The great office space conundrum: To lease or buy?
The sign for Miss Maria’s Gymnastics is still on the front door of Angel Competition Bikinis’ new headquarters on 87th Street Parkway in Lenexa.
Karah Jones, ACB’s co-founder and CEO, said removing the logo of the former tenant is one of the final to-dos in completing the building conversion that began in January 2018.
Jones is thrilled to be here—but it wasn’t love at first sight.
“When I first walked into this building, I was like ‘Uh, this will not work,’” she said, speaking of when she and her twin sister Lauren Beeves first saw the location last fall.
Jones and Beeves founded Angel Competition Bikinis in 2013. The sisters wanted to provide a high-quality suit for those like them who competed in the bikini division of female bodybuilding competitions.
After starting in Jones’ apartment on Rainbow Boulevard, then running the business out of a rental home in Mission, it was time to find a building to create and distribute the suits.
They had their heart set on another location, but the landlord there wanted only to lease. Jones and Beeves knew they wanted to buy for investment reasons, so they were disappointed.
A real estate agent showed them the building on 87th Street Parkway, and after their initial hesitation, they saw the potential the building and the surrounding area offered the business. They paid $605,000 for the property, and after some delays due to their lending, finally moved in.
Deciding on what type of commercial space to occupy and whether to lease or buy can define the overall success of a business. And in a hot market with an abundance of information available at your fingertips, choices have to be made quickly.
But those decisions don’t have to be hasty or reactive. With the proper tools and guidelines, the right space for your business is just around the corner.
Seek knowledge, not just data
In the digital age, it’s easy to get lots of information about spaces.
The democratization of technology and the desire for instant gratification makes it simpler for business owners to bypass real estate agents and go straight to the landlord.
Niki Bradshaw, managing partner of Eastbrook Properties, said that for business owners, “the world is your oyster. You can find out whatever you want.”
Eastbrook Properties is a family-owned, 26-acre mixed-use business park off Northwest Vivion Road in Kansas City. It’s 13 buildings in total, including the new Eastbrook Collaborative Work Space, which opened in November 2017.
She said owners come to her with more information but still don’t know what they want in a work facility.
“They come in more educated in terms of what’s available to them, but when it comes to understanding, they don’t want to say they don’t understand,” Bradshaw said.
As an owner with a growing business, it may be difficult to fully know what you want at the outset. Therefore, the goal is to focus on desires and not excess data.
“What are your hard stops, and what are you able to work with and get creative with?” she said.
Plan accordingly for the move(s)
Finding space, like all aspects of running a business, requires planning.
Stephanie Landis, a certified value growth adviser based in Johnson County, will walk her clients who are looking to move through their business plan, building out a projected cash flow, run rate and additional costs of doing business.
In working with those who need space, “we try to get what’s happened and where they see the next two to three years of the business—because with space, typically, comes people,” Landis said.
From there, she consults on figuring what amount of debt the business can handle or how much revenue needs to be generated to afford a lease or mortgage payment. That can determine whether it’s better to buy or rent.
But there are bigger questions that needed to be considered, Landis said. Where is your customer base? Where are your competitors? Will the businesses near your projected space help generate foot traffic and/or be profitable to raise the property value? Does the city offer business incentives?
“You can rent in Leawood or buy in Lenexa. Is that imperative to your business?” Landis said.
It’s also important to research any zoning or code restrictions. Jones had to get approval from the Lenexa City Council to change the zoning of ACB’s new building from commercial to manufacturing.
Some buildings may not be able to accommodate certain types of business activity. For that reason, Bradshaw said it’s worth looking into older buildings that may be grandfathered into.
Types of leases for small businesses
Most small businesses will sign one of three types of leases:
- A triple-net lease, which is usually for retail or single-tenant buildings. Once the base rent price is established, the tenant will pay utilities, common maintenance, taxes and insurance.
- A modified gross lease, which, depending on the agreement, includes the base rent plus some proportion of paying utilities, common maintenance, taxes and insurance. In some instances, the landlord will include an expense stop, which caps the amount the landlord will pay on a certain expenditure, like electricity. If the actual costs exceed the agreed-to amount, the tenant will be billed for the overage.
- A full-service gross lease, which is a turnkey lease. The tenant will pay one fixed price for rent and all expenditures. Most coworking and collaborative spaces offer a full-service gross lease.
Bradshaw suggests asking the landlord on what expenditure qualifies as the landlord’s responsibility or the tenant’s responsibility under a lease. For example, if the HVAC goes out, it may be up to the tenant to replace, or it may be considered a capital improvement for the landlord, which they will fix.
Most importantly, read the lease and ask questions before you sign.
“You be amazed at how many people don’t read their lease. They just sign away and they don’t know what they’re signing away to,” Bradshaw said. “Do due diligence and read your lease and read how it’s written—and if you have any questions, consult an attorney.”
Buying commercial property is a whole new ball game
For the stage of some businesses, buying may be the best option.
If you want to buy, and especially if you’ll be taking out a loan, it’s crucial to understand the process and timelines. Many business owners may think buying is similar to purchasing a home. It’s not.
“It’s a whole different ball game than buying a house,” Jones said. “I thought buying this building was like buying a house at first, but I realized it doesn’t even compare. It’s completely different.”
That’s especially the case with obtaining a loan to buy the space. Both Landis and Jones urge patience and diligence if applying for a Small Business Administration 504 partner loan. Depending on your financial situation, the bank may require additional working capital before the loan is approved.
As for finding a financial institution for your mortgage, Landis said to approach finding a banker the same way you would approach looking for space to buy.
“If you’re interviewing bankers, ask them how many deals they’ve done and how many have gone through and what was the typical turn time,” Landis said. “Knowing your banker and their level of experience with the different loan types is really important.”
Be flexible and creative in responding to business growth
Even when the lease is signed or the space is purchased, things can change quickly. Regardless of whether the business succeeds or fails, the tenant or owner is still responsible for the lease or the mortgage.
“They think they’re going to grow exponentially, and once they bite off a huge piece of property or this huge lease, they’re stuck,” Bradshaw said. “The business doesn’t always take off the way they thought it would, and they’re on the hook for it.”
The reverse can be a problem as well if the business grows quickly.
Always communicate with the landlord to see what options are available. Bradshaw said Eastbrook Properties will let its tenants move to a bigger place within it’s office park if they outgrow their current space, and if a larger space is available at the time.
Landis had a client who was unsure about renewing her lease but couldn’t find a new place. After talking with Landis, the client renegotiated the terms of her lease with the landlord.
If you do expect the business to grow in a short amount of time, a coworking or collaborative space may be a great option. In coworking facilities, there can be more flexibility in adding an open desk without having to worry about maintenance or construction costs.
“But always ask, what happens when I outgrow the space during the lease term? Could I sublet this?” Bradshaw said. “Ask those questions to make sure you know that if all the stars align and you get to where you want to be, do you have an out? Are you capable of growing? Are you capable of expanding, or are you at a hard stop with no room for flexibility for you? You need to take that into consideration.”
Jones is the first to admit buying a building was a challenge. She said that if ACB had leased the other location, it would have been crammed — and then it would be back in the position to look for more space.
“The most character-building I ever went through was buying this property, as crazy as that sounds,” Jones said. “And it’s been much more work than I thought, taking care of a commercial property.”
Jones and Beeves have been mindful of the growth of their business since the beginning, so it’s gratifying to be in a facility that fits their needs.
“I really like to play it conservative, and this forced me to take a risk because it’s good to push me in that direction—this was over the initial budget we had set, but we just — well, we feel that is really growing. So we just went for it.”
All that’s left is to change the logo on the door.