STARTING YOUR OWN BUSINESS – PART 2: LOCATION & LEASES
Hello everyone! This is part 2 of my article on Starting Your Own Business. In this article, I will be providing information on Home-based and Commercial Businesses, Lease Agreements, as well as discussing some key points on selecting a location most beneficial to your business. As I mentioned in my previous article, I am in no way a business guru. What I am, is an attorney and an entrepreneur who has experience – some good, and some bad. I am presenting you with information and some personal examples of my own, that I hope will benefit you in your entrepreneurial endeavors. As always, please do your own due diligence prior to making any important decisions.
Home-based Businesses vs Commercial Retail/Service Spaces - A Question of Location
Assuming that you have come up with an idea and have established some type of business plan, what now? Now is the time to think about where you want to open your business -- the important question of location. In answering this question, you must consider whether you can run your business from home, or do you need or want a "brick and mortar"; that is, buying or leasing a typical office space or warehouse. Some businesses can be operated in a residential setting (often referred to as a "home business"), while others can not due to local city, state and/or federal regulations and laws. If your business is regulated, you will have to find a location outside your home and in a commercial area that is zoned for the particular purpose and type for your business operations. Also, in many instances where you are permitted to operate a business from home, you may not want to do so considering the scale of your business. For bigger operations, your best bet is to lease or buy an office or warehouse. On the other hand, if you just want to test the waters or you are questioning the successfulness of your business, there is nothing wrong with starting small and doing it from you home (unless of course, as I mentioned above, there are regulations against it. In any and all cases, you must do your own due diligence and find this out - check with the appropriate authorities). You can always scale up later once you have established some sort of success.
Examples of Home-based Businesses:
Online Retailers, Tax Preparers, Consultants of Various Types, Writers, Freelance Artists, etc.
Examples of Commercial-Building Businesses:
Restaurants, Cafe & Donut Shops, Large-Scale Import/Export, etc.
Location, Location, Location
You have heard it before: Location is key. In fact, location is so important in starting a business that you can actually fail even before you start. Some things you should consider when choosing a location:
1) Distance. How far should it be from my house? (Consider travel time with and without traffic to get to and get from work. What about cost of gas? Maintenance?) The farther you have to travel, the more it will cost you money for gas, maintenance, and cost of time that could be spent with family, etc.
2) Convenience. Will my location be convenient for my customers/clients? As I alluded to earlier, this is very important. You want to be close to your targeted customer base. Everyone loves the convenience of buying from a local business. If a business is too far, your customer will simply look for a closer competitor (even if you are better or cheaper than them!). Although you can not be near everyone, try to pick a location that is the most convenient for a larger number of your customer base. In addition, consider foot traffic and whether you are the kind of business that relies on foot traffic to generate revenue.
3) Cost of Lease. For most of us, when we open a business, we will be looking to lease a space, not buy it. Either for a restaurant, a retail space, or for whatever your business is, you need to know how much a particular area will cost. In the industry, we usually talk about price per square feet. You will need to multiply the size of your prospective space in square feet (sq'ft), and the lease cost per each square ft.
EXAMPLE: You want to open a retail store selling pet supplies. After weeks of looking, you've found two places. One place, Location "A" is 1,500 square feet, and the landlord is offering to lease it out for $3.00/sq'ft. The other place, Location "B" is 1,000 square feet, and this landlord is willing to lease it for $3.75/sq'ft.
Therefore.......... Location "A": 1,500 sq.ft' X $3.00 = $4,500 per month.
Location "B": 1,000 sq.ft' X $3.75 = $3,750 per month.
In the example above, you will have to determine how much space you actually need, along with other cost factors. Location "A": costs $750 per month more than Location "B", but it is 500 square feet bigger than Location "B". Is this extra 500 square feet important to your business? Will the additional $750 for leasing the larger spot cause a financial stress on your business? These are just some things to consider in comparing price and size of potential lease spaces. Generally, you will find large spaces costing less per square feet than small spaces. Also, keep in mind, it may be possible to negotiate the price per square feet with the landlord!
Common Types of Commercial Leases
A lease is a contract by which one party (the landlord/owner/management, etc) allows another party (You - the tenant) to use their space for a specified time, in exchange for periodic payments. Although there are many different types of leases, most are just variations of the standard lease which is based a base rent. The following are some common types of commercial leases:
Full Gross Lease / Full Service Lease
In this type of the lease, the tenant pays the base rent and there is no additional rent. The asking rental rate of the lease space includes all operating expenses such as property maintenance, utilities, janitorial services and property taxes. Note, however, that although the operating expenses are already included in the monthly rent, the lease usually reserves a right for the landlord to pass down to the tenants any future increases in those expenses on a pro rata basis. For example, if during the summer months when it's hot, the building as a whole uses more air conditioning, the tenants will receive a bill for the amount the property’s A/C expense exceeded the landlord's estimate (based on previous year’s).
Modified Gross Lease
This is similar to the Full Gross Lease mentioned above, in that the lease will be a full service lease, but with modification so that some expenses are not included and will be charged to the tenant separately and in addition to the monthly rent. Most modified gross leases will be full service but not include electrical. All other property expenses are already included in the regular monthly rent.
Triple Net Lease (commonly listed as “NNN”)
These are lease agreements where the additional operating expenses and any taxes are billed separately from the asking rental rate. The tenant pays all of its proportionate share of the operating expenses and taxes for the building. "Net" operating expenses may include, but are not limited to, utilities, maintenance, property taxes, insurance and sometimes management.
Under these types of leases, the tenant pays a base rent for the leased space, as well as a monthly % of revenue earned from the business. These types of leases are most often used in bigger retail spaces such as malls.
Disclaimer: The information contained herein have been prepared for informational purposes only and are not to be considered legal advice unless otherwise specified. If you have a specific question regarding your personal case, please contact the Law Offices of Joseph Chitmongran for a full consultation.