Leasing A Space

Now is the time to lease a space. If you are working your business from your home you are missing out on valuable customers that cannot find you or won’t do business with you because you work out of your home. Leasing a retail/commercial/industrial space costs money and carries an obligation with it and can be very stressful to get into. On the other hand, if your sales go up as a result then why not do it?

Leasing, the in’s and out’s.

Leasing terms explained: Like any business leasing space has it’s own lingo and you need to know it to be able to decide what is best for you. The more common types are Net, Double Net, Triple Net, and Gross Monthly. For a small operation you should look for a Gross Monthly lease. Net leases basically pass on the cost of the building and land to the tenant (you). As an example, property taxes go up, your rent goes up. The roof falls in, you pay to fix it. A gross monthly lease is a fixed payment no matter what. The building owner is responsible for everything that goes wrong. Hint: Stay away from net lease terms. You will get screwed.

CAM or Common Area Maintenance: Most leases have CAM charges. Basically CAM is to maintain the exterior of the building and is normally charged on a cents or percent per square foot of rented space. File CAM under another way to screw you. When you negotiate CAM charges there should be a maximum annual increase for this expense. Otherwise you are going to get unlimited CAM increases down the road. This is a way for the landlord to make up for low rental rates. If you can get a lease without CAM then more power to you.

Lease length: The length of your lease outlines your responsibility to the building owner. Unless you have a lot of sales or have a D&B credit rating you will probably have to personally guarantee the lease. Common lengths are three to five years although you can get shorter terms based on current economic conditions. The term both protects you from future rent increases as well as giving the building owner some confidence that his property will generate revenue for a specified period of time before he has to lease it out again.

Now that you have that information why should you lease a place today? With the current economic conditions commercial buildings are at very low occupancy rates. You can get very favorable terms and bring more exposure to your business. After all, how long can you operate from your home or garage and increase your volume? At some point you will hit a wall on volume. A retail location gives you that legitimacy that you would otherwise not have. Here are some things to look for.

Old town areas: These areas tend to be filled with antique shops and beauty shops. If that is the case then your walking traffic may not be enough to support you but your rent should be lower than other locations. Often times these buildings are owned by individuals and you can get a gross monthly lease without CAM charges. They are often more willing to work with you and you can develop more of a relationship with them than someone who uses a leasing agent. If your local old town area is in active redevelopment then you will benefit from that activity. Basically the city works with the State and Federal government to obtain grants to bring businesses to these redevelopment areas.

Strip Malls: These are often run by management companies and will have some sort of CAM associated with them. The value of the rent payments will increase with the number of big time stores in the mall. If you have a large grocery and drug store with a fast food place your rent will be more than if they were not there. Also, if you do get into one of these malls and the big time retailers move out you should immediately renegotiate your rent. No one is coming into these malls for you. You depend on traffic generated by the big stores to get exposure. If that is gone then you need to pay a lower rent. The other type of strip mall is one that is smaller and has what I would call in-and-out stores such as a liquor store, or other small time businesses. You basically want to be in one that is full rather than being the only store open.

Shopping Malls: Your rent here will be the highest as well as having to operate in a manner dictated by the mall. You are joining an association of which you have no say and no rights. You must operate specified hours and you must be open on specified days and not doing so will cause fines and fees to accrue as well as the possibility of being evicted. For this hassle you do get advertising from the mall as well as the draw of people.

So, what should your rent be? Well, from a perspective of gross sales your rent should be between 5% and 8% of sales. Any more and you are paying too much to make a profit, any less and you are not in a big enough place (or you have a great deal!) Of course your sales will not be enough to make that ratio to start with. You need a financial plan to get you there. If your sales are $4000/month and your rent is $1000/month then you have to find a way to get your sales to $20,000/month. At that rate you will need at least 3 people working full time to do all of the work.

There you have it. Now, are you willing to take that step? Check back and I will go over how to negotiate a lease and space rental to your advantage.

Part 2

Negotiating a space rental or lease for your business can be a daunting task if you have never done it before. What you really need to know and how to do it is something we will cover now. In the last article we talked about terms such as Net or Gross and CAM.

