Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
by Beth Ewen
Getting the attention of real estate brokers isn’t always easy when you own a small, growing business. That’s because “the commission might be $3,000 and I’m running around like a dog,” says Paula Anderson with a laugh.
She founded Square Feat LLC three years ago to represent tenants, and she likes to start with companies in their early stages and help them grow into their space all along the way. Anderson tells how to make the most of your real estate spending, whether this lease is your first or your 15th.
Upsize: I’ve heard you say there are a lot of ways for small-business owners to waste money on real estate. Tell me about ways to avoid them.
Paula Anderson: To begin, I try to get the requirements of what each tenant is looking for. Then I send an e-mail to the Minnesota Commercial Real Estate Exchange. It’s like the MLS for residential space. You try to match whatever you can. That’s as-is space so you can get more for your money. I always recommend as-is space first for that reason.
Then, look at subleases. For example, I recently saved one company 40 percent by getting them into a sublease.
Another idea: If you think you’re going to be growing, find out what leases are on each side of you. Find out if you can get the first right to lease the space when it becomes available. That’s what I did for one client. He wanted 10,000 square feet eventually, but only needed 6,000 square feet right now. So I saved him a lot of money in the meantime.
Upsize: Who do you talk to about a sublease, or a first right to lease?
Anderson: Your broker, or your tenant representative, which is what I am.
Upsize: How easy is it to get these things?
Anderson: You can always ask for all that you want but you won’t get everything. You have to ask for what’s really important to you. It depends on what your short- and long-term goals are. A broker has to sit down with a company and find out what they really need.
Upsize: What things do you ask?
Anderson: No. 1, financials. Are they strong? Is a landlord going to want to lease to them?
No. 2, budget. You can find space at $14 gross to $24 gross, per foot. There’s no sense looking at $24 if they can’t afford it.
No. 3, how many employees they have and how many they’re going to have.
Upsize: Are business owners good at that last point, do you think, estimating their growth?
Anderson: They’re conservative, and yes, they’re pretty good at it, at least my clients. A good tip, if there’s uncertainty: Try to get a buyout clause. Maybe you have a five-year lease. Try to get a clause that says you can buy it out after three years. You’d have to pay for unamortized improvements and pay for a couple of months rent.
Another idea if you can’t predict your growth: I like to work with a larger landlord. A landlord that has a large amount of space and many buildings, they often have flexibility to work with a tenant to go into different space if the one doesn’t work out.
Upsize: Your firm is relatively new. Tell me about your background.
Anderson: This is my third year. I was in medical supply sales. I also had my real estate license for 10 years and I invested in real estate. I looked at the two things that I loved the most, and so I combined commercial real estate and medical. I specialize in working with medical companies; that’s probably half my business. I’ve invested in medical IPOS, too.
Upsize: What’s your view of the real estate market now?
Anderson: It’s still a tenants’ market. But there are some brokers that really beat up the landlord. I think that everyone should make a reasonable profit. The tables are going to turn down the road.
Upsize: What about medical?
Anderson: This is a great market for medical; there are so many companies, and Gov. Pawlenty is getting interested now.
Upsize: What’s an example of how some of your client companies have grown?
Anderson: One company had a 2,500-square-foot sublease, a two-year deal. Then they thought they needed 6,000 to 10,000 feet. I got them 6,000, with an option to get the space next to them in five years.
Another company, they had 10 employees, in 4,000 square feet. Now they have 25 employees in 20,000 square feet.
That’s another idea to negotiate. Say they can only pay for 6,000 square feet, but you found a space they love for 10,000. You can step them up. This year, they’ll pay for 6,000, next year for 8,000, next year for 10,000.
Upsize: Will landlords do that?
Anderson: It’s all a matter of negotiation. I calculate a net effective rate for everybody involved in a deal. Real estate is very creative if you’re good.
Upsize: Do you see any common mistakes that small-business owners make when getting office space?
Anderson: People think, “I need space, so I’ll call the guy on the sign.” They see lots of signs and think there must be gobs of space. There’s a lot of spinning wheels and wasting time. I’ve never spent more than a half day with anybody and I find them many options in that time.
Another thing is, they only know about real estate maybe every three or five years, when their lease is up, so they just don’t know the market.
This is important: If you want to stay in your space but your lease is coming up, you should always talk to your landlord, and look around. It keeps everyone honest. Real estate is usually your second largest expense. You have a responsibility to your company to look around.
Upsize: How do tenant reps get paid in the business?
Anderson: When you buy, we get a percentage of the lease each year: 7 percent the first year, then 6 percent, 5 percent, 4 percent, 3 percent, 2 percent until the end of the lease. The landlord rep gets their part, too.
You have to watch out for brokers wanting too much from the landlord rep. Because the market is so weak, there are brokers who want a double fee from the landlord rep. People remember that. It’s not going to win you business when the tables are turned.
Upsize: You’ve mentioned this a couple of times — to not be too hardball when negotiating.
Anderson: What goes around comes around. It’s about building a reputation.
Upsize: What other tips can you tell our readers?
Anderson: Look for used furniture, used phone systems. Look for ways to save the company money.
Hire a real estate attorney vs. a general attorney. They know the market. They’re fast and efficient.
One thing I do: I hire and pay for a designer to do a color scheme for my clients’ offices, and pay for that out of my pocket. If you paint a nice color on your wall it costs the same as white. I think it creates a fun, positive image. I get a lot of referrals that way. And one company said they feel they got more for their buyout because of their interior design.
Upsize: Who pays for the office design work?
Anderson: The landlord will put it in the lease. And you really have to pay attention to the space planning and the buildout. If you have a large buildout, get several bids. Let’s say you have major electrical needs. Get someone from the company to meet with the contractors to make sure it’s right.
You want to put so much work up front in the planning, so there aren’t changes, because the changes are costly.
[contact] Paula Anderson is principal of Square Feat LLC in Edina: 952.886.7088; pa***@********at.us; www.squarefeat.us
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