So keep in mind rule number one when looking for commercial real estate: crunch the numbers, and sign up only for what you can afford. “Most commercial buildings are based on triple-net leases,” says Jason Lind, director of acquisitions for Howard & Mills Inc., in Northridge, Calif. That means the tenant pays for insurance, management and taxes on top of his monthly lease payment.
Buying the Building
It’s a much bigger undertaking to buy the whole building than to lease an office suite, but plenty of startups do it.
Is buying for you? Don’t even consider buying a building unless it’s a great real estate investment separate from your business, or unless you have cash to burn. Give your business some time to grow before taking that step, as real estate woes can muddy your business focus.
If you’ve found a real estate opportunity you just can’t pass up, maximize the space and create a revenue stream for yourself. The best way to go whole hog in commercial real estate is to buy a building that your company only fills part of, according to Daniel Edrei, director and principal at Meecorp Capital Markets in Fort Lee, N.J. You can then supplement your payments with rental income from other tenants. Ask former colleagues and compatriots at local chamber of commerce meetings, or network among entrepreneur groups to find tenants for your new digs.
If you’re set on buying the building alone, though, understand the obstacles.
Startup companies have little existing credit, and banks don’t like to take chances. That’s where bridge lenders come in. They’re banks that loan money based on the property’s value, rather than the company’s risk.
Even with a bridge loan, you’re going to have to front some of the money yourself – and it could be as much as 40 percent, says Edrei. “Banks are very careful right now, specifically with owner-occupied properties,” he says. “Look at the real estate separately from the business.”
Finding a Space to Lease
If all you want to do is rent, you’ll have an easier time because there’s always commercial space that needs filling.
After four years of running their graphic design business out of their Minneapolis home, Tom Crowser and Tracie Curb-Crowser were ready to rent. And they knew exactly where they wanted to be: the trendy, artsy Warehouse District.
They leafed through real estate magazines and consulted Tracie’s former boss, who had rented Warehouse District space. Yet they had no credit and no real estate track record to speak of, a typical scenario for small startups.
“We paid cash for everything,” Tom said, and their nascent company had only four employees, including them. They sat down with landlord Ken Sherman, asked how much he’d charge per square foot, and did the math to determine what they could afford – landing them in 1,100 square feet of open space.
“I needed the space more than I needed a cool space,” said Tom, who leased a basic Warehouse District space and made it “cool” himself by building partitions out of 4x4s and steel grids and nailing them to desks fashioned from old doors. Those partitions stayed with the company for years – until it was financially stable enough to hire more employees and lease a larger space.
Going with a Pro
Unless you have a business mentor like the Crowsers, you’ll need to find a commercial real estate broker who knows your field. Interview at least three who specialize in your type of business. Meet with each for an hour, and choose the one who meshes with your company’s personality.
Ask questions about the properties your broker presents to you: Is there parking? Are there truck docks? Good signage? Visibility from the road? Do you have to pay a premium for air-conditioning after 6 p.m.?
Avoid buildings that are 99 percent full. That leaves little room for expansion and when your business grows, you don’t want to have to start the process all over again or lose clients who can’t find your new location. Ask the landlord to write a clause into the lease okaying a move up to bigger digs on-site when you grow.
Finding the right location for your business takes longer than you might expect, so plan ahead, says Jim Martell, CEO of Ridge Property Trust in Chicago. “Do the proper evaluation and understand the costs, so you’re not rushing into something. Find the lease to meet the requirements of your business plan.”
Remember, though, that “what you’re all about is making money for your company,” Sherman says. “The space is secondary to your ability to generate revenue. Know the market. Get competitive bids. Find a landlord you can trust.” And get to work.
Lynne Meredith Schreiber is a freelance writer for StartupNation.