Business Advice for the Mathematically Challenged
September 1, 2010 10:08 AM   Subscribe

A colleague has asked me to share an office space with her. We are not in the same place financially in our careers. I'm trying to figure out what would be a fair deal for both of us, but I can't seem to get my head around the business logic. Can you guys help?

My colleague has saved up enough capital to make the major investment required to rent a fairly large office space in a big city. The initial outlay -- including first month's rent, security deposit, taxes, realtor fees and other fees -- could run up to $30,000 depending on the space we find. I, on the other hand, am just starting out and have no savings to contribute to any of this, although I have enough clients to guarantee a monthly rent as I go along.

Here's where the math comes in. Colleague wants two rooms to work in, I need just one, and we'd share the communal space (waiting room, bathroom, kitchenette). I was thinking along the lines of a two-thirds/one-third split of the rent, but my future partner feels that since she's taking all the risk (the lease will be in her name and I will officially be subletting) and putting up all the initial money, the rent should be split 50/50.

Is this fair? If not, what would be? If yes, how do we handle utility bills, repairs and purchases for the space? If I pay half the rent for one-third the space, do I do that forever, or until I "pay back" half of the sum she fronted for the rental?
posted by Paris Elk to Work & Money (21 answers total)
If you are getting the use of one out of the three rooms, you should be paying one third of the rent. As for the intial investment, you can add a surcharge to your month's rent (perhaps so that you are paying half the rent) but only until you have paid your half of that intial investment. The fact that your colleague's name is on the lease has nothing to do with the division of expenses. If she doesn't like bearing all of the risk, she can ask you to also sign the lease.

If your colleague does not agree to this arrangement, you are not compelled to share an office space with her.
posted by grizzled at 10:15 AM on September 1, 2010 [3 favorites]

No, it's not fair. If anything, it's counter-productive - you may have trouble reaching a 50% amount one month, meaning a shortfall the next.

Your rent should reflect your use of the property, and you only use 1/3.
posted by djgh at 10:17 AM on September 1, 2010

Doesn't seem fair to me. Office space is rented by the foot, and sub-letters are there to help the leaseholder pay the rent. I've never heard of people leasing rooms in their larger offices for half the rent of the place. There are greater responsibilities in being the leaseholder, true, but she also has more leeway in who she rents the room to and how long they get to stay.
posted by oneirodynia at 10:17 AM on September 1, 2010

Even if you really like your colleague and really get along with her, what you are contemplating is having her extend you a loan.

My advice is:

(1) Don't do it. Do you have a compelling need to have as large or fancy an office as that? If not, even in a large city, that's a really big initial outlay. Unless you need to impress your clients, consider something more modest, or even a serviced office environment--those tend to have lower startup costs.

(2) If you decide to go through with this plan, keep the sum she's loaning you separate from your share of the rent. For instance, you could reach an agreement with her that you will pay 1/3 of the monthly rent, but 50% of the startup costs (excluding first month's rent). Then draw up a contract in which you spell out how she'll be fronting the initial costs and you'll pay her back periodically, with interest, until you're square. Make sure you agree on how long your sublet will be, and how much notice is required by either party to terminate.

"Is this fair?" is really a question for you to answer, of course, but to me option #2 seems fair, whereas paying half the rent for a third of the space doesn't. (What if you can't make it work, and you bail after a month? Not fair to her. On the other hand, if you do that for years, it's not fair to you.)
posted by AkzidenzGrotesk at 10:18 AM on September 1, 2010

Does it even matter if this is fair? How much is that (or any) office space really worth to you? Is having it going to help your business? What are your alternatives and how much do they cost?
posted by deanc at 10:19 AM on September 1, 2010 [3 favorites]

So really, you're using 4/6 rooms and she is using 5/6 rooms, correct? Maybe compromise between 1/3 and 50/50 and use the actual rooms you are using? So 4 + 5 = 9. You pay 4/9, she pays 5/9. (~44% and 56%)

And really, that's close enough to 50/50 that, since she is putting down all the upfront costs, 50/50 seems pretty fair to me.
posted by Grither at 10:19 AM on September 1, 2010 [3 favorites]

