Leasing space in Orange County

Once you have your business concept, you may need to lease space.  If your business is to be taken seriously, you need a real business address.  With all the internet mapping software, people can see if you are doing business out of your house or apartment.  The old strategy of renting a box at a postal store and re-naming it as Office 162 instead of P.O. Box 162 does not work any more.  Potential customers will look up your address on the net and think you are a fly-by-night operator.  Also, you may not want people coming by your home during dinner to discuss a return or dispute a credit card charge.  Again, nobody will take you seriously if you are working out of your condo.

You need to find an actual business location.  It doesn’t have to be the best location in town, just some commercial building so that people can say you are a legit business.  One way to do this is to drive around town and look at all the nice Available banners and signs.  But there are smarter ways to do this.

  • In many cases, it makes sense to go through a commercial real estate agent.  Look for someone with experience leasing commercial space.  You will not pay them directly; they will be working on a commission from the landlord.  Typically a percentage of the total rent that will be paid for the lease term.  That’s good and bad at the same time.  It means there is not money out of your pocket; but there is an incentive for them to steer you for more expensive properties and lock you into a long-term lease.  Also, many individual landlords are cheap and are not willing to pay commissions on their rentals.  And some property managers may increase the commission if they are having problems renting.  Hence encouraging agents to bring clients to less desirable buildings.  Although ethically, the agent should show you the building that is best for you, it is hard to say if all agents are as ethical as they can be.

Know what you need  If you don’t have a typical business, before you contact an agent, it might be a good idea to find out what you need.  Describe your business, and first check with the cities you are looking at what type of zoning you need.  Call the city and ask to speak to someone in planning.  Describe your business and ask what type of zoning you need.  They will give you a code consisting of a letter (usually B or C) and a number (usually 1-3).  Also ask if your business would require any special or conditional permits; and if so what is involved in getting the permits.  Sometimes these are approved on a case by case basis.  Try to feel out the planner for how likely it is to go through.  It might be the case that a special or conditional permit could be approved in theory, but it is never going to happen in reality.  Another thing to consider is that the city may require site improvements to grant a special permit.  As the tenant, you would be asked to pay these costs.  Zoning is similar from city to city but there may be differences.

Although all cities say they are business friendly, Anaheim has had the best reputation for inexpensive licenses and reasonably straightforward approval.

You can use this information when searching for a location.  Ask the landlord or her agent if it is zoned __.  If you sign a lease and discover that you cannot run your business in that location or that you have to go through a planning process that could take months, you end up paying rent and insurance on an empty building.

If you are dealing with retail customers, you also want to make sure that the building is ADA approved.  ADA stands for the American with Disability’s Act.  Basically, it means that a disabled person should be able to have access to your business or that you can make some sort of reasonable accommodation for them.  As the business owner this responsibility falls on you.  Make sure your insurance policy covers ADA lawsuits.  Apparently there are attorneys who drive around town and find the slightest violations.  Unlike most other regulations the ADA is enforced by private party lawsuits.  Firms specialize in sending demand letters for thousands of dollars if there is a violation.  Since this is not a legal site and we are not attorneys we will not give any legal advice other than it is a good idea to have insurance.  For instance, a business in Anaheim was sued because the signs on their disabled parking spaces were 4 inches too low.  Since it is impossible to be in 100% compliance or even know what that is, it is best to make sure you have insurance or a few thousand dollars in cash reserves to cover this expense.  Welcome to California.

The next thing you need to consider is the building type.  This distinction does not necessarily correspond to regulations, and there are many spaces that are in one category and on the cusp of another.  For instance a supplier to contractors may do business out of a warehouse.  Contractors will call in their order and don’t care if the floors have been waxed or street visibility.  It’s like retail sales, but they don’t need to pay for expensive retail space.

Rent what you need.  The point is, don’t waste your time trying to fit a square peg into a round hole.  For instance, if you want to open a beauty salon or dog grooming in inexpensive office space you are wasting your time.  Generally it’s not practical to convert office space into retail space.  And yes people try to do that.  But in commercial leases there is a use of premises clause where you and the landlord agree on what you will do in the space.  You cannot just rent space and then decide on a business plan.

Be Honest. On the application be explicit about what you will be using the space for. If you misrepresent your business use, you will pay the cost. It’s not like an apartment where they will not kick you out because of your lifestyle. You can be evicted, and pay the cost of eviction, if you lie about how you will use the space.  If you tell your landlord you will be selling insurance and then you do massage therapy in your office, you will be evicted and have to pay for the landlord’s attorney fees and most likely pay the rent on your empty office, which you have been locked out of, for the remainder of your lease.

