When Hamburg-native Ilona Ionescu decided to become self-employed and open a brokerage firm for fitness-center equipment about a year and a half ago, she was a one-woman-shop. “I wrote a conclusive business plan, and I brought a lot of experience into the enterprise – however, like many people starting their own business, I was glad about every cent I was able to save,” remembers the 34-year-old her humble beginnings, “I knew from the outset: I’ll rent a small office in a business center.”
The reasons were obvious to her: “I didn’t have to enter long-term lease arrangements. Still don’t have to do that today. It meant that I didn’t have to create provisions in my business plan to cover an obligation which was very difficult to assess in advance.” Many business founders find themselves in the same predicament as Ilona Ionescu – Marcus Gelderblom is an attorney specialized in commercial real estate and serves as a Managing Director with Haus und Grund in Bonn. He knows everything about the potential pitfalls of long-term commercial leases: “Many people starting businesses aren’t familiar with the ins and outs of the law. For example, most have never heard of the term “Verwendungsrisiko”, a peculiarity of German commercial real estate. It means “risk of usage” – in Germany, it lies exclusively with the tenant. Even if the tenant is on the brink of becoming insolvent and needs to file for bankruptcy, the law does not protect him from the liability of having to pay up the entire length of the rental contract. In extreme cases, the tenant will have to continue to make payments for years – even if the space has been vacated long before. It can have existential consequences for some people.”
Dr André Helf, CEO of COLLECTION Business Center Group, is familiar with those problems: “We will prevent our clients from entering such risks. We know that many of them start their businesses with small steps and plan expansion carefully and with smart strategies. What does not help at all are long-term capital obligations. Savvy profit-reinvestments into product developments, advertising or marketing is a much better idea – for our customers, their partners and us. Because we like our clients to be happy and stay with us.”
Ilona Ionescu points out another disadvantage of long-term commercial leases: “Incidentals can be a huge problem and a risk factor nobody really wants. The financial burden of those ancillary costs is next to impossible to predict – energy prices, for example, tend to vary dramatically. In the long run, they are likely to rise steadily. Those are variables that business owners don’t like to deal with. In a Business Center, I don’t have those problems. Everything is set from the beginning. I can even add on space if I must – currently, I have two employees to match the amount of work that needs to be done. But what if business slows down in a year or two? If I need to let them go, I don’t want to be stuck with having to pay for space I don’t need.”
Furthermore, there’s always the risk of stepping into the interest trap: “Depending on how I arranged for my credit line, I can opt for flexible or fixed interest rates,” explains Ms Ionescu, “right now, interest rates are fairly low. That may not be the case in a few years from now. Then what? If I have a credit plan with flexible rates, it can break my neck, particularly if I need to meet a long-term liability resulting from a commercial real estate contract. I don’t need that risk, and it’s totally unnecessary in today’s world where business centers offer offices and conference rooms without any long-term obligations.”
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