Letting premises is a rite of passage for some business owners. Make sure it’s the right move.
Starting a business is exhilarating and hard work, and for those who make it through the perilous start-up phase and enjoy early profits, it can be tempting to splash out on some fancy office space.
You deserve a great place to work, and a business has to have a good image to gain credibility right? Michelle Dickens, founder and MD of the Tenant Profile Network, offers caution though. There are things to consider then looking for rental space.
Before you get started
“A variety of functions come into play when growing businesses are looking for rental space that will suit their specific business needs. Many of these considerations – like size and location – are obvious, but there are other important questions you need to have answered before you sign a lease,” says Dickens.
But before even considering a lease, Dickens advises that small and medium businesses do their research, know their capability, and plan for the future. “Tenants need to be aware that their information is being recorded to their credit profiles, as your payment behaviour will affect your credit profile. The knock-on effects of defaulting could be expensive,” Dickens warns.
Getting your ducks in a row
You and your business
One of the first factors you need to assess is what kind of business you are. “The type of business you run will dictate the type of space you look for, as well as the services and amenities you’ll need,” says Dickens.
“As an example, a call centre operation wouldn’t need to be in an expensive and desirable CBD like Sandton. A less expensive, outlying area of the city would serve well. A call centre would also normally require a high number of staff. While they may not need as much space per person, you’d need to consider the average parking allocation – which is normally four parking bays per 100m2. So the next question would be to determine how many of your employees would use their own transport versus public transport.”
The building itself
“With today’s trend of sustainable design and engineering modern, multi-use office parks and buildings, many rental spaces can be easily adapted to suit both a range of needs and very specific requirements.
Would you need a functioning corporate office space or a high-end design showroom floor?
What kind of structural changes would need to be made to suit your needs?” says Dickens. She adds, however, that because of the adaptability of many buildings, don’t be put off by the building’s current purpose versus its potential purpose.
What needs do your employees have?
Your employees have a range of needs at work – not just how they get there and where they park their car.
“You need to ascertain who is at the work, when they’re at work, and what facilities will be required. Do you have many visitors coming and going from your workplace, or do you perhaps have a need to host seminars? Even occasional training sessions could require, for example, 50 parking bays to be available over the period.
If you’re not just accommodating for permanent employees and are making provisions for expected visitors to your building, you need to clarify who these visitors are and what their needs will be,” says Dickens. “Again, if you’re going to take up offices in Sandton’s CBD for example, you should expect regular traffic gridlock. This means you’d need to time your events carefully and be flexible with staff when traffic is an issue.”
Who are your neighbours?
How will your business be affected by association? “If you have a high-end clientele, you may not want to be situated next to, say, a strip club,” says Dickens. “Their brand will essentially accent yours so make sure you’re in agreement with the neighbouring companies and their visions, as your company will be affected by perceptions of theirs,” Dickens explains.
“Another point to take into consideration is the type of work your neighbours are doing: If you are a busy call centre and require silence for effective telecommunications, it would not be ideal to be placed next to a car workshop where a variety of heavy machinery sounds throughout the working day would create a noise disturbance.”
On the up-side, being placed around certain businesses could be a benefit to you and provide opportunity for networking, partnerships and collaborations.
What grade of building do you require?
Buildings are graded based on their level of amenities and this will affect your rental figure. For example, a Premier (P-graded) office space, which would be suitable for businesses that need to accommodate blue-chip clientele regularly, would have high-end features and finishes, ample parking, a plusher aesthetic and other lavish ‘extras’.
“You would be likely to pay around R170 to R185 per meter squared in a P-grade office in Sandton CBD,” estimates Dickens.
Grade B office spaces (generally older but refurbished offices), however, would include just the basic amenities needed for a mid-level corporate operation. Facilities such as standard level air-conditioning, parking bay allocation and security would be provided as part of your agreement.
“For example, a B-graded office in Rivonia’s business district – still a Sandton area- will probably cost about R110per meter squared,” Dickens continues.
What are your operating costs?
If there are other companies in the same building as you, service elements such as cleaning staff and security personnel will most likely be a shared cost based on the proportion of the business space your company takes up.
If you take up 50% of the building you will pay 50% of this cost. “Parking costs also needs to be considered and again they are graded and priced by standard: Open bays, covered bays and basement parking bays,” says Dickens. “Costs of utilities like electricity, water, rates and taxes will depend on your participation quota in that particular establishment.
You should calculate the percentage you will take on directly linked to how much of the total space you are renting. If you are not being placed in a separately metred environment (based on your participation quota) this could lead to issues, especially if your neighbour is running an atom-based science lab and you’re operating on one computer.”
What licencing does the building have?
If you are opening a restaurant or nightclub, for example, it will be essential for the building to have a liquor licence in order for you to run effectively. If you are informed that the building is fully licenced, make sure you know the current and up-to-date status of the particular licence that will be relevant to you, as often buildings lose these licences for a number of reasons.
“If the licences aren’t in place you need to understand what the process of applying for them yourself will entail. Keep in mind that bureaucracy and red-tape involved can make approval processes long and costly,” cautions Dickens.
Will you need to accommodate for growth in the future?
It’s preferable not to move your business, so the answer to providing for growth is not a shorter lease. Another argument against moving too often is that it can affect your tenant installation, a monetary amount allocated to you by your agent on signing your lease, which will cover the setup and personalisation of the space to suit your particular business needs.
“This is dependent on the length of your lease: A five-year lease will get a higher installation package than a three year lease. But you then need to consider where you’ll be in five years,” warns Dickens.
“Some businesses, such as a standardised franchise operation, would not necessarily grow and increase staff members. However, if a contract based business, such as a software development company, lands a big contract and as a result employs more developers on-site, they will need to have extra space readily available.”
Do you properly understand the terms of your lease agreement?
“The biggest difference of commercial leases to residential leases is that companies, with the exception sole-proprietors bringing in under R 2 million per annum, do not qualify for protections such as the Consumer Protection Act (CPA), and as such the implications of contract breach are far greater,” says Dickens.
“This means that you have to be 100% sure of what you’re signing into and make sure you understand the conditions of your contract – you will be held accountable for any non-compliance and, depending on the length and terms of your lease, the costs of non-compliance could run into the millions.”
Dickens says that a common contractual clause that you should look out for is the relocation agreement, whereby the landlord is given the right to relocate you if they are refurbishing or decide to sell the building.
“Relocation is common in large retail environments where tenants may be moved to a completely different environment with little or no notice. For a retail store, the consequences of this can be devastating for your business, but the centre owners are often completely within their rights.”
What about hidden costs?
“There is really no such thing as a ‘hidden’ cost – all of the information you’ll need is available and being aware of all factors is the ultimate responsibility of the tenant,” says Dickens. The rental figure quoted will unlikely include Vat – that’s another 14% of the monthly costs on top of the number you’re given.
Some agents will also require up to six months’ deposit upfront as part of the agreement. For these reasons, it’s never advisable to accept a rental figure based on your maximum spend or projected profit: If you for some reason aren’t able to access the full amount you will find it difficult to cover all of your rental costs,” Dickens conclude.