Leasing retail area is typically one of the greatest operating expenses for a small business. It takes careful planning, consideration, and budgeting to find a place that fulfills your requirements and does not too big a bite out of your budget. Below, we will help you through 6 steps on the best way to locate and rent retail space for your store.
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Step 1: Determine Your Budget
Before you go out and scout potential locations for your business, you need to understand what you are able to afford. This will allow you to narrow down your options and prevent you from jumping on a place only because it looks attractive. Bear in mind, your rental amount will require large chunk from your monthly budget so that it’s important to adhere to a figure you are familiar with.
The maximum percent a company should allocate to their rental payment differs depending on the industry. On the other hand, the range is generally 3% to 10 percent of gross monthly sales. Ideally, you should spend no more than 10% of your monthly gross earnings on your lease payment.
Below are sample figures from home management firm, Hartman, to give you an idea of how much different kinds of retail shops typically spend on lease.
| Industry | Proportion of sales allocated for space rent |
|---|---|
| Clothing and apparel | 7.66% |
| General merchandise stores | 3.86percent |
| Furniture and furnishing stores | 5.98% |
| Food and beverage habits | 5.81percent |
| Electronics and appliance stores | 2.09percent |
| Novels, hobby, music, sporting goods stores | 3.30% |
| Health & personal care stores | 3.37% |
In order to determine what percentage of your company profits will go to your rental payment, simply take the yearly price of lease and divide it by your gross annual income.
Here is a Fast sample calculation:
Annual leasing: $150,000.00
Gross Annual Income: $2 million
Equation: $150,000.00/ $2 million = 8%
This means that 8 pennies of your profits go to rent for each $1 billion your business earns.
Factors which Impact Monthly Lease Payment
Although this list will Differ from city to city, here are some of the main factors that influence retail leasing costs:
- Location. High traffic and high visibility locations obviously increase the rental costs tremendously since they put your store in a prime place for high foot traffic.
- Demand. If you’re eyeing a place that’s convenient for shoppers — such as variety of other stores around the area, ample parking space, and other amenities — prepare to pay high rental expenses.
- State of the Space. When a retail space is essentially move-in ready, you are likely to pay a lot more than you would to get a similar size space that requires improvements/remodeling.
- Length of Period. In generalthe longer the lease duration, the more bargaining/negotiating energy you’ve got. But in the event that you only have a 1 year lease arrangement, you have much less bargaining power.
- Incentives with all the Space Being Leased. In the event the lease comes with incentives such as routine improvements, then that will add to the price. Try to find out if you’re able to negotiate this and look after the advancements yourself.
- Competition for Space. In some specific high growth towns, commercial space is at a premium. You are not the only possible tenant which the vendor is considering, and someone else may make a higher offer to acquire the retail area you are eyeing.
Other Costs Related to a Commercial Lease
Apart from the lease base speed, you will find other one-off and recurring things you Want to take into consideration and include on your financial plan such as:
- Property Taxes. This amount constitutes a big percentage of the expenses when renting a space and could change per state. The average tax rate across the nation is approximately 2.113% of the rental amount.
- Insurance Covering Natural Calamities and Theft. The cost of commercial property varies, but it finally depends upon the size of the space. Normal cost of insurance ranges from $.03 to $.04 per square foot.
- Common Area Maintenance. Based on the type of location you choose, this cost changes based on the property’s maintenance needs. Is there safety? Are they maintaining landscapes?
- Utilities. Variable in costs for energy, water, sewer, heat, internet, and other utilities you’re planning to utilize.
- Structure. Most retail lease spaces are bare, empty and needs a few design and construction function. Make certain that you allot a construction and interior design budget to make your shop visually attractive and reflective of your business personality.
Guru Tip: Establish a Conservative Budget!
Be conservative when placing your lease budget because you’ll need additional cash on hand to run your business day to day and cover for unforeseen expenses. These experts concur:
Cedric Stewart, Residential & Business Sales Consultant, Entourage RG in Keller Williams says:
“Depending on your type of company,
it might take several months to get the company up and running after procuring the area. During that time, you’ll still need to account for various start up costs that might include build-out cash, payroll, rent, and supplies. Your agreement with the landlord will find out whether or not you’ll want to pay some of them, but it is best to set aside 8-12 weeks of reserves at the minimum.”
Carrie Wood, Chief Marketing Officer, Leaseref.com agree:
“It’s easy to analyze the gross rent,
where tenants get tripped up is the hidden extra fees. Budgets almost always end up coming in higher than originally anticipated, and there are always added fees that renters weren’t completely conscious of about the get-go. For example, common construction budgets nearly never have third party consulting fees (such as fees for participating interior designers and mechanical/ electrical drawings). As a tenant who rarely travels through this procedure, it’s always a last moment and painful surprise so make sure to consider all the potential expenses you will encounter. If possible, hire a real estate adviser.”
