Look before you lease.

REAL ESTATE PROFESSIONALS OFTEN SAY THE three most important factors in choosing a business space are location, location and location. For certain types of businesses, this may be true. But for others, things like cost, style and tech readiness of a building are at the top of the list.

Whatever the requirements, finding a facility is essential to starting a business. Whether uptown, downtown or even in your home, every operation should have a space from which to sell its products and/or services. While choosing an outside location may appear to be easy, it's a very structured and time-consuming process. If not handled properly, it can be the death knell of your business.

For most start-up firms, selecting a site boils down to dollars and cents. Few businesses have a budget big enough to purchase a building, so nearly all new enterprises start out in a leased space. Many businesses prefer to lease quarters throughout the entire life of the business because it allows them to move once their space needs change.

Some small businesses also consider subleasing, a situation in which an existing tenant will lease part of his or her space to another tenant. For example, if Company A has leased 30,000 sq. ft. of space--the measurement by which commercial space is priced--but only uses half of the area, Company A may lease the remaining 15,000 sq. ft. to Company B. Subleased space is often offered at a discount, sometimes $5-$10 less per sq. ft. than the going rate. This type of arrangement also cuts costs in outfitting your area because most subleased space already contains furniture and other office equipment.

Whether you choose to lease or sublease, commercial real estate is going to cost you. Like a roller coaster ride, prices over the last couple of years have gone up and down and up again. Currently, major metropolitan areas such as New York City, Chicago and Los Angeles are experiencing a boom in the real estate market. Vacancy rates are low and rental rates are high. "There are buildings now that are 100% leased [in New York]," says Elizabeth Martin, president of E.L. Martin & Co., Inc., a commercial real estate firm in Manhattan. "Then you have buildings that in the past couple of months have upped their prices by $5 and $6 per sq. ft.," she says. This is good news for landlords, but bad news for business owners in search of space.

Matching your budget to a location that works well for your business can be difficult, but it is not impossible. However, it requires more than just combing through the classifieds. Before you put on your walking shoes and start your search, first assess your needs. Ask yourself a few questions: What can I afford? How much space do I need? Do I want my office in the city or the suburbs? Is it important to be near my competitors, clients/suppliers and/or staff? What type of building do I want? Do I want to lease, sublease, buy or participate in a shared co-op? Answers to these questions will help you narrow your search and save you the time of looking at buildings that don't suit your needs.

While you can go it alone in your search for space, it is recommended that you work with a commercial real estate agent/broker. "The broker has access to data in terms of demographics, income in the neighborhood and traffic flow. He or she can also assist you with negotiation of the lease," says Wiley Sturns, president of Consolidated Realty Board, a subsidiary of the National Association of Real Estate Brokers in Los Angeles.

You will also want to work with an architect to help with the build-out or renovation of your space. Most spaces, particularly in retail, come as a plain vanilla shell. You have to design it to fit the needs of your business.

Once negotiations of the space start and leases are drawn, hire a commercial real estate attorney (not a general practitioner) to review the agreements. "It's extremely important that you get somebody who knows the ins and outs of real estate law because it's not like regular law," says Donn Raabe, director of member services for the Commercial Investment Real Estate Institute, a Chicago-based organization that offers certification in commercial and investment real estate. "There are distinctions within each community and state that you need to be aware of," he says. Commercial real estate attorneys charge by the hour. Fees vary but can run as high as $200-$300 per hour.

There's no standard length of time for finding a facility. Each case is different. However, depending on the complexity and size of the business, negotiating a lease and closing a deal can take anywhere from a few weeks to several months. If your build-out is extensive, it can take several months before your space is operational.

SUBURBS OR CITY? ASSESSING YOUR NEEDS

Perhaps the biggest part of your search will be determining what you can afford. Devise a budget to include all expenses related to your space. Keep in mind the rental rate is not your only expense. You must also consider cost for the security deposit, real estate taxes and various operating expenses. For retail businesses such as restaurants, operating costs can be especially high. For example, all restaurants must have proper ventilation.

In New York, for instance, the ventilation in restaurants runs along the sides of buildings and onto the roof. From scratch, each story can run about $10,000 just to vent. If you're looking to locate in a building with 40 or 50 stories, that can be a significant cost that goes well beyond your monthly note.

The cost of commercial space varies according to a number of factors including location and type of building. However, in most major cities, there are average prices for four classes of space.

Class A buildings run anywhere from $30-$65 per sq. ft., with the average at $43-$44 per sq. ft. These buildings are the creme de la creme of sites. They are situated in prime locations, have excellent amenities such as indoor restaurants, concierge and messenger services and secured access to the building 24 hours a day, seven days a week. These buildings are also equipped with the latest technology, including integrated services digital network (ISDN) lines, which support advanced computer capabilities.

