Small business owners have a lot on their mind: solving for customers, growing the team and developing new partnerships. But there are a ton of not-so-exciting tasks that go into running a business as well. Among the most time consuming (and expensive) is finding and securing real estate.
The Real Estate Problems Small Business Owners Face:
1. Lease terms are long and often require a personal guarantee
Small business owners looking to rent their first space are often surprised to discover how long commercial lease terms are. Commercial leases typically run around 5-10 years, and while it’s possible to find leases for two years or less, these spaces are typically more expensive and come with fewer perks.
Equally as daunting, commercial leases almost always require a personal guarantee. A personal guarantee requires an individual, usually the business owner, to personally pay fees associate with the property even if their business defaults. This requirement was rare before the 2008 crash, but today it’s commonplace and can be a major source of stress for small business owners.
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2. Making sure your lease protects your interests rather than exploits them
When a landlord tells you that what you are about to sign is a standard business lease, don’t believe them. Unlike residential leases, there are few to no laws to protect commercial tenants. Instead, you should work with an attorney, preferably one who specializes in commercial lease negotiations, to craft a lease that appeases the landlord and protects your vital interests. Every clause of your commercial lease is negotiable.
3. Your business growth can be tough to predict, will you add 10 people this year or 50?
The last thing you want is to rent the perfect sized space for your current company and realize, after signing a five year lease, you have no room to grow, or much worse, downsize. For many, it’s incredibly difficult to accurately plan a business’s growth five years out. That’s why, if you’re growing, it’s usually a good idea to rent quite a bit more space than you think you will need. It’s better to end up not needing it than to watch your growth stagnate simply due to a lack of physical space.
4. Unless you own your building, your office space costs don’t add value to your business
Cash is a rare commodity for small businesses, and with so many useful things to spend it on, it’s frustrating to throw large amounts of it into a cost that adds no value to your business. Unless your business is a retailer or a restaurant, real estate simply solves the necessity of having a place for your team to work and doesn’t add value to the business. But that doesn’t mean it’s cheap—real estate usually represents the largest overhead cost for small businesses.
5. Rents go up as areas are re-developed, and possibly if your landlord catches wind that you’re doing well
Gentrification can seriously impact the real estate small businesses depend on. As areas are redeveloped, or simply become more popular, rents rise and local businesses are often forced to relocate. This can be a disruptive process for any small business. At the same time, many landlords do everything they can to increase rent if they find out your business is doing well. Much like gentrification, this pressure can force businesses to relocate or even close.
Solutions For Real Estate Problems:
While many of the real estate challenges facing small businesses require unique, business-specific solutions, there are three options that, beyond just solving problems, turn those challenges into strengths.
1. Flexible office solutions
Co-working spaces and executive suite centers are offered by thousands of companies worldwide, like WeWork, Regus and Impact Hub, and they give freelancers and small businesses alike flexible office space without forcing them to commit to a long lease. These arrangements give businesses time to get their feet on the ground and plan their next move. Businesses may even find they like the creative environments fostered by these setups, which encourage employees to interact with each other and can boost creativity.
Depending on their size, small businesses may even find it better to work from home. This option entirely eliminates all real estate challenges, but is not the best fit for many businesses.
2. Find a real estate advisor you can truly trust
Real estate brokers tend to get a bad rap. For some, the poor reputation is deserved, but a quality broker can serve as a true asset to your business. When it comes time to find space, it’s essential to secure a broker capable of understanding your business’s needs and limitations. Once you’ve found them, treat them like a partner, not a cashier. The more honest you are with them, the more successful your search for space will be. On top of that, a good broker will help you negotiate lease terms ensuring your business is better off for years to come.
3. Buy your building
Admittedly a bold move, buying rather than renting your building turns many of the real estate challenges facing small businesses into strengths. This option requires a significant investment, both of time and money, but has the potential to pay out tremendously over time. Businesses who own their own building often find the property itself becomes one of their largest assets. It can even provide a source of capital to fund business expansions.
While restaurants and retailers typically benefit the most from buying their own building since they have a vested interest in staying put, any small business that is well established in its space should consider this option. Instead of throwing money away on rent, you’re investing in the equity of your own property, and whether you keep your businesses in that space forever or not, you will still own that equity.
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