Broker’s Fee
If you operate with a broker, make sure you also factor in their fee. Commercial real estate brokers who rent retail area normally charge from 7 to 10% of the total lease costs. By way of example, if you register a three year rental at $50,000 a year ($150,000 total), and your broker fees 10%, then the broker’s fee would be $15,000.
It is also possible that the fees may be charged on a per square foot basis, generally $1-$5 bucks depending on the period of the lease. For instance, let us say you rent a 5000 square foot building with a 3 year lease term. Your agent fee would be around $15,000 (5000 sq. feet x $3).
To learn more about broker charges and whether you need to use a broker, see our commercial real-estate article.
Step 2: Know the Various Kinds of Leases
Different landlords offer various kinds of leases. The main differences between rental types are the sorts of prices each party will bend. Below are the types of leases you may come across, what they imply, and how they will impact your monthly rental budget.
The Four Kinds of Retail Leases
-
- Triple Net Lease. This really is the most common kind of lease. Within this kind of lease, the tenant shoulders the majority of the costs. The landlord is only responsible for structural repairs.
- Single Net Lease. Within this kind of rental, the tenant is only responsible for paying utilities and land taxation, while the landlord takes care of the rest such as insurance and upkeep.
- Double Net Lease. In this kind of lease, the tenant is responsible for utilities, real estate taxes, property taxes, and insurance costs. The landlord will bend the maintenance.
- Modified Net Lease. Expenses are split between the landlord and tenant.
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Step 3: Decide How Much Space You Need
When you lease retail space, you do not want to pay for space you won’t desire, but you want to have enough room to accommodate business growth. Space needs will change for every company, but here are some common places for which you may want distance:
- Revenue Floor
- Stockroom
- Offices
- Bathrooms
- Dressing Rooms
- Additional Storage Space
Come up with a general calculation of how much space you require, in 250 or so square feet, and you’ll restrict your property significantly.
Here’s a basic formula for estimating the size of your sales floor based on revenue goals:
Gross Sales Volume ÷ Revenue Per Square Foot = Size Of Selling Space
Here are a few more advice on how to determine ballpark figures of finding the average sales per square foot.
Have a look at our articles on Planning Your Shop Layout and Shop Displays — How To Pick The Ideal Ones For Your Business for additional information concerning how to setup your area.
Step 4: Locate 5 or 4 Quality Retail Space Options
Now that you have your budget figured out, it is time to find 4 to 5 caliber options for renting retail space. You don’t need to restrict yourself to one right from the beginning. Rather, find four or five options that could function and then compare and contrast them to one another to ascertain the best fit. Having multiple options also gives you more leverage when you negotiate price later.
Here are the best ways to locate property:
Neighborhood Broker
There’s no substitute for local knowledge. That is the reason why local agents continue to be the top alternative for finding property for your retail requirements. A local agent should have in-depth understanding of your area, understanding exactly who lives in what sections of town and where the retail visitors is. Even better is if they have previous experience working with the landlord.
Online Brokerage Sites
Several sites have free commercial property listings, such as Loopnet, Craigslist, and Catylist.
These sites typically contain featured listings, lease costs, kinds of businesses that are allowed to operate from the area, property addresses, and agent contact information.
Subscription Services
Property list subscription services help you find retail properties. The advantage of this is it is much more than a place tool, also offering in-depth analysis of neighborhood markets, demographics, and other pertinent info. However, it will also cost you, around $300 — $1000/month based on the package selected.
Have a look at our reviews of real estate listing websites and see whether it is something that you’d like to consider when searching for your retail space.
Measure 5. Evaluate Each Possible Location
Now that you have 4 or 5 good options, it is time to narrow them down into the one that is best for you. Locating the right retail store for rental really comes down to 3 things: price, size, and location. Once you understand your budget and also the approximate dimensions you are looking for, it all comes down to place.
Here’s a summary of the things you should consider when Selecting a location:
- Find your company in a Safe Area: If clients do not feel secure, they are not going to want to shop. Check out mylocalcrime.com, put in your zipcode, and determine how your potential location measures around surrounding areas.
- Find Your Business Where Your Customers Are: Know where your clients are and be sure your company is situated in an area that attracts that market. It’s possible to use census.gov’s fact-finder tool to look up overall demographics to get an area/city. It is also possible to try determining the foot traffic of a particular place — learn here.
