Friday, October 5, 2007

New Business Rent or Own?

Two of the most common problems commercial real estate professionals experience when dealing with small businesses are:


(1) An unrealistic time frames, and


(2) Lack of capital.


from Commercial Investment Real Estate, March-April 2006


"In 2004, 99.9% of approximately 24.7 million U.S. businesses had fewer than 500 employees, qualifying as small businesses, according to estimates from the Small Business Administration's Office of Advocacy.


This growing sector presents numerous new business opportunities.
Small-business owners only face decisions about space needs once every 3 to 10 years. This lack of experience and market knowledge means that small-business owners need as much guidance as possible from commercial real estate professionals when making their property decisions.


Making Decisions


One of the most important decisions the small-business owner will make:
whether to rent or own property. While full-scale lease-or-buy analyses are complicated and detailed, there are some preliminary steps commercial real estate professionals can take with clients. The decision to lease or own cannot be made until the business stage of development is determined. Strategy is driven mostly by whether the tenant is in a growth phase, characterized by expansion options and/or a relatively short-term lease, or a mature phase, characterized by a long-term lease and possible candidacy for owning. Buying too big of a building or leasing too much space for too long of a term has been the death of many small businesses.


While condominiums are a good option for some small companies, others might find that building their own property seems like the best choice.
Some small businesses] tend to want to leave a legacy. They want to construct a facility that will perhaps turn into an investment for a son, daughter, or grandchild. Sometimes it's not much of a choice, if a tenant cannot get financing to buy its own property.


Negotiating Leases

While buying or building potentially can provide future security for a small business, leasing has advantages as well. Renting rather than owning a property allows small businesses more flexibility as they grow.
Small-business owners are entrepreneurs who always have visions of growth. The challenge is finding space, negotiating a lease, and finding a building that has expansion capabilities and that can accommodate their vision.
When the right rental space has been located, more choices need to be made regarding the lease type and terms. More often than in the case of larger companies, small-business owners want endless expansion, renewal, and relocation rights. Many start-up companies are fairly conservative with leasing space. This is due to a certain degree of financial uncertainty and growth plans. This means it is important to negotiate for expansion options and contraction clauses in the leases."
Another option, which can be espe-cially beneficial for start-up businesses, are step-up leases. The tenant pays a lower amount of rent in the first portion of the lease with the rent increasing over the latter portion of the lease. This helps keep the initial costs low, helping with potential cash flow issues.


It is important to consider small businesses' long-term goals as well.
Sometimes rental rates rise above what tenants can afford to pay and companies that once had been thriving are forced to close down." for more information see www.houstonrealtyadvisors.net or www.houstonrealtyadvisor.com