Guide: Start a Business | Bonus Step

Commercial Real Estate and You

Are you in the market for a brick and mortar storefront? A physical location will legitimize your brand and create trust with consumers. Before you sign a contract, here are a few things to consider.

Renting Commercial Real Estate

Distinguish between usable and rentable space:

  • Usable Square Footage (USF) is the actual space you will be able to occupy. USF does not include common areas such as lobbies, restrooms, stairwells, storage rooms, and hallways. For tenants leasing an entire floor or several floors, the usable square footage would include the hallways and restrooms exclusively serving their floor.

  • Rentable Square Footage (RSF) is your usable square footage plus a portion of the building’s shared space. As we stated above, shared space can be anything that is outside of your occupied space and is of benefit to you (lobbies, restrooms, hallways, etc). As a tenant in a commercial space, you pay for a portion of the shared space and thus your monthly rent is always calculated on RSF.

  • The increase in the rentable square footage above your usable square footage is referred to variously as the Load Factor. This is usually somewhere within the 10-15% range but can be higher in some buildings. When evaluating commercial real estate space options for your small business, you’ll want to be informed of this factor so you know exactly what you’re getting and what you’re paying for.

Before signing a lease, it is important to understand the difference between Triple Net (NNN) and Gross leases. Having this knowledge will allow you to determine the value of the property and the costs you will be responsible for.

  • A Triple Net Lease is a lease in which the lessee pays rent to the lessor, as well as all taxes, insurance, and maintenance expenses that arise from the use of the property.  In the typical triple net lease, the lessee pays a fixed amount of base rent each month as well as an "additional rent" payment which constitutes ½ of an estimated amount for taxes, insurance and maintenance expenses. At the end of the lease year, the estimated amounts are compared to actual expenses incurred and an adjustment is made depending upon whether the tenant paid too much or too little through its monthly payments.

  • By contrast, a Gross lease is a property lease in which the landlord agrees to pay all expenses associated with ownership, such as utilities, repairs, insurance, and (sometimes) taxes. The tenant pays a fixed amount each month, and nothing more.  More than likely, a landlord offering a gross lease has factored in the taxes, insurance and maintenance expenses when agreeing to accept a fixed monthly payment.

Purchasing Commercial Real Estate

The small business sector in America occupies 30% to 50% of all commercial space. Owning a brick and mortar storefront comes with a bundle of benefits, e.g fixed rates, tax breaks, and total control - giving you the freedom to customize your space as you please. Just like renting, there are a couple of things to consider when purchasing commercial real estate.

  • Location
    This is the number one issue in purchasing commercial real estate. Where you set up shop can make all the difference, whether you want to be close to your customers; need access to rail, highway or shipping lanes; or any other reason.

  • Legal considerations
    From commercial office space to industrial warehouses, make sure local zoning allows for the type of business you’re bringing.

  • Physical condition
    Have a thorough inspection done of the property and find out beforehand about potential environment or liability issues, such as asbestos or lead paint.

  • Limitations
    Be familiar with all zoning laws or building codes because there may be conditions in place on whether you can make changes to the outside or inside.

  • Parking
    Make sure you have as much parking space as you need, as well as up-to-date disability access.

  • Flexibility
    If you’re looking to grow your business, look for property that you can expand. Also consider the opposite: If you don’t end up using all the space, can it be rented out?

In your search for commercial real estate, you may need to establish relationships with experts throughout the purchasing process. Here are some options for you:

  • Commercial broker
    A commercial real estate broker will help you locate potential properties in your price range and desired location.

  • Mortgage broker
    Mortgage Brokers can assist with all financing needs, from guaranteed government loans to commercial real estate loans.

  • Accountant
    Bring in an expert who will advise you on what your business can afford, navigate you through tax benefits and estimate your operating budget.

  • Lawyer
    Make the process easier on yourself with a legal representative to negotiate and complete the entire transaction.

Utilizing Incubators

Business incubators are organizations geared toward developing startups and early stage businesses. They’re often a good path to capital from angel investors, state governments, economic-development coalitions and other investors. Incubators sometimes call themselves accelerators instead, when their focus is geared toward jumpstarting businesses that are more developed.

It is important to find an incubator that is right for your business. A great source for finding an incubator includes state and local economic development departments, as well as through a local Small Business Administration office. 

Coworking Spaces

Coworking spaces can be a great option for your startup if you are in the early stages or development or have minimal employees. Coworking spaces are created to have a sense of community, collaboration, learning and sustainability. Most spaces can be rented on a monthly to yearly basis, and offer a variety of options, such as tabletop, office, and conference space.

Visit Clay and Milk's list of Coworking Spaces for coworking options in Iowa. 

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