When Steven Heald, 33, and Nick Fontana, 36, negotiated the
lease for Capital Q, their 1,300-square-foot Texas barbecue
restaurant in Washington, DC, there wasn't a lot of room to cut
costs. A new sports venue, MCI Center, was scheduled to open in
December 1997--exactly when the partners expected to serve their
first meal--and the excitement was pushing commercial rents
sky-high. That didn't stop them from looking for ways to save,
however.
Rather than pay the $65 or even $100 per square foot owners were
asking for prime commercial space, Heald and Fontana shopped around
and eventually settled on a location between the White House and
Capitol Hill. Signing a 20-year lease helped them negotiate a cost
per square foot of only $32, in addition to pass-throughs--a
set percentage of the landlord's property taxes, property
insurance and common-area maintenance costs.
Although Heald and Fontana's landlord refused to cap their
pass-through costs, it's a good idea to push hard for a
specified limit. Ground-floor tenants in Capital Q's district
often have to pay the entire property tax bill, so when the tax
assessor bumped up the value of the improved building, the
restaurant was hit with a 20 percent increase in property
taxes.
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Even without a cap on pass-throughs, auditing the landlord's
invoices for items included in your pass-through costs can turn up
savings. When Heald double-checked his landlord's invoices for
common-area maintenance (costs such as lighting the parking lot and
sweeping walkways), he discovered the restaurant was being
overcharged due to clerical errors.
"On a free-standing building, the tenant pays [100 percent]
of [pass-through] costs. The lease should stipulate that he [or
she] has the right to review those costs," says Jim Voltz, a
commercial broker with Voltz Realty Solutions in Tuscaloosa,
Alabama. If your building's expenses aren't too
complicated, you can audit the invoices yourself; if not, have your
accountant look them over or show you what to look for.
In addition to monthly lease costs, most start-ups face expenses
for building improvements such as fixtures, carpeting and a
storeroom. Heald and Fontana saved money on the extensive
improvements for their restaurant by getting bids from several
contractors and putting in their own sweat equity. "We did a
lot of the build-out work ourselves--stripping the walls,
painting," says Heald.
Many landlords will allot a rent-free period during which you
can get ready to open for business. "Most landlords will give
you about 30 days to get plans approved, install fixtures and all
that," says Robert Zavakos, a commercial real estate broker
and owner of RE/MAX Commercial Dayton in Dayton, Ohio.
Perhaps the most direct way to save money on a lease is to think
small. "Lease as small a place as possible," says
Zavakos. "A lot of companies lease 2,000 square feet because
they have big ideas, but 500 square feet ends up being storage
space that they're paying prime retail rent for."
Optimism also blinds some entrepreneurs to the value of an
option to terminate the lease at a specified future date. Not just
an exit strategy, an escape clause can save you money if your
business outgrows its space or could do even better in another
location. "Write into the lease that at the end of three
years, if you notify the landlord of an intent to get out of the
lease, the landlord will agree to a penalty of one month's
rent, 10 months' rent or whatever," suggests Voltz. That
way, you can get out of the lease and move to another location.
Even though the lease is in writing, it isn't set in stone
until you sign it. Everything in a lease is negotiable. Know your
landlord's situation and what compromises you're willing to
make for a better deal. The result could be significant savings on
that monthly necessity called rent.
Marcie Geffner (mgeff@worldnet.att.net), a
freelance writer in Los Angeles, frequently covers real estate
issues.
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