When it comes to office space, IE Design + Communications principals Marcie Carson and Corey Baim have worked there, outgrown that. After starting the company in their tiny Los Angeles apartment 10 years ago, they moved into a new home and brought their business with them. They moved to and outgrew a 1,300 square-foot rented office in Studio City before finding a 2,200 square-foot space in Manhattan Beach. Located on a movie lot, it seemed like a good idea but turned out to be "miserable," Carson says. That’s when Carson and Baim decided to purchase their own building. After buying a 1960s-era retail space that was originally a surfboard shop, they’re paying less per month for more square footage and gaining equity in the property.
Buying vs. leasing is one of the many decisions facing creative firms when they look for new office space. The first and most important question is: Can you afford to move?
The 6% Rule
Facility costs are a fixed expense: They stay the same no matter how well or how badly business is going. In addition to rent, they include utilities, cleaning services and other expenses associated with putting a roof over your employees’ heads. Cameron Foote, editor of Creative Business, recommends keeping facility costs between 5% and 6% of your firm’s total fee billings (excluding pass-through billings). This can be difficult in high-rent areas, he concedes, "but it’s a fiscally prudent target, and it’s also the national average for successful design firms."
Another rule of thumb: "You probably shouldn’t select a space that won’t allow you to recoup any relocation expenses within a year, either through new business or increased efficiency," Foote says. Higher rent should be offset by at least an equal increase in yearly income or efficiency; a 2-to-1 payback is even better, Foote notes.
While you may be certain that business is booming and will continue to grow, don’t commit yourself to a new lease or purchase based on revenue projections. Choose a space you can afford with current earnings.
Buying: Building Equity
The viability of buying property vs. leasing varies according to the real estate market, financing options, the size of your firm, renovation required, ownership issues and other factors. With so many variables, it’s impossible to make a blanket statement about which is better. But buying is a much longer-term commitment than leasing, and should be approached accordingly.
"If your business stays stable, buying is probably the best thing you can do long-term," Foote says. When you buy real estate for business use, the typical M.O. is to invest your personal money, then lease the office to your company, thereby covering the monthly mortgage while you build equity in the property. Many people have retired on the profits from a good commercial real estate investment. But commercial real estate can be risky: If your business fails, you’re stuck with the property.
Buying also requires more up-front investment. Down payments can be as high as 25% of the purchase price. And while a landlord may want your business so badly he’ll cover renovation costs, you’re generally on your own when you purchase a building (although some municipalities offer tax breaks for improving property).
Leasing: Everything Is Negotiable
For some firms, particularly those in metro areas with high cost-per-square-foot, purchasing space isn’t feasible. But leasing has its benefits, too: Many companies opt to rent space and let their landlord worry about repairs, maintenance, cleaning and even utilities. When you’re in the market to lease, remember the two most important rules: (1) Everything is negotiable, and (2) know exactly what you’re agreeing to when you sign.
By 2004, the design firm 160over90 had grown out of its 4,500 square-foot space in downtown Philadelphia. About a year before the lease expired, founder Shannon Slusher began scouting for new space; he signed an 11-year lease on 9,000 square feet in an "A+" building next door to City Hall. Because Philly had at the time an excess inventory of office space, Slusher negotiated a year of free rent and a generous tenant-improvement budget that paid for needed renovations.
Rule No. 2 is know exactly what you’re getting into when you sign a legally binding contract that may last a decade or beyond. Understand all the terms; know exactly how much you’re paying per square foot and how much unusable space is included; and determine which services are included in the lease. In addition, know the answers to these questions: Can the rent go up? Who pays for improvements? When is the space available? Will you be able to renew? Who are your neighbors? Can you sublet? What insurance coverage does your landlord carry, and what insurance should you carry?
The Space Equation
Once you’ve figured which arrangement works for you and your firm, you have to decide how much office space you need. The decision may be influenced less by the number of people you have and more by how you use the space. Foote recommends the "3Cs Formula": The space should be cozy, providing a "home-away-from-home" feeling; creative in that it offers a stimulating environment; and comfortable in a way that enhances productivity.
The minimum two-person office is about 250 square feet; the ideal size is about 400 square feet. Larger firms require common areas such as meeting rooms, space for shared equipment and a kitchen. If the space is open, less square footage is required per person, but it must be carefully configured to optimize productivity. Foote suggests approx. 200 square feet per person: about 900 square feet for an office of three to five employees; 2,000 square feet for an office of six to 10 and so on.
Beyond the costs of rent and utilities, creative firms should also plan for the unexpected costs that crop up during a move. Renovation is a known cost, but often it escalates beyond original plans, so pad your budget to accommodate the inevitable inflation. Also budget to pay the movers, the phone and utility companies for reconnecting services and computer experts for hooking up hardware. Remember the costs of new furniture, equipment and supplies. Last, factor in the time it will take to move your employees into the space and get them comfortable; lost productivity can be an expensive by-product of the move.
Making the Space Your Own
How you outfit your new office is as individual as the culture of your company. Creating an environment that’s comfortable, functional and stimulating for you and your employees is key. And yes, the appearance of the office is an important marketing tool if you plan to invite clients on a regular basis. But don’t get too carried away with the wow factor.