Don’t want to be tied down with a long-term lease? What are your options?
There are times when flexibility is critical to an organization – entering a new market, acquiring or merging with other companies, launching a new product or service, or growing dramatically in the short term.
In these cases, you should first find a corporate real estate advisor who can help guide you through the process and then find and analyze the options. These professionals work for you, but they are paid by the landlord, so they are effectively a free service. Their expertise and involvement also frees you up to stay focused on your business.
So here are four options that you should consider to solve your need for flexibility.
1. Executive suites/Coworking
What’s the difference between an executive suite and coworking? Executive suites are the traditional shared office arrangement where you lease one or more private offices and have shared use of conference rooms, restrooms, a kitchen, copiers, and support staff. Coworking is a more open concept which usually provides a menu ranging from daily use of a desk to a dedicated desk to a dedicated private office. There are still shared conference rooms, restrooms and a kitchen, but little or no support staff. Coworking also will often have training opportunities, happy hours in the space and other events to create a sense of community among the people using the facility.
Executive suites are generally more “corporate” while coworking is more creative. Many executive suites are scrambling to compete with coworking. I was recently asked to participate in a survey by Regus, the 800-pound gorilla of the executive suite world, in which most of the questions focused on coworking. It was clear that they are considering ways to operate their suites to compete more directly with coworking. Coworking is usually a lot less expensive than executive suites.
Both options provide great flexibility for office space. Both offer plans from month-to-month to multi-year contracts. They both can also have you set up and working within a day to a few weeks depending on availability. Executive suites are usually the most expensive option offering flexibility, but can arrange for secretarial services, high-speed internet, fax, phones, copier, printer, receptionist, voice mail, and furniture rental, all in the matter of a days. In the case of coworking, most of these services are already in place waiting for you to just walk in and start working. You can even get a day pass to most coworking locations. Some of these services are included in the base rent and others cost extra. What’s included varies widely by location and operator so be sure to look at the “all in” price and not just the base rent.
When companies vacate their space prior to the lease expiration they will often offer it for sublease to reduce their remaining lease obligation. The rent is usually discounted from the landlord’s asking rent depending on the amount of time left on the lease and whether any furniture is available. For example, a sublease in a building where the landlord is asking $24.00 may go for $18.00 – $20.00. The shorter the remaining lease term, the lower the price.
If you need a longer term than what is left on the lease, you can often negotiate a wrap lease with the landlord. That is a direct deal which commences upon the expiration of the sublease. It allows you to enjoy the lower cost of the sublease with the certainty that you can stay in the space for a longer term.
Subleasing can be risky, however. If the prime tenant is not financially stable and the landlord doesn’t get the rent, you could be evicted even though you were paying the subrent to the prime tenant. Subleases usually are leased in an as-is condition so any changes needed to the space may be your cost. That’s negotiable, of course. Finally, the landlord must approve the sublease before you move in. If the business you are in does not mesh with the landlord’s desired tenant mix or another existing tenant would be your direct competitor, you may be denied.
3. Space sharing
Sharing space with another firm can provide flexibility as well. It’s a hybrid between an executive suite and a sublease. Like an executive suite, you may share services like a kitchen, conference room, copier, etc. This is technically a sublease so it comes with the same risks as mentioned above, but with one additional issue – getting along with and trusting your suite-mates. You must trust the people in the other company and have compatible business styles. You wouldn’t want to have a law firm share with a dot com or a credit restoration company share with a high-end financial planning firm. All these companies are office users, but they use that space very differently.
4. Direct Lease
Don’t overlook the opportunity to lease space directly from a landlord. While they typically prefer a 3-5 year lease, I have seen them be very flexible when a prospective tenant explains the business reason behind the request. For example, one of my clients took over an insurance company in receivership and the company leased space in a building owned by the previous business owner. That owner was bitter about losing the company and didn’t want the company in his building any longer. So the company had to move quickly. We negotiated with a few landlords and eventually negotiated a one-year lease which allowed the receiver to stabilize the business and find a buyer. We even got a 5-year renewal option at a pre-determined rental rate so a buyer of the company had the option to stay and would know exactly what the lease terms would be.
5. Work from Home
Most companies overlook this option because they fear it will look bad to clients, investors and employees. They also fear that they won’t be able to maintain productivity if they aren’t looking over the shoulders of their employees. With all the technology available today, however, those concerns are far less significant than they were even 5 years ago. While it may not be ideal, it just might be the best option for a while especially for start-ups. Leasing space is a usually a large fixed cost and 2nd only to payroll and benefits. So growing companies, start-ups and new non-profits should think long and hard before committing to that expense.
In the final analysis, business owners and managers will always have to evaluate the trade-off between their desire for flexibility and the risks and costs of actually having it.
Bob Gibbons is a Real Estate Advisor & Tenant Advocate with REATA Commercial Realty, Inc. which is a tenant advisory firm based in Plano, Texas. Bob serves companies in Plano, Frisco, McKinney, Allen, Richardson, Addison, Dallas and the surrounding areas and specializes in companies which lease or buy office and warehouse properties.