Types of space include:
Office Space —it’s just that.  Space for doing office work.  This is usually the least expensive type of real estate.  Generally it is suited to businesses that do not have a lot of customers coming in off the street.  It used to be that retail was excluded from office space, but now with the internet; most customers may never step inside your building.

Medical Office This is where you will find doctors, dentists and other medical professionals.  Suites typically have a waiting area, in suite restroom, running hot and cold water inside exam rooms, and upgraded electrical ( at least 100 amps 3 phase service) for medical equipment.  Generally they have more electric power going into them for equipment.

Office Motels/Virtual Office This might be a good option for the credit challenged renter or to meet a short-term need such as hiring cast members for the circus coming to town.  But, as discussed above people will do an internet search on your address to see if you are legit and the ad for the “office by the day” building will come up.  Also, they can get expensive if you need to rent for more that a few days a month.

Warehouse/office Space These consist of a small office area and a large interior space.  They often have large roll up doors for loading and unloading.

Office/Retail Space also called Retail/Office.  This is generally retail space where a few customers may come into an office type environment.  Street visibility, signage and easy parking are important.  Often cheaper than high quality retail space.

Retail Space Think of this as where people can shop.

Light Industrial Light assembly work, soldering  …

Industrial Space self explanatory

Storage Space self explanatory

Special Purpose Space This is a catch-all for everything else.  It can include boarding houses, properties with facilities for boarding animals  …

Artist’s Loft Space Most cities do not allow you to live in any space that is not zoned residential.  Some cities allow people in the arts to live and work in the same space.  That’s because they are afraid that the spaces will be turned into a sum area with tenants paying low rents–and the problems associated with people who cannot afford a real apartment.  So lofts tend to be expensive, and for artists to keep out the rift-raft.  These are called Live/Work Lofts.   Santa Ana has allowed these buildings in.  For example Artist Place in Santa Ana, City Place in Santa Ana, Olson Lofts in Santa Ana, and Santiago Street Lofts in Santa Ana, Depot Walk in Orange, Cannery Lofts in Newport Beach (3,000 sq ft and on the water), Central Park West’s Maxfield & Central Park West’s Granville in Irvine near the Great Park, SoCo Lofts in Fullerton, South Brea Lofts and Downtown Collection Lofts in Brea, Harbor Lofts & Stadium Lofts near the Big A in Anaheim, Vantis Latitude North and Vantis View/CityWalk in Alisa Viejo, Prospect Village in Tustin.  If you want to see photos and get a general idea check out the website OCLoftGuide http://www.ocloftguide.com  This is a real estate company that specializes in Live/Work Lofts.  You can also go through your own real estate agent.  Your best deals may be renting from an owner rather than buying from a developer.

The only Live/retail/Art area we know about is Old World Village in Huntington Beach.  It’s a condo complex with living space above and retail below.  It started out as a German themed shopping center, but now it’s a more eclectic group of tenants.  And some stores are used as apartments only.

 Q Why not just use my office or warehouse as an apartment?: I don’t need a kitchen, so if I rent an office and sleep in it that’s okay as long as I pay the rent.  Right?  Wrong You might save some money, but if your landlord finds out he will have to evict you and that eviction will go on your record.  Also you will have to pay legal fees which at a minimum are $1,200 for a commercial eviction.  And If the city finds out, you could get a citation and you will have to pay a large fine.  If you don’t pay that fine, you might end up in jail.  Also the eviction judgement and city fines and unpaid back rent will mess up your criminal and credit history for years.

So, for the couple hundred bucks you save, you will give up an opportunity to get a good job in the future, rent an apartment in the future, and be able to buy a car or get a credit card in the future???  Make sure that the city says you can live in the rental unit before you move in and make sure it states in your rental agreement that you can live in the rental unit.  Be careful, even if the manager says it’s okay to live in a commercial building, check with the city to make sure it’s okay.  As a tenant using space for an unapproved use, you will pay the price.

Yes, there is a guy who wrote a book and blog about how he lives in office space.  But we know of a couple of people who have totally messed up their credit, and ended up moving back home to live with their parents.  There are probably thousands of people like that all across america, but a book titled “how I F####  UP My Life by Lying to my Building Manager: a guide to going nowhere in life” just will not sell, so it has not been published.  If you want to save a few bucks, just move in with mom.

