies offering ISO and MLS profitable partnership programs and cutting-edge tools to help their portfolios grow. To learn more about partnering with EPI, visit www.epiprogram.com or e-mail Nardy at mike@elecpayments.com

Article published in issue number 060901

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