Signing any kind of lease is a big deal but when it’s for your business in a competitive or volatile real estate market such as San Francisco, the stakes are particularly high. There are many facets to consider before signing a commercial lease in San Francisco and other similar markets. Rents have been increasing in this popular, densely packed city for over 10 years. Demand is high with loads of businesses wanting to stay in the center of the city.
It’s essential for you to weigh all the factors before making the commitment – turns out signing that lease is not always the best option.
Are the lease terms reasonable and do they work for you and your business?
It is crucial to carefully investigate the terms before signing a commercial lease to make sure they will meet your business’s needs. New businesses often want to sign a lease for a year or two because they don’t know where their business will be – but is that favorable in the current market? Will your landlord raise your rent exponentially after a year when the term is up?
How much will your rate increase year after year? Many leases will have annual percentage rent increases stated, which should be spelled out clearly in the lease agreement. To keep your rent from skyrocketing at the end of term, try to get options for renewal in the lease. San Francisco rents have doubled or even tripled in a few years. Be proactive to protect yourself (and your bank account) from soaring rents.
Leases can be confusing and complicated. Be sure to have an attorney look it over and be sure you understand all the conditions. An attorney may be able to suggest favorable terms you can try to negotiate into your lease.
Is the location right for your business?
Research the area thoroughly before signing a commercial lease in San Francisco. Are you signing where you want to be or are you moving to where you think you can afford? Is the location easy to find and easy to access for your employees and customers? Is it safe?
The location of your business can be monumentally important! Be sure to give this aspect full consideration.
Who is your landlord?
When considering signing a commercial lease in San Francisco, it’s important to consider who the owner of the building is. Are they local? Are they perhaps a tenant within the building? Or are they an out of state investor? Bottom line is, can you trust them to create and withhold a secure operating location for your business? If possible, check with other tenants in the building or former tenants.
Do you need to customize the space to work for your business?
If your business requires modifications or improvements, will your landlord be agreeable to those changes? Does it make sense for you to put a substantial amount of money into a customized space on a property you do not own? Keep in mind – it is your landlord that will ultimately prosper from tenant improvements you make.
Can you afford to buy?
All too many small business owners rule out buying a property, thinking it’s not realistic for them. However, there is a program created by the Small Business Administration that makes purchasing a building for your business within reach. In addition, we often find that mortgage payments are even less than rent payments.
For example, Brian Eby with Eby Construction came to the conclusion that if he wanted to stay in the Bay Area, he had to purchase property. TMC Financing helped Eby secure $2 million to purchase a warehouse in Richmond, CA. “Owning our building is such a relief. We no longer have to worry about our occupancy costs spiking without warning,” said Brian. “The mortgage payment on our new building is less than what we were paying in rent and now we have a building to call our own.”
When you own the property, many of the issues above are solved. You have a stable operating location and peace of mind knowing your monthly costs will not increase. YOU are your own landlord. You write your monthly rent checks to YOURSELF. YOU prosper from any tenant improvements you make. YOU are gaining equity on the property.
Rather than signing a commercial lease in San Francisco, consider financing a real estate purchase with a 504 loan
The SBA 504 Program allows business owners to purchase fixed assets, including real estate or equipment, for their business with only a 10% down payment. The loan also covers construction or renovation costs so any improvements you need to make your space ‘yours’ can be added to the total project cost and financed. The interest rate (3.62% as of August 2019) is below market, fully amortized, and fixed for 25 years. That means there is no balloon payment and you know what your occupancy costs will be for 25 years. Having a stable and secure operating will allow you to keep focus on your business.
One of the best aspects of the program is its accessibility. Most for-profit businesses in the U.S. qualify. The 504 loan is designed to help small businesses prosper, and it is ideally suited to the needs of an expanding business. A 504 loan can be used to:
- purchase land or buildings
- construct, improve or upgrade buildings
- purchase equipment with a service life of ten years or more
- refinance conventional debt
If you already own your premises, you can use the 504 loan for improvements. If you are looking to move, you can buy a building with the 504 loan or even build one from the ground up. The 504 loan has a term of 10, 20 or 25 years, a fixed, below-market rate and no balloon payments.
The 504 loan is administered by a Certified Development Company (CDC) such as TMC Financing, and loans are granted in conjunction with a conventional lender that provides 50% of the total project cost. Your CDC facilitates the SBA loan for up to 40% of cost, up to $5 million ($5.5 million for manufacturers or projects that implement green efficiencies). You provide a minimum of 10% of the project cost as a down payment.
You can lease out up to 49% of the space you purchase. This could provide you with a permanent source of extra income and allow you to create a synergistic environment with a neighboring business. It is also worth remembering that the 504 loan can be used for large equipment purchases as well.
The 504 loan provides flexible and affordable financing for small business and is an option you need to explore before signing a commercial lease in San Francisco.
You can find out more about it from our San Francisco Loan Expert, Anna O’Brien. TMC is an SBA Premier Certified Lender and has funded projects worth more than $9 billion across California and Nevada, resulting in the creation of an estimated 60,000 jobs. With close to 40 years of experience, TMC can help you find the financing that is best for you and guide you through entire process.