Site Selection for retail businesses

What many people do is identify your ideal customer.   You can use data from the census to locate your ideal demographic — age, family size, income levels, education levels, and ethnic background.  See our section on writing a business plan for more information.  Screen potential locations for easy access to your ideal demographic.  The demographics are from the US Census, and they have obvious drawbacks.  You are interested in people who will be around your building rather than people who live around your building.  A good example is South Coast Plaza.  It’s surrounded by houses, condos and apartments of the middle class in an area that real estate agents have dubbed South Coast Metro—which I guess sounds better than Santa Ana/Costa Mesa to some people.  But high income shoppers come off the 405 and work in near by office towers.  The office workers would be missed by the census data as it focuses on where people live.

The next step is to scope out available locations.  Be sure to visit during different times of the day and days of the week.  When you find one that’s interesting, park your car in that location and observe what’s going on.  If you are in a retail business, you want to see if a lot of cars are coming in and out of the center.  Think about who else is in the center.  A store that pulls customers into a center is called the anchor tenant.   For instance, people may go the the supermarket, and while shopping the kids may visit the pet shop.  On the way out, you might visit the mail center.  The basic idea is that it’s easier for potential customers to make it into your store if they are already in your parking lot then if they are driving by at 50 mph.  A supermarket is a great anchor tenant.  People go shopping about once a week so you have a different crowd every day.  A gym may not be such a great co-tenant.  Their clients tend to be focused on their work out and use a lot of parking.  after their workout they go home.

Walk around the nearby centers.  See if there is the same type of business nearby.  You can also search for competitors on google maps, but not every business will come up.  Your real estate agent may not know about a similar business around the corner.  But competition  may or may not be a bad thing for your business.  For instance, clusters of restaurants or bars are successful.  People may go to the location because there are a lot of cool places to choose from.  And one business may pick up the overflow from the other.  Also people may want to comparison shop.  Examples of this might include the auto-mall or clusters of restaurants.  It all depends on your business.

Next drive by.  Being on a busy road may be good or bad.  If cars travel at a high speed and lanes are congested, your potential customers are focused on accident avoidance and may not notice your sign.  Making a left into your center may be a hustle.  And there may be competing businesses a few minutes away.

Helpful Rental Sites

www.loopnet.com this site is the MLS for commercial rentals.  Agents, managers, and owners list on this site.  It gives you demographics, from census data, and allows for easy comparison shopping.  You can search in a map, by price range, and type of building.  If you are serious about starting a business, it is worth the money to become a basic member for a month or two so you can search all the ads.  Even if you are working with an agent, it’s helpful to educate yourself before your get talked into something you don’t want.  And since it is a pay site, you do not have the same issues with craigslist–multiple postings of the same unit, having to search through thousands of irrelevant ads, and scamsters.

www.Craigslist.org can also be a helpful tool.  Many properties managers only post on craigslist because it’s free and it generates a lot of calls.  But it is just a list.  You can no longer search by area because many ads include a list of all cities so they will show up in searches.  Also there are multiple posters who post many times a day so their ad will stay on top.  So when you do a search, you end up with pages of the same ad.  There are companies that allow people to get around all of Craig’s restrictions.  Additionally, many posters don’t know how to remove their ad.

 

Google Searches or as marketers call it organic results.  Search google with terms like “space for lease” in “city name” and a lot of results will pop up.  You can do a focused search on google maps.

==> Beware of “free” listings services on the internet  These are listing services that offer “free” search and “free” listings and generally have a phone number.  Be careful of anything that’s free on the internet.  (1) Don’t provide contact info.  Sites make money by getting you on a marketing list that could be sold off to other companies.  And by steering traffic to certain buildings.   Be sure to ask to negotiate with the building manager directly.  Generally, the service or their agent are not licensed real estate agents and cannot negotiate on your behalf or on behalf of the building owner.

Shoe Leather It seems old fashion, but a lot of stuff just doesn’t show up on the net.  Stuff has been on the market so long that the listings have expired, and some old fashion Real Estate Agents are relying on their own websites which don’t show up on the first few pages of a search.   If you know the approximate location you want to locate in, look for those AVAILABLE signs.  Be sure to make notes of what else is in the location.  You can get a great deal if you are the only one who has called in a month.  The owner may not understand that her listing was lost in space.

Commercial real estate agents will have access to better organized listings.

Rental Rates–How much will you really pay?  