And obviously, this is only if you are really interested in having this office space in the city. If it's not going to help your business considerably (meaning the increase in money you will make is greater than the rent), then I would just pass.
posted by Grither at 10:21 AM on September 1, 2010

I wonder if perhaps your colleague will be on shaky ground financially once she pays the deposit and initial costs, and that's why she's asking you for an unreasonable rent arrangement. In other words, she may have $30,000--but only $30,000, and so she's leaning more heavily on you for the ongoing rent because she doesn't have the financial cushion she ought to have before making this move.
posted by Meg_Murry at 10:27 AM on September 1, 2010

Oh, and: have a lawyer review, or help you draw up, any sublease or repayment agreement you enter into with your colleague. I know "get a lawyer" is (a) old news on AskMe and (b) probably obvious anyway, but it's cheap insurance against something going sour down the road.
posted by AkzidenzGrotesk at 10:30 AM on September 1, 2010

Does it matter if a bunch of people on the Internet think it's fair? You are engaged in a negotiation with her; she presently would like you to agree to pay half the monthly rent, and you presently are offering to pay a third of the monthly rent. See if one of you can convince the other to budge and/or find a happy medium.

Since I'm considering entering a vaguely similar arrangement, only from her position, here's what I would be thinking in her situation. I have the startup capital, I can (barely) afford the monthly, and I really really want to make this happen. Whatever I can do to mitigate the financial burden would be a great help. More to the better if my potential business partner is a friend who I know I can trust and share the office with. If you want to really go halfsies on everything, we can set it up that way, but if you are just starting up and can only afford 1/3 of the rent, oh well, that helps me more than zero. I would want to make sure the utilities were split equitably along the way though.

From your perspective, I think you should state what you are willing to spend, state how much space you need, and ask if she can live with that. You can draw up a list of anticipated revenues, if you think that would help, to show what you really can and cannot afford. Just be clear with her - it is a business transaction. I would avoid bringing "fairness" into it at all actually; that just impugns her motives and debases your friendship, and she's probably just trying to make sure this office thing works long-term.

You could also offer to do the 1/3 rent for a "trial period" (first year?) and then reconsider depending on how well each of you has been doing in terms of hitting your projections.
posted by rkent at 10:35 AM on September 1, 2010 [1 favorite]

I agree with Grither. You aren't using 1 out of 3, you are using 4 out of 6. I think the 50/50 split is fair also and I think it should be for as long as you are in the space. Split expenses for the waiting room, bathroom and kitchenette and utilities 50/50, and you should each pay to furnish your personal spaces. Repairs are a different story, if they are for the shared spaces then they should be split 50/50, but you should pay for anything in your own rooms.
posted by raisingsand at 10:37 AM on September 1, 2010

> We are not in the same place financially in our careers.

I anticipated you even paying less than the 1/3 or 4/6 because of this. In general the rent should be split according to the actual use you have. If you're using the communal rooms for a third only (because e.g. you only have a third of customers waiting in a waiting room), then pay a third of this as well. Otherwise do pay 50% of the communal spaces.

Reading your question my gut feeling was: this guys is being f'ed with. So I wouldn't move in with you colleague at all.
posted by oxit at 10:54 AM on September 1, 2010

You can do this one of two ways: either you sublet from her and pay an agreed-upon flat rate and she pays for rent, utilities, repairs, etc. or you share expenses fairly.

In the first case, you just need to try to negotiate whatever rent you think is reasonable and then you have a straightforward sublet. If you aren't willing to sign an agreement to sublet for the entire length of the lease, then this is a fair way to go (because she will be bearing the risk that you leave).

For the second case, you need a fair way to divide expenses. Divide the rent based on square footage: calculate the square footage of your room, plus half of the square footage of the common areas and divide by the total area. You pay this portion of the rent and of heating, cooling, and electrical expenses. You pay half of water, sewer, garbage, etc. expenses and you pay half of repairs, maintenance, and purchases for the common areas and all the repairs, maintenance, and purchases for your room.

