Going Places
This story appears in the October 1999 issue of Startups. Subscribe »
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.
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.
Smart Move
Get Guidance
Check out Leasing Smart, by Craig A. Melby and Jane Utzman (PT Publications, $14.95, 800-547-4326). Written by two commercial real estate agents, this 125-page book is a worthwhile introductory guide to commercial property leases. Chapters cover using demographics, physical factors to consider when choosing a location, and advice for negotiating the best lease terms. The book also includes start-up checklists, sample leases and tips for entrepreneurs.
Contact Sources
Capital Q, (202) 347-8396
RE/MAX Commercial Dayton, (937) 222-3441, ohioccim@concentric.net
Voltz Realty Solutions, (205) 345-1007, jwvoltz@ccim.net