So the first thing you need to know is square feet and what is included in that. Does your square feet include outside areas like a parking lot, walkways, entrance? What about the inside? Restrooms, office, warehouse? All of these things are important as they have different values. Do you get dedicated parking spaces, sign space, or other extras?

Retail space is the most expensive and warehouse is the least. If you have a combination of retail and warehouse space then you should not be paying a retail rate for your storage. As an example, if you have 1500 square feet where 300 is office, 700 is retail and 500 is storage you should be paying separate rates for each of those spaces. Now, you can average out those rates to come up with a consolidated rate but the initial negotiation should be for each part.

Here is an example. If retail space is $2/ft and warehouse is $0.50/ft and office is $1.50/ft then you rate should be $1400 + $450 + $250 = $2100/month or $1.40/ft. If you were to just pay the $2/ft for retail or even the $1.50/ft for office you would be over paying.

Check rates in the area you want to be in. This will give you a starting point for what your rent should be. Everything is negotiable so don’t be afraid to ask. Also, if you are dealing with a broker then you will have a harder time negotiating than if you are direct with the building owner. The broker has a commission to look after and he will take any information you give him and use that against you in negotiations. The more information you have to start with the better off you will be. Know the going rates and you will be that much more ahead.

Current and local conditions affect how much you will be paying and what concessions you can get. Many places are offering free rent for up to a year. What does that mean? Unfortunately it doesn’t mean you won’t pay anything for a year. Free rent will often be amortized over the life of the lease or the first few years. So if your rent is $2100/mo and you get 6 months free you can expect to pay 1050/mo for the first two years and then $2100/mo after that. The owners want cash flow and letting you sit there for a year without paying anything isn’t going to give them that. Also, CAM is often not included in those discounts so if your CAM is 0.25c/ft then you will need to pay that full amount each month.

What else can you get in your lease? In addition to free rent you can often get allowances on build out. Carpet/flooring, paint, signage, appliances, advertising and just about anything else can be negotiated into your lease. So if you get a $1200 allowance for carpet for the retail space you would put it in, pay for it, and deduct that from your rent. Now, any improvements you make to the building will normally stay there when you leave so the owner is really just making an investment for the future.

Security deposits are common and often one month of rent is what you will need to put down. This will be a requirement to move in.

Lease terms vary and can be as short as one year or as long as five or seven years. Three to five years are common. You will be responsible for that entire time if the owner cannot lease the space if you leave early unless you can negotiate some exit plan if your have to leave early. The lease is in place to protect you from large rent increases and to protect the owner from turning over tenants too quickly. Unfortunately, if a tenant cannot pay the rent then the owner has no real protection. Your rent increases should be something simple to calculate such as 2% or 3% annual increase. Keep in mind that if you have CAM this is not part of the calculation. CAM is unlimited and is based on the cost of operating the park you are in.

Alternate ways to negotiate a lease: When times are good the building owners will often take a percentage of your gross sales as rent. When times are bad owners want a fixed payment. All good for them but not you. We are now in the worst economic downturn in our lifetime and you may be able to negotiate a better lease by combining these concepts. Your rent should be between 5% and 8% of your gross revenue. If you can negotiate a rate like that then you are ahead of the game. You will need to be able to prove how much that would be so if you sales do not support it then you need to have a minimum payment to make each month. Using our above example with a 5% lease rate you would need to gross $42,000/mo to make that payment. If you have say $50,000/mo in revenue then you could approach your negotiations as some multiple of your revenue. The owner will benefit from any increase in your business and you will know that you will always have a 5% cost of rent. On the other hand if your gross is $30,000/mo then you would only be paying $1500/mo. In that case you may need to have a minimum such as the greater of $1800/mo or 5% of gross. This gives both parties some skin in the game and eliminate surprises when you lease is up and the owner wants a large increase in rent for the next lease term.

Finally, get everything in writing. Real estate transactions are not enforceable unless they are in writing. The owner can promise anything but if it isn’t in writing it isn’t enforceable.

Fred Parker Lynn Promotions, Inc

260-B North 2nd Ave Upland CA 91786

909-638-3339 www.lynnpromotions.com