Leasing retail space is one of the largest investments you’ll have to make as a small business owner. It’s also one of the more challenging tasks you’re going to have to wrestle with as you manage your business. There’s quite a lot to consider before putting pen to paper and signing on to a rental agreement, and getting it right first time is critical. The wrong choice of property or location, or a miscalculation of cost, can have disastrous effects down the line.
However, if you plan ahead and know what steps to follow before making your final decisions you can find the ideal property at a cost that fits your budget and allows your business to thrive and grow. It’s simply a matter of understanding what is involved in finding and leasing a retail space, and moving forward through the process carefully and conservatively.
Setting a Firm Budget
The first step in finding and leasing any retail space is to determine your budget. If you don’t have a suitable budget in place at the beginning of the process you are only going to run into complications later. Remember, your lease amount will account for a large part of your monthly operating expenses, and you need to be realistic about what you can and cannot afford.
Ideally, a brick-and-mortar retailer should expect to spend no more than 3% to 5% of their gross monthly sales for rent. This figure can vary somewhat depending on the industry, but the absolute upper limit should rarely exceed 7.5%, and then only if you are running a high-end retail establishment.
Should you find a property that appeals to you, there is a quick calculation you can use to determine what percentage of your gross profits will need to be allocated to meet your lease payments. Simply take your annual cost of rent and divide it by your gross annual income. For example:
$18,000 (annual rent at $1500.00 per month)÷$50,000 (annual gross income) = 3%
Keep in mind that your budget should also stretch to include any associated costs over and above the lease base rate. These include:
- Insurance – Including, but not limited to, general liability, workers compensation, and business crime insurance.
- Property Taxes – These will vary depending on your state.
- Utilities – Including water, sewer, electric and gas.
- Shared Amenities – These may, or may not, be figured into your lease and might include general parking lot maintenance, security, fire prevention, etc.
- Remodeling – This may only be a one time expense but you should allow for general interior design and merchandising costs in your budget.
Understanding Different Types of Retail Leases
When it comes to renting a retail space there is no such thing as a standard one-size-fits-all lease. Different landlords will offer different types of leases depending on their own preferences. The primary distinction between these leases is the division of costs between landlord and renter.
There are three basic types of retail leases with which you should be familiar:
- Single Net Lease – With a single net lease the renter is responsible for paying property taxes and utility costs. The landlord is responsible for other associated costs such as ground maintenance and insurance.
- Double Net Lease – With this type of lease the renter is responsible for property taxes, utilities, and insurance costs. The landlord is responsible for the costs of maintenance.
- Triple Net Lease – This is, perhaps, the most common type of lease associated with retail properties. With a triple net lease the renter is responsible for all expenses including property taxes, insurance, utilities and maintenance while the landlord is only responsible for the costs of structural repairs.
- Modified Net Lease – With a modified net lease expenditures above and beyond the base rent figure are split evenly between renter and landlord.
Determining What Size Retail Space You Need
Before you start looking at properties it’s important to get a rough idea of how much space you’re going to need. This will help to narrow down your property search so you can focus in on those retail spaces that fit your budget and meet your square footage needs.
If this is your first retail shop estimating your desired square footage may be a bit of a challenge, but with some simple online research you should be able to arrive at a rough idea of the amount of sales and storage space you’ll need. The easiest way is to research similar stores in your industry and in your market to get an idea of your potential sales volume. To arrive at an estimate of the square footage you will need simply divide the potential sales volume by your industry’s average sales by square foot.
Sales volume ÷ sales per square foot = selling space
So, for example, let’s say your widget shop has the potential to do $100,000 per year in sales. Industry research tells you that the average sales-per-square-foot for a widget shop in your market is $125. After plugging these figures into the above equation you’ll find the amount of selling space you need is 800 square feet. This gives you a better idea of how much space you need and how far your budget will stretch.
Scouting Potential Locations
With your budget in place and a rough idea of the size of space you want to lease it’s time to start looking at potential properties. Ideally you want to find at lest 4 or 5 locations before you make any firm decisions. When shopping for retail space you want options, not only so you can compare and contrast the properties themselves but also so you have some leverage when it comes to negotiating the actual lease.