Unlike your apartment where the landlord will typically make it move-in ready, as a tenant in commercial space you are just renting four walls and the space in between.  If you need to upgrade the electrical, install new flooring or do most interior improvements, you pay for these things after you have signed the lease.  The time to negotiate with the landlord is before you sign the lease.  The industry uses terms like improvement allowance or participation as code for the landlord will pay part of the costs of your improvement.  And in some cases, the landlord may be under contractual restrictions with her lender regarding minimum rent/sq foot she can charge.  As rents have gone down in the past few years more and more newer buildings are encountering these restrictions.  But the landlord may be able to make concessions such as new flooring, bathroom upgrades, paint, sign faces.  The key point is to look at all the costs of moving in—the deposit, rent, necessary upgrades and compare before you sign your lease.

The rent or retail space will be typically quoted as Net, triple-net, NNN, or Net-Net-Net.  What this means in English is that they are quoting the base or minimum rent.  You will have to pay extra rent to cover the buildings expenses—property tax, insurance, security, plants in the parking lot.  Most lease give a bit of latitude for the landlord or her management company to spend your money this way.  For instance, a tenant who had a printing shop I know noticed that the new management company was painting the building, re doing the parking lot, installing new signs, and doing a lot of landscaping.  It looked great and although it did not bring in any extra customers most of the tenants were happy with the improvements—until the costs started showing up on the statement.  Another issue you should be aware of is that a lot of local governments are talking about adding on special assessments for things like school spending, sewer line upgrades, landscaping in the street…  You as the business owner will end up paying this.  So the point is that the rent you see quoted is often the base rent.  Ask about what the CAM fees are.  Also ask what happens if the other businesses default on their leases.  Will the remaining tenants end up paying a higher percentage of the expenses as the rented area of the building decreases?

Some leases in large shopping centers charge a percentage of total sales as rent.  This is good because it aligns the interest f the property manager and the retail tenant. The management company will have an incentive to get more people into the store.  For smaller centers this is not commonly used because verifying actual sales can be challenging.

Office tenants will also pay CAM fees.  But since the office market is so competitive, be sure to negotiate a limit on these.

Term of the Lease As a person opening a new business, this is very important.  You will be paying the rent for the term of the lease whether or not you are open.  You don’t want to hear this, but most small businesses close within five years.  The landlord and her real estate agents have an incentive to lock you into a long term lease.  For the landlord it means assured rent for a longer period of time, and for her agents it means a larger commission.  She may be willing to give you a reduction in the rental rate.  You on the other hand need an out if the business is not making it.  This is a negotiation point which may be more important than the rent, and there is no easy rule-of-thumb in terms of what is the best option for you.

What you are interested in is flexibility.  Ask for a shorter lease term with “options.”  For instance, a one year lease with an option to renew for and additional year after that, and an additional two years after the first option would be better than a four year lease.  Maybe after a year and defiantly after the second year you will know if it is working out. If not, you just write a letter stating “I regret to inform you that I decline to exercise the upcoming option.”  Be sure to read this part of the lease carefully and to mark your calendar with all the relevant dates.

Ask for a regulatory denial early termination clause.  If you are working with an agent, she will not be too enthusiastic about such a clause because she will have to return her commission to the landlord.  But you have to be realistic.  Even if you or your agent has a soft approval from the local government, that doesn’t mean it will go through.  The person answering the phone may have thought they were answering general questions, or may have misunderstood you business plans.  Or the planning office may have been super busy when you called and unbeknownst to you, you were talking to a junior staffer or an intern.  The clause should state that if you are denied permits in a reasonable amount of time, say 90-120 days, you will be pay the full rent for that period even if you had a free rent period.  But you can terminate the lease and walk away with the deposit you put down.

Exclusivity If you are renting in a large center, make sure that you have an exclusive right to sell your product.  The rub is that the listing agent may want to describe your product very specifically.  For instance you have the exclusive right to sell New York Pizza.  You may find new tenants moving in selling tacos, burgers, and Chicago style Pizza.  You should try to get exclusive rights as general as possible.  For instance, restaurants that sells meals for less than $20.  In many cases, it may not hurt you if there is a similar business next door.  If you are a real estate agent, most of you work will be done out of the office, and if you are a nicer restaurant, a grouping of nicer restaurants may pull more total people into the center than an isolated stand alone restaurant would generate by itself.

