We need more space

We Need More Space written by a former National Post business writer Charles Davies was published on the Visa Small Business Website August 2005 with quotes and advice from Anthony Dyson Toronto Commercial Real Estate Lease Advisor. Anthony has been consulting to tenants exclusively since 1989.

Charles Davies is an award-winning editor and writer for many prestigious Canadian business and financial publications. Charles leads a team of business writers dedicated to keeping your business up-to-date.

Maybe you want to be closer to your customers or in a location where your business will have greater visibility. Whatever the reason, you need new office or plant space. And if you're like most small businesspeople, finding that space and leasing it on the right terms will be a journey into potentially perilous territory.

"When people go out to rent office space, they don't know what they're getting into," says Toronto commercial real estate broker Anthony Dyson. "Everything is negotiable, but it depends a lot on the circumstances, what the landlord is like, what his vacancy rate is and whether or not he's willing to do a deal. There are never any hard and fast rules."

Dyson, who owns and operates Dyson Realty Corp., is what's known as a buyer broker, an agent who has no listings of his own but acts on behalf of potential tenants. His clients include businesses large and small across a wide range of economic sectors. What his tenant-clients share, however, is the prospect of dealing with landlords who will try to rent space for the highest possible price and on the strictest possible terms. While most landlords are reasonable, Dyson says, some will push the margins of fair dealing. "I helped a smaller industrial tenant a while ago, and once we got the landlord's offer, what they called their standard offer, it said that if we didn't come to an agreement on the lease within 15 days, they were going to keep the tenant's deposit. I couldn't believe it."

This kind of situation, and countless other pitfalls, can be avoided if prospective tenants follow six common-sense rules of engagement in the leasing game, Dyson says. They are, in more or less logical order:

1. Make sure that time is on your side

Many existing and novice office tenants fail to allow sufficient time to shop around either to renew a lease or to find new premises. But getting an early start is particularly crucial because landlords typically drag out negotiations and systematically withhold certain elements of a rental agreement in order to prevent you from seeking alternatives or to extract concessions. The less time you have, the more money and concessions they're likely to get.

As a general rule, Dyson recommends that you begin to look for new premises at least six months before you plan to start a business. If you already have rented space and want to renew or expand your square footage, start negotiations anywhere from nine to 12 months before your existing lease expires.

2. Get a broker

To get the best possible lease, you require a broker who knows the marketplace and how to negotiate an agreement. Commercial real estate is unlike residential, where most listings are available on the Multiple Listing Service's website. Instead, office and plant listings tend to be restricted to a private data base. A broker will have access not only to that data base but to regular listings updates produced by real estate brokerages. A broker, then, is your pipeline to the widest range of rental properties.

You also have to establish that the broker is working for you rather than the landlord. By law, commercial real estate agents now have to disclose their "agency role," Dyson says. A broker with a large firm will naturally tend to promote the firm's listings, but they can also strike a deal in which they act as a "dual agent," working for you as well as the landlord. In this case, says Dyson, it's not hard to figure out which side will get better representation.

The best solution, he says, is to enlist a buyer broker who has no listings axe to grind. If one isn't available, seek an independent leasing consultant. Failing that, you can go the dual agent route, although it's important to make sure any buyer agency contract you sign with a dual agent has an escape clause if you decide that the agent doesn't truly have your best interests at heart.

3. Know what you need

Before you seek new space or a lease renewal, you have to establish your requirements.

Based on your company's current size and prospective growth, how much square footage will you need? What's your price range? What term of lease will you want? Where do you want to be located and in what class of building? Do your layout requirements include private offices, conference rooms, kitchens and storage space? Is parking required? And are there particular conditions you require for your business, including heating and air conditioning (many companies now operate 24 hours a day, but landlords won't heat or cool your space round the clock unless it's written into the lease) and signage, a crucial factor for retail businesses.

Brokers will often send you a checklist that will cover these and other items for consideration. Once a broker has an accurate assessment of your needs, he or she will start matching you with listings. The broker may also do a detailed space plan although, as Dyson points out, many small businesses can quickly figure out their requirements on their own.

4. Understand the difference between usable and rentable space

As you trek around with your broker to narrow down the choices, it's important to consider the difference between usable and rentable space. The former is the actual space your company uses to do business while the latter is usable space plus common areas in the building such as foyers, corridors and washrooms. Ideally, you're paying for the usable space plus your fair share of the common space. Since rentable space can increase your monthly payments by as much as 20%, it's important to know that common space is properly measured - by Dyson's estimate, about 30% of space isn't measured correctly - and that accurate numbers are written into the lease. Another thing to watch for is the tendency of landlords to add clauses to the lease that will allow them to increase your rentable space during the lease term.

5. Negotiate effectively

Your broker is the person to lean on here, but there are some key aspects of the negotiation process you should understand. Although many landlords will present you with their "standard lease," the fact is that no two commercial leases are identical. And while your small company may not have the negotiating clout of a major corporation, there are many things you can ask for and often get. In this respect, Dyson's philosophy of negotiating is instructive: "I always ask for more than I think I'm going to get and then work back from there. You never get everything you want."

There are certain things you will want to try for, however. One is the option to renew your lease so that you can't be tossed out of a building you like. The other extreme is a termination clause that will allow you to escape a lease if your business runs into difficulty or conditions in your building become difficult. Sublease clauses are also commonly sought and the best ones allow tenants to keep any profits if they can sublease space for more than they're paying for it. Usually, landlords insist that any potential profits from a sublease go to them.

It's also important to establish what leasehold improvements are to be made and who will pay for them. Often, tenants will finance leasehold improvements, but landlords will also cover such costs, recovering their money by escalating the rent you pay over the term of the lease. You also have to be on the lookout for clauses that subject you to possibly onerous increases in a landlord's operating costs.

And one thing you want to avoid if possible is giving a personal guarantee that could cause you to re-mortgage your home or sell other assets in the event that your company can't pay its rent. Landlords almost always ask for personal guarantees and very often the best outcome for you is to limit the guarantee and stipulate in the lease that it will be reduced over the term of the lease by the amount of rent you pay.

6. Have your lawyer look at the lease

A broker can do the heavy lifting when it comes to crafting a favourable lease, but before you sign, take it to your lawyer. You never know what key point might somehow have been overlooked. Surprisingly, says Dyson, most small businesspeople don't bother to consult their lawyers about leases. "Most small guys just feel they're lucky to be getting the space. They don't realize that they have some power."

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