Strategizing a New Business Location

Strategizing a New Business Location

When it comes time to your business lease expiring or starting a new business, business owners must objectively evaluate what is in their best interest when considering a move or new location. The size, price and physical location are paramount factors in determining what‘s best for your business.

For example, the size is a major variable if 10% of your space is wasted in dead space, corridors or poor general layout.   This would translate to a 10% increase in effective rent being paid, so a $1.50 per square foot rate is really like paying $1.65.

When contemplating the relocation of a business, a physical space audit relative to space usage is required whereas for a new business the size based on estimated employee count, customer count and product merchandising. Other important factors to consider are parking, existing customer bases, demographics, access and amenities.

It is essential that all suitable prospective locations be carefully analyzed while methodically plotting out the process and timing of the move or business opening as accuracy of timing is crucial to avoid substantial losses to delays.  When it comes to evaluating new space or alternative space, it is important to make cost comparisons on an apples-apples basis (effective cost basis), so each of the varying terms offered or negotiated by the landlord are weighted equally with common denominators. This process is often confusing for business tenants as they are required to sort out all the varying economic factors of each possibility as one landlord will offer more free rent, but another will provide more tenant improvements while a third landlord has a less expensive price per square foot.

The cost factors will always vary greatly from building to building, in addition to the sizes of the potential spaces and how they are measured.  The business owner needs to inquire how a prospective space is measured as it is a common practice for landlords to charge rent for space that is not in the tenant’s premises; this is called a rentable measurement or load factor.  It is often confusing for a business owner to sort all this out or even know what to ask when speaking to the leasing agent.   You can refer to the Lease Doctor website for a sample matrix of all costs involved when making an analysis and a glossary of actual definitions of leasing terminology.  Other landlord measuring techniques are derived from BOMA (Building owners and managers association).  There are instances when a  smaller space in square footage is more usable than a similar larger space, therefore using flexible size ranges is best when seeking commercial space as you can always eliminate those which do not suit your needs.  Other items to consider are gross or triple net leases, potential tenant improvement costs and allowances, free rent, and basic rent increases.  All of these factors have to be calculated into the total and effective cost of the prospective business lease.

There are other physical considerations that need to be looked at by the business owner as well such as the age of the building or center and the future need for repairs or capital improvements which can be charged back to the triple net paying tenant or passed through to the gross lease tenant.   There are ways the tenant can control the future exposure of these items by asking questions about the condition of the center and adding protective language in the lease document for protection.

Todd Dorn is president of Dorn and Company-Commercial Lease Advisors & The Lease Doctor, which specializes in lease negotiations and tenant representation.  You can reach Mr. Dorn at (951) 659-3163 or at tdorn@theleasedoctor.com