Sub-letting and co-tenants See if your lease allows you to rent part of your space to someone else  (virtually all agreements explicitly prevent the tenant from subletting).  There are a lot of businesses that seem to work good together because they tend to have the same customer base.  You may not know anything about the other business, so you can let someone else set up shop in part of your space.

One thing you do not want to think about is if you don’t make it, can you sublet your space to someone else.  That way they can cover part of your rent until the lease is up.  Generally, the landlord likes to be in control of who is occupying the building sot this is forbidden in the lease.

Application and Approval

I’ve Got the Cash, so what’s the big deal with an application?  Virtually nobody rents on the spot for cash, and if they do it’s probably a scam.  The deal is that this is this is California, where it takes at least $1,200 to get started on a commercial eviction and an eviction could drag on for months.  Rental agents tend to lose their listings (jobs) if they rent to people who cost the landlord a lot of money.  So they would rather not deal with you if you might be a problem.  Unlike residential real estate, tenants have limited “rights.”  But the legal process is slow and costly.  because of this it’s hard to get into a place even if you have the money to pay for it.  Your ability to pay is just one factor.

The landlord is interested in a number of issues.  First and foremost, do you have the ability to pay the rent.  Most landlords will consider your personal credit information.  And unless you are a well established company, somewhere in the rental agreement there will be a personal liability clause–basically you are ultimately responsible for the rent.  If you seem Evasive in any way about your identity, this sets off a big RED FLAG and most landlords will simply just throw you application in the trash.  Things to avoid

(1) Name.  This seems like the most easy question on the application form.  Using multiple names–they will show up on the credit report–sets off a red flag.  If you have changed your name (for instance a change marital status or you were give a foreign name that nobody can pronounce, so now you use an American name.) , let the rental agent know.  Your name needs to match your SSN and your birth date.

(2) Avoid trying to use somebody elses credit.  “I’m putting the business in my friend’s name.” or ” I’m using a personal name and my corporate Tax ID number” or “I’m doing this business with my wife, but we don’t want you to check my credit.”   All of these are RED FLAGS.

(3) You need a credit check/cour record check. Most Rental Agents have heard applicants try to get out of this.  “Don’t run my credit…I am buying a house and I am worried about my FICO score.”  “I don’t want my cred run for amounts less than $1,000.” or “You don’t need to run my credit, I have my report from a website or I have a copy of my Credit Report.”  Yes, even rental agents have heard of photoshop.

(4) Cash in Advance “I can pay you cash in advance for several months if I can move in today.”  Although some less experienced agents might go for this, this indicates that you are desperate to get in.  The implication is that you are being kicked out of your current place.  Also, it indicates you want to skip the credit/criminal background check.  Perhaps there is a reason for that.  Additionally, the you may believe you cannot get kicked out if you have prepaid rent.  Again there might be a reason.

1-3 above are great ways to spin your wheels and waste a lot of time and money on application fees.  Just be honest.  In today’s world, the rental agent will have a copy of your credit, names you have used, your criminal background, and court records that indicate if you have been evicted, you are a serial litigator, or are involved with the criminal justice system (that is you’ve been convicted of a crime.)  And, many rental agents also have a service that alerts them to the fact that you may have been using multiple names.

Just be upfront and admit you have had problems in the past.  Some Rental Agents will be willing to work with you–by allowing a co-signer or you to make an extra deposit–while others will not.  But if it looks like you’re hiding something, don’t expect a call back.

Personal Reference  If this is checked, it’s checked after the credit/eviction/criminal background check.  Everyone has at least one friend, so the fact that you have a good personal reference is not a big deal.  The real reason it’s on most applications is so that if you skip out on rent, the person collecting the judgement can call the reference and ask where they can find you.

The Question At some point, the rental agent will ask you something like “what business are you in?”  Have a clear answer.  You rent space for a specific business.  The rental agent wants to make sure you have a reason to rent the space and that you will not conflict with other tenants.  For instance, a good answer would be “My wife and I need an office to sell travel insurance.  We might get another employee down the road.”  A not so good answer might be “we like the space, and like, we might sell stuff or just hang out.”

As it says in the FAQ’s we’re not legal experts and reading free stuff on the internet is not a substitute for real legal or professional advice.  Seek out an attorney or professional real estate agent to protect your interest.  A lease can be a hard thing to break.

It would be nice to recommend some recent books with relevant information to our area.  But there are none.  Three good books which cover the subject are:

Don’t let the publication dates scare you off, not much has changed in the past twenty years.

 

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