26 Aug 2013
Before signing a lease, small to medium enterprises (SMEs) need to do their research, know their requirements, and plan for the future.
This is according to Michelle Dickens, Founder and Managing Director of the Tenant Profile Network (TPN), who says tenants need to be aware that their information is being recorded to their credit profiles. She says your payment behaviour will affect your credit profile and the knock-on effects of defaulting could be extensive.
A variety of functions come into play when SMEs are looking for rental space that will suit their specific business needs. Many of these considerations, such as size and location, are obvious. However, as Dickens points out, there are other important questions you need to have answered before you sign into a lease.
What type of company are you?
The type of business you run will dictate the type of space you look for, as well as the services and amenities you need.
Dickens says a call centre operation will normally require a high number of staff who will take up a small space per person. In this case, she says you’d have to consider that the average parking allocation is normally four parking bays per 100 square metres. She says the next question should be what type of employee you have – do they use public transport or do they drive their own cars? “A call centre also wouldn’t require premises in the costly Sandton CBD, however, you would look at outlying areas such as Midrand in Johannesburg.”
The trend toward sustainable design and engineering of modern, multi-use office parks and buildings means that many spaces can be easily adapted to suit a wide variety of specific requirements. A building could be adapted from a central distribution centre to anything from a functioning corporate office space to a high-end design showroom floor, with minimal heavy rebuilding or structural changes.
Find out if the space you are looking at was built with this type of flexibility, and depending on the extent of changes you would require to be made, don’t let the immediate function of the building overshadow its potential functions.
What type of employees do you have?
You then need to ascertain who is at 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 are not just accommodating 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.
If you’re going to take up offices in Sandton’s CBD for example, you should expect regular traffic gridlocks. Again, the type of employee and visitor you’re accommodating can affect this. what type of transport do your employees use, public transport, or their own cars? What are their necessary working hours? If you’re able to be flexible then traffic is less of an issue.
Who are your neighbours?
How will your business be affected by association? Dickens says if you have a high-end clientele, you may not want to be situated next to, say, a strip club. He says 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 the perceptions of others.
“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.
Dickens says you would be likely to pay around R170 to R185 per square metre in a P-grade office in Sandton CBD.
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 in the Sandton area, will probably cost about R110 per square metres.”
What are your operating costs?
If there are other companies in the same building as you, service elements such as cleaning staff and security personal will most likely be a shared cost, based on the proportion of the business space your company takes up. If you take up 50 percent of the building you will pay 50 percent of this cost.
Dickens says parking costs also need to be considered and again, they are graded and priced by standard – open bays, covered bays and basement parking bays.
“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 licensing does the building have?
If you’re 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 licensed, 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 due to 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.
Will you need to accommodate for growth in the future?
It is 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.
Dickens says this is dependent on the length of your lease. She says 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, she says.
“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 understand the terms of your lease agreement?
The biggest difference between commercial leases and residential leases is that companies, with the exception of sole proprietors, bringing in under R2 million per annum, do not qualify for protection such as the Consumer Protection Act (CPA), and as such the implications of contract breach are far greater, says Dickens.
She says this means that you have to be 100 percent 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.
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.
Dickens says there is really no such thing as a ‘hidden’ cost – all of the information you’ll need is available and being aware of all the factors is the ultimate responsibility of the tenant.
The rental figure quoted will unlikely include VAT- that’s another 14 percent 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 is never advisable to accept a rental figure based on your maximum spend or projected profits - 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.
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