Whether you’re opening a new store or looking for a new spot for an existing business, choosing the right location is a critical step. Finding a popular spot with good foot traffic at the right price is a balance that all retailers need to seek. But it’s not easy. The best spots are often unfathomably expensive and the worst spots will tank even the best businesses.
But there are some ways that businesses can get great bang for their buck. Smart retail lease negotiation can help ensure the future success of your business. So let’s examine some of the ins and outs of commercial retail leases and how you can optimize yours.
- Determine the Best Type of Lease for Your Business
- Decide on an Independent Landlord or Mall/Shopping Complex
- Choose Your Must-Have Amenities and Conditions
- Know That Landlords Will Ask for High Prices
- Do Research in the Space and Around the Area
- Get a Lawyer or Real Estate Agent
- Look for Lease Inducements to Save Money
- Learn About Any Penalties for Early Termination
- Discuss Building Upkeep and Improvements
- Think About a Long-Term Lease
- Check for Scalability Options
- Add Co-Tenancy and Non-Compete Clauses
- Take Your Time with Your Retail Lease Negotiation!
There are a surprising number of options when it comes to your commercial lease. And most are longer-term. Often times, retail leases will be several years, at times even a decade long.
For retailers who are confident about their business and the location, a long-term lease is a great option. It locks you into a set price for a long period of time, protecting your business against dramatic spikes in the rental price.
On the other hand, newer retailers may look for short-term agreements in case. It’s too risky to put too many marbles in one basket, and it’s legally dicey to sign a long-term contract without being sure about the future of your business.
There are also several payment options with most retail leases:
- A single net lease means that you pay the utilities and property taxes, in addition to your rent. The landlord covers maintenance, repairs, and insurance. Other options leave the tenant on the hook for upkeep costs and insurance (sometimes referred to as double or triple net leases), but typically the landlord will take care of structural maintenance.
- Other options are called Full Service or Modified Gross leases. This type of retail lease splits any expenses on top of the rent between the tenant and landlord. These are the most common types of retail leases and offer the most predictable operating costs for businesses. Your rent won’t change month to month from changing utility bills or costly building repairs but beware of the details of the contract. Some contracts come with costly attachments.
Independent landlords will give you more flexibility in terms of your lease, especially if they are owned by local people. You might be able to negotiate a different term-length or the structure of the additional fees. You also will have a better chance of exiting the contract if necessary.
A space in a retail mall or shopping complex will not come with such flexibility, but there are advantages of this route, too. At malls, tenants and landlords both benefit from more foot traffic, so landlords will pitch in for the marketing efforts. This helps build your brand awareness and customer base without having to spend your time and money. A collective marketing agreement can be a huge benefit.
This comes with creating a detailed and definitive budget. Figuring out the types of things you need is the first step in generating your budget. Think about the size of retail space you desire, corner spot or mid-street/avenue, parking availability, neighboring stores, building architecture, additional indoor facilities, patio area, etc. There are countless factors worth considering that may impact your budget.
The percent of your total revenue that you spend on your lease can vary, but most estimates range from 3-10% of your revenue going toward your retail rent.
Consider any additional overhead costs that your business will incur. If you have a lot of costs that will also cut into your profit margins, try to find a lower rent.
No matter what you decide on, go into your search and discussion knowing exactly what you are looking for. It will make your decisions that much easier.
Most landlords put a rental space on the market at an inflated price, sometimes by as much as 20 or 25%. Perhaps they’ll get that price if they’re lucky, but don’t let it come from you. Be prepared with a counter offer and have a middle number in mind that you’d be okay with spending.
Also, negotiate with different locations at the same time. It helps to have different options available at all times. Comparing different spaces, locations, and landlords is an important part of the process. Remember, landlords are in the market of finding renters and negotiating as much as you are in the market for a retail space.
Check nearby retail spaces to see what they are being listed at or currently rented for. You may be able to find that information online. If not, consider talking to a local commercial real estate agent to see get up-to-date information. This information will arm you with more negotiating power.
Also, research the property itself:
- Check out your neighbors. Are there any direct competitors to your business? Are they similar minded and attract shoppers that might be interested in your store too? If you’re part of a complex or community, it’s important that each retailer helps their neighbors succeed.