Class B buildings can range from $27-$35 per sq. ft. These buildings tend to be older and are often located on a side street. They also have fewer extras.

The rate for Class C buildings runs $18-$25 per sq. ft. This space is less convenient and tends to be a few miles away from the central business district. Class C buildings also have limited access and fewer technological advances.

Class D spaces, which range from about $10-$11 per square foot, are at the bottom of the list in terms of extras. These buildings are generally occupied by manufacturing companies.

After creating your budget, determine where you want to locate your business. Get a sense of where your competitors and suppliers are and decide if you want to be among them. Also think about your clients' location and staff and whether you want to be in the city or suburbs. Rental rates are cheaper in some suburbs, but a drawback can be a longer commute for staff and customers who may live in the city.

Byron Stewart, owner of Modus Inc. Architects in New Orleans, operated his business from a residential community for seven years before moving to the city. In search of greater access to clients, he leased 1,500 sq. ft. of space in the central business district last July. "The problem with being remotely located in the suburbs is if you are a service-oriented business, you have a lot of traveling to do," says Stewart, whose customers include public schools, casinos and airports. "So I looked for an area where I would be closer to my vendors and clients," he says. Average cost per square foot in the central business district of New Orleans ranges from $8-$15.

THE HUNT IS ON: CONDUCTING YOUR SEARCH

In many ways, shopping for space is a lot like apartment hunting. You start with a budget, decide what type of space you want and then use a broker to help with your search.

Real estate brokers understand the nuances of the business and are able to get you a deal you can afford. "A tenant will come to me with a budget, saying they can spend no more than $30 or $35 a foot. I go through the process of selecting buildings that will meet their criteria and then put together a space showing," says Martin, whose firm did $5 million in transactions last year (her commission was 3%-5%).

When working with a broker, offer as much information as possible about the type of space you want. "Decide if you want an older building or a newer building or an art deco building versus the contemporary style because those are very different searches," Martin explains. "If you told me you want a building that's built after 1980, that limits our search, but helps me because I don't waste your time showing you buildings that are inadequate for your needs," she says.

Financial statements are an important piece of documentation, especially to landlords. Landlords use these documents to determine the strength of your company and whether it will be a good candidate for occupancy. A financial statement is also crucial to negotiating the amount of your security deposit.

Keep in mind, when searching for space, landlords do have restrictions on renting to certain types of businesses. "Some landlords won't take personnel agencies, record companies or city agencies because there's a constant flow of traffic and they don't want the strain on their buildings," says Martin. Real estate agents represent the interests of the tenant, but are paid a commission by the landlord. The percentage is based on the size of the deal and varies from state to state.

To find a commercial real estate agent, you can look in the Yellow Pages. "However, you're probably better off using the referral system," says Wiley Sturns, also a broker for Montgomery and Associates, a residential and commercial real estate firm in Los Angeles. "Speak to someone who has dealt with brokers in your area because they will probably refer you to the top two or three in the neighborhood." When shopping for a broker, look for one who has been in the business for several years and has a good track record of successful placements. Avoid brokers working to get that quick sale.

To create the most effective search, work with only one broker at a time. Do not split loyalties. "If I know we're working in partnership, then I'm going to do all I can to knock down every door to find the space you're looking for," says Dennis Perkins, senior analyst at Julien Studley, Inc., a New York-based commercial real estate consulting firm. "But if I take you out to show you space and you say you've already seen it, then as your broker, I lose interest and the focus is not there."

Leasing space can be a big percentage of your budget, so take your time searching. Don't expect to find a spot in a matter of days and don't commit to a space just because it's available. Also, don't get hooked on one location. Narrow your choices down to three that you can actually live with. When you do find that special spot, act quickly. In tight markets, space goes fast, so you don't want to be left out in the cold.

SIGN ON THE DOTTED LINE: NEGOTIATING THE DEAL

A lease is a written agreement between you (the lessee) and the landlord (the lessor). On average, a written agreement is a 50-100-page document that describes in detail all the terms that go along with occupying a space. Each landlord drafts his own document, but every lease has standard information that includes the occupant's name, the lease premises and its condition upon rental, the rental rate, fee for security deposit, a breakdown of operating costs, the starting date and the length of the lease.

Most real estate agents advise leasing a space for a period of three to five years, but some deals are cut for 10 years. Consider your growth plans when determining the length of your lease. "It's important to understand what your likely space requirement IS going to be over the term of the lease so as not to rent too little space," says John I. Williams, president and CEO of Biztravel.com, an Internet-based travel company in New York. "You don't want to have to find additional or alternative space well before the end of the lease term," he says.