You also need a fair way to pay back your partner's initial outlay. Total up the expenses, figure out how long you need to pay back your portion (based on area seems fairest here), and then add a generous interest rate to cover the both the time value of the money and the risk that your partner is taking on (a fair rate would be what a bank would charge you for an unsecured business loan). Add the appropriate amount to your monthly payments.

You should reach an agreement to have your name added to the lease once these payments are completed.
posted by ssg at 10:57 AM on September 1, 2010 [1 favorite]

if the monthly rental is $1000 and the whole area is 1000sq.ft then each sqft costs $1 per month.
she pays for the number of sqfts in her two offices while you pay for the number of sqfts in your office. The cost of the the common area you can divide 50/50.
posted by WizKid at 11:04 AM on September 1, 2010 [1 favorite]

honestly like ssg said the easiest is to get a sub lease from her.
posted by WizKid at 11:07 AM on September 1, 2010

What's the going rent for a similar space? That's what's fair.

If she want to be a landlord, great. She's responsible for charging what she needs to cover her payments, utilities, etc. Heck, it's even "fair" for her to make a profit. Or a loss - that's the way the business cookie crumbles.

If you're willing to pay what she's charging, great. If not, you can negotiate for a better offer (fairness has nothing to do with this), or she can go ahead and sublet to someone else. If it's worth it to her to charge a lower rental payment because you're a known entity, then that works for you too. And if no one else wants the space at her price, that says she's charging too much.

It's not about fair. This is a business arrangement, plain and simple. You don't "pay back" what she fronted unless you're sharing the profit AND loss; ie you're partners in this.
posted by cgg at 11:29 AM on September 1, 2010

So really, you're using 4/6 rooms and she is using 5/6 rooms, correct? Maybe compromise between 1/3 and 50/50 and use the actual rooms you are using? So 4 + 5 = 9. You pay 4/9, she pays 5/9.

Really, this should be done on the basis of square footage, but if you want to do it on the basis of rooms you should count each shared room as a "half-room" for each person. In other words, OP uses one room exclusively plus three shared "half-rooms"; partner uses two rooms exclusively plus three shared "half-rooms". The rent should then be split in the ratio 2.5/3.5, which means the OP would pay 5/12 and the partner would pay 7/12 (about 42% & 58% respectively.)
posted by Johnny Assay at 11:34 AM on September 1, 2010

Deposit is irrelevant -- she gets that back. First month's rent is irrelevant, because you're paying your part of the rent. Taxes are usually on top of the rent, so you should be paying those (or paying higher rent to cover them). Utilities you also pay.

So the question is: how do you split the rental costs, the taxes, and the utilities? This is a business arrangement, and there are a lot of reasonable ways to do it. Do you need a kitchenette and office space with private bathroom, or are those just nice perks? How much would you pay if you rented the same amount of space in a shared area with a stranger? What will happen if you get more clients -- will you need to move to a bigger space, or can you grow for a while and have one room be sufficient?
posted by jeather at 11:36 AM on September 1, 2010

I strikes me that you're treating this situation like one of those relationship questions about how to split household costs when partners make vastly different incomes. It's not the same at all. Those questions are about partnerships; this is about a landlord-tenant contract.

In short, she wants to rent space and sublet it for some amount X. You can afford Y. Market rate rent for the space is Z. If x<>
As an aside, renting fancy schmancy office space (often due to ego or delusions of grandeur) is an easy way to screw yourself, especially when your cash flow is uneven.
posted by carmicha at 1:36 PM on September 1, 2010

That sentence that starts with "If x <>" was supposed to read, "If x is less than or equal to y and y is less than or equal to z, everyone wins or at least is treated fairly. If not, there may be no good solution."
posted by carmicha at 1:37 PM on September 1, 2010

If she sublet 1/3 of her office to a stranger, that stranger would pay 1/3 rent (assuming that was going market rate in your area, etc). Why would she charge you, her friend, more? This isn't an investment or partnership for you, right? It's just a landlord-tenant thing.

That said, the value of the property is what the market will bear. If similar office space elsewhere is $x, you're looking at paying $x, whether that's 1/2 her rent, 1/3 of her rent or all of her rent.
posted by judith at 2:29 PM on September 1, 2010

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