- Find your company Near Your Competitors: even though it might appear counter-intuitive, locating near your competition guarantees that you will have customer traffic that’s interested in your goods. This can be particularly invaluable for new companies that do not have an established customer base.
- Find Your Business Near Other Compatible Businesses: Retail spaces such as restaurants, bookstores and coffee shops go well together. Apparel stores work good near makeup and shoe stores, pharmacies and healthcare offices work nicely together, and thus do bookstores and cafes.
- Locate Near Public Transport/Major Highways: Your retail location needs to be visible and accessible for clients.
Step 6: Evaluate & Negotiate Your Lease
Now you own a space picked out, it is time to assess and negotiate your lease. This may be a complex process, particularly considering all of the legal language and lease-speak.
Use an attorney who’s experienced in commercial rental arrangements and commercial real estate transactions whenever possible. We advocate LawTrades, an online legal service supplier which can give you a dedicated attorney. You can register for a no commitment free trial .
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Evaluate Your Lease
In assessing your lease, do an extensive review of everything you can or what you can not do with the distance you’re leasing. Below are some items and exemptions to watch out for before contemplating a space for your company:
Exclusive Use Clause
If your company depends on foot traffic, then you may choose to attempt to negotiate an exclusive use clause to the contract. A private usage clause prevents your landlord from renting out space to one of your competitors in the exact same building or purchasing complex.
Renovation or Construction Limits
Should you need to make alterations to the distance, then you want to make certain that it’s clearly outlined in the lease what alterations you’re allowed to make.
“Some space improvements the tenant must take on can be counted towards leasing,” advises Kevin Godfrey, a realtor at Douglas Elliman. “If you are replacing a bathroom for $500, you can request for that amount to be deducted from next month’s rent. When a property is not in a good condition, ask for anything and everything you can think of. A agent would like to close the deal and are happy to pitch to the landlord additional requests you might have.”
Signage
If you wish to post available signs, open/closed signs, or other signs on your storefront, then make sure that you know what is and isn’t allowed to be installed in the space.
Sublease Clause
Whenever you can, you want to have the ability to sublease your distance. This provides some protection if you’re not able to cover the lease, or if you’ve expanded to the point where you need to move to a larger space.
Co-Tenancy Clause
If your company is contingent on the foot traffic which another nearby company brings into a place, then you should think about including a co-tenancy clause which lets you break your lease if the anchor tenant leaves. This is particularly vital in shopping malls and centers which have a couple of very big shops that are responsible for a big section of the mall’s customers.
We’ve got an in depth explanation of all of the things to consider in a commercial lease in our article”How To Lease Commercial Real Estate”.
Negotiating Your Lease
Below are some items you can negotiate on.
Base Rent
It’s possible to attempt to bring down this, particularly if you’re looking at leasing the distance long-term. But if you are looking to stay for under 3 decades, you’ve got less negotiating space here and should concentrate on your efforts in other areas.
Rent Hikes After Renewal
Landlords will generally attempt to work into the rent an yearly growth in rent based on the consumer price index or some other measure. These are also known as escalations and should be completely understood prior to entering into any rental.
Bundle Utilities
Utilities also take a chunk out of your profits, so try to see whether this is something that the landlord can include in the base rate. While they might not agree to include all, try to negotiate some items like sewage and water.
Lease Terms
Lease terms vary from state-to-state, but are usually 1-5 years in duration. Long-term lease provisions can be daunting, especially if you’re just starting out. The majority of lease arrangements require a tenant to cover the lease whether their company survives or not, so it can help to become conservative and negotiate down your lease length. However, do note that a shorter lease length increases the lease base rate.
Emergency or Escape Clauses
You don’t know what is going to happen to your organization, so try to find out if you can include a clause which will allow you to escape the lease under unexpected conditions, such as damages inside the area vicinity, loss of earnings and bankruptcy, environmental contamination, etc..
Down Payment
Most commercial rentals ask tenants to initially pay as much as 3 months rent upfront. Attempt to pay off this to one or 2 weeks to conserve cash flow.
Carrie Wood of Leaseref.com gives a last parting tip. “Do not give the impression that you’re so curious in the distance — with your own broker. Negotiations are obtained by whomever cares the least. So always leave the impression that you could walk away from the deal.”
Bottom Line: Lease Retail Space
The ideal thing to do would be to devote some time to weigh and consider the choices so that you’ll avoid making hasty conclusions. In the end, your retail space is the truest representation of your enterprise. If you want to rent retail space to your enterprise, you will want to do a great deal of planning, but we expect this step by step guide gave you a fantastic idea about the best way best to get started and in the end, close a fantastic and cost-efficient deal with a broker.
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