In theory, all terms of a lease are negotiable. However, just how far you can negotiate depends upon economic conditions. In areas where vacancy rates are high, you may get a cheaper deal per sq. ft. than in locations where less space is available. Stewart advises that when looking for space, hone in on hungry landlords. "If you have a building that is totally occupied or 85% occupied, the landlord is not cutting any deals. But if you have a building that is 50% occupied, he's going to cut a deal to get you in there," says Stewart.

You should also pay special attention to newly constructed office buildings. In most cases, landlords must pre-sell units to obtain financing for construction. Some lenders require that a new building be 70% preleased before the foundation is laid. This presents another opportunity to get a good deal. "It's like presells on condominiums," says Stewart. "You come in first, you get a better rate. But if you come in after it's built, they are going to charge you more.

To attract tenants, many landlords offer a package of rental concessions (or incentives). In soft markets, these benefits can include a year's free rent and build-out of the space at the expense of the landlord. The average cost is $35-$40 per sq. ft. and a typical build-out from scratch can take anywhere from three to four months. Of course, the landlord's willingness to pick up the tab will depend on such factors as the length of the lease, the condition of the building, your type of business and whether improvements will be useful to a future tenant. You will need to work with an architect to create drawings of how your space is to be renovated.

You can build-out the space yourself. This creates a bargaining chip to negotiate a lower rental rate. "But most tenants don't want to take on the construction costs and the responsibility for contractors," Martin says.

Other points of negotiation can include rent bumps--increase in rental rate--and your security deposit. The Consumer Price Index (CPI), the measure of inflation, can affect the cost of operating a building. Landlords will often include in the lease an increase in rent after a specified period. You should negotiate a cap on how much the rent can increase (generally 4%-5%) because if there isn't a cap on a 10-year deal for example, an escalation in the CPI could really hurt your operation.

The security deposit--money to cover unpaid rent--is tied to your financials, and the amount can differ based on the age of the company. "For a company that's been established for 15 or 20 years, you're talking about three months security and the first month's rent, but for a new company, it may be more," Martin says.

If you are moving into a building that's under construction, you may also want to negotiate a cut-off date in which you have the right to cancel the lease if the space is not ready for occupancy by a certain time.

Once all terms are negotiated, the lease can be drawn. Allow a week for document preparation and at least two weeks for attorney review. Before signing, read the fine print. Make sure all costs to the tenant are listed and landlord obligations including maintenance of the building and other services are spelled out. If you need to get out of your lease before your term expires, use your broker to negotiate your exit. You can either buy your way out or sublease to another tenant.

TO LEASE OR NOT TO LEASE? WEIGHING OTHER OPTIONS

Not every business owner will need to commit to a four- or five-year lease. For some businesses, shared co-op space provides a better alternative.

Shared co-ops are in virtually every major city across the country. In this arrangement, you share office space with several other businesses. There is a central receptionist, several conference rooms, a fax machine and other office amenities. For the business owner who's in transition between spaces or is looking to solve a temporary space need, shared co-ops are a good choice, but they can be very expensive in the long run. Two offices can run you $5,000-$6,000 a month in some areas.

Purchasing a facility is another option. Most small businesses do not buy real estate, but for some operations, such as nonprofits that can take advantage of their tax-exempt status, it can be a wise investment. The process when buying a facility or participating in a shared co-op is the same as leasing. However, when purchasing a building, you must work with a mortgage broker to help with the financing. Depending on the bank that you use, you may need to put down 20%-25% of the purchase price.

Dealing with commercial real estate, whether you rent, share or buy, is a complex process and one that you should not handle alone. It involves various terms that if not clearly outlined can create disputes between you and your landlord. So when you're ready to hang out your shingle, find a broker, grab a good pair of walking shoes and look before you lease.

RELATED ARTICLE: Real estate terms to know

* Lease: a written contract between the lessee and lessor to occupy a space at a specific rental rate for a specified period of time

* Lessee: the tenant.

* Lessor: the landlord/owner of property.

* Base year: the year from which a tenant's charges are measured, usually the year that occupancy begins.

* Real estate taxes: the taxes assessed to the property. A tenant pays a proportionate share of any increase in the taxes over a base year.

* Swing space: space that provides a short-term need, usually under a two-year period.

* Lease back: when a property is sold and then leased by the original owner. Many large corporations use this technique to get the properties off their books. The lease is then treated as an operating expense.

* Operating expenses: amounts paid to maintain property, such as utilities, hazard insurance, property taxes and building personnel. A tenant pays a proportionate share of an increase in operating expenses over a base year.

* Build-out: renovation of a space to suit the tenant's needs.

* Landlord concessions: incentives offered by the landlord as part of the overall leasing transaction. Benefits can include free rent for a year and build-out of space.