- Scope out foot traffic on weekdays and weekends. How many people are coming through the area? What are the busy times? Is it an area with lots of businesses around or more residential?
- Consider the trajectory of the neighborhood. Is it up and coming? Stagnant? Declining? Some retailers have benefitted from the recent rise of many city center areas across the country. Getting a long-term lease early on during a city’s revival can be amazing for business.
- Ask around about your landlord. Most of them are fine, but we’ve all had a bad one at some point, whether it was commercial or residential. It’s just the worst. Running a business is hard enough without having to deal with a bad landlord.
If you have a lawyer for other reasons, like a liquor license, franchise, H.R., etc. ask them about potential lease options. Even if they’re not a real estate expert they will probably have insight into some of the details. If it’s within your budget, look into specialized lawyers that will have more expertise on the issue.
Real estate agents will also be helpful, and probably more affordable. Look for options in your area.
If the market is friendly to renters, landlords have to offer extra attractions to potential tenants. These often come in the form of lease inducements.
There are many different forms of lease inducements. For instance, a landlord might pay for the tenant’s existing lease remainder or early termination penalties. They might also offer to help with moving expenses, put in additional appliances/amenities, offer free month’s rent, or spruce up the property.
Find out if your area is saturated with rental properties. If so, determine a few benefits that you think would be fair and ask landlords about how much they’re willing to negotiate.
Of course, you want to make sure that your business isn’t severely bound to an unfair lease agreement. Most contracts will have early termination penalties, but make sure there are legal ways to get out if the landlord fails to uphold their end of the agreement. You never want your business to be stuck in a bad situation.
You also need to make sure that penalties for leaving, even if there are no legal outs. This is called the “cure” period. Perhaps you find yourself in a place where the rent is too high, the foot traffic wasn’t as steady as you expected, or where you’re so popular that you need more space. These changes generally can’t wait too long. In these cases, changing locations quickly is imperative. While some penalty is fair, make sure it’s not prohibitive to you leaving.
Look at their terms for expelling tenants, too. Do they have a bad history with past tenants?
Also, ask them what the legal procedures are if the building is sold. Large retail spaces are bought and sold often, so have a plan in place if this happens at your location.
Finally, review their policy for subleasing a space. Subleasing can be mutually beneficial if your business needs to leave because it keeps the income steady for the landlord.
Businesses in retail spaces rely on landlords to keep the building in operation and to update the space when necessary. Make sure that the owner is responsible for day-to-day upkeep as well as long-term issues like carpets, windows, doors, security, etc.
Many retail businesses also have the need to perform their own renovations or improvements. Check with the landlord that any planned construction is acceptable under the terms of your lease and legal under the zoning laws of your city and state. For improvements that will benefit future tenants, you may even get discounted rent for certain repairs.
While signing on for a long-term lease can be risky since it leaves you with less flexibility down the road, it will almost undoubtedly save you money. Landlords would rather lock in long-term deals to avoid the time-consuming and costly process of looking for new renters down the road.
If they aren’t interested in a set price over several years, you can try to compromise with favorable renewal options. Many businesses will pay a set price for a few years and have an optional year or two afterward to renew their lease at a friendly price – typically, a price just slightly above what the original rate.
Be careful before looking at longer-term options, though. You want to be confident that your business will succeed in the long run, especially at that location.
It’s a pain to move locations if your business is growing fast. It’s a huge process and adds risk to even successful and established operations.
Some leases come with the option to refuse the lease of adjoining units. This gives your business the opportunity to expand without moving if you desire.
Some landlords own multiple shopping areas and might also allow you to expand in one of their other locations. Inquire about how their property will be able to scale with your business.
Many small businesses move to retail locations because a popular retailer already drives productive foot traffic. But if they leave, then you have a problem. This issue has been particularly relevant in recent years as many big-box retailers have shut down locations or even entirely.
Therefore, ask about co-tenancy clauses, allowing you to break a contract early if a major tenant leaves the property.
Similarly, be sure that the landlord doesn’t rent out a neighboring space to a competitor. This can be disastrous for obvious reasons, and a scenario that must be avoided.
Like any major business decision, be careful and take great consideration prior to finalizing anything. Signing a multi-year lease is a huge step for any business and it’s important that you feel great about it. Read the small print, ask for help, and don’t let pushy salespeople add pressure or make you feel rushed.
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