When it comes to scouting out potential retail properties you have three primary resources at your disposal:
- Local Real Estate Brokers – A local broker is often the best options when searching for retail properties. They have the local knowledge that can steer you in the best direction, as well as personal experience with local landlords.
- Online Brokerage Sites – Online brokerage sites like Loopnet and Catylist offer searchable databases of local commercial real estate listings. The sites include lease prices, zoning information, property addresses and agent contact information.
- Real Estate Subscription Services – Real estate subscription services can help you find retail properties that meet your size and budgetary needs. They also provide insight into local markets and shopper demographics that are invaluable when searching for the ideal retail space. However, subscription services are not free, and the cost per month can range from $300 – $1000 depending on the service selected.
Evaluating Your Short-List of Locations
Once you’ve put together a short-list of potential locations it’s time to narrow your choices down even further. Naturally, budget and square footage requirements will greatly impact your final decision. However, you also have to think about location and the impact it will have on your business.
Before you settle on a final choice of retail space ask yourself the following questions:
- Is the Area Safe? – This is an important point to consider. If customers don’t feel safe visiting your shop you won’t be doing much business. You can check out potential locations by going to com and entering the zip code for the area in question. This will give you a good idea of crime statistics in the area and how they compare with other potential locations.
- Does the Location Attract the Right Demographic? – Ideally you want your business located in an area that attracts the right demographic for your products or services.
- Is the Location Close to Your Competitors? – It may sound counterintuitive to open your shop close to your perceived competition. However, being near your competitors means that customers interested in your products are already shopping in that area.
- Is the Location Close to Complementary Businesses? – Some retail shops naturally complement each other, offering services and products that are linked in the customer’s mind. For example, shoes shops clothing outlets naturally work well together.
- Does the Area Provide Easy Access for Customers? – Your shop should be easy to access for all customers. So you want to find a space that is close to a major highway, accessible via public transport and, whenever possible, walkable.
Reviewing Your Lease
Once you’ve settled on an ideal space it’s time to take a closer look at your lease. Remember, your lease is a legal contract and it is always advisable to consult legal counsel before signing anything binding. If you are working with a broker they should be able to recommend a suitable lawyer. If you are going it alone you should consult your state’s bar association to find an attorney that specializes in real estate law.
When assessing your lease there are a few key points you should consider:
- Exclusive Use Clauses – If your business depends on local foot traffic you may want to negotiate an exclusive use clause into your contract. An exclusive use clause prevents the landlord from renting retail space in your building to a direct competitor.
- Renovation Restrictions – If there are changes you want to make to the space to make it more suitable for your specific retail needs you will want to make certain what types of structural or cosmetic alterations are, and are not, allowed.
- Signage Allowances – It is important to understand what types of signage you are allowed to post in and around your shop. If there are any restrictions concerning the size, number or location of your business’ signage you need to know upfront.
- Sublease Clauses – Having a clause in place that allows you to sublease the property is always a good idea. If your business expands beyond your current location, and you need to move your shop, you can sublease the property to avoid carrying two rents.
Negotiating Your Lease
Finally, before you put pen to paper and sign the contract there are some specific points in your lease that should be carefully negotiated. Again, having legal counsel on hand during this final step is a good idea.
Key areas of negotiation include:
- Base Rent – This will likely be influenced by the terms of your lease. Often, if you sign on to a longer-term lease you can negotiate a reduction in your base rent to offset the long-term commitment.
- Rent Hikes – Landlords typically include annual rent increases in commercial leases. Be sure you understand the scale and timing of these increases.
- Packaged Utilities – Utility costs form a large part of your operating expenses. If possible, try to negotiate utility costs as part of your base rent.
- Lease Terms – Typically, commercial leases will be for a term of 1 – 5 years. If you are just starting out in the retail sector you may feel more secure with a shorter lease. However, short-term leases generally translate to a higher base rent.
- Escape Clauses – Negotiating an emergency or escape clause is always beneficial to business owners. This will allow you to get out of your lease prematurely in the event of an unforeseen emergency such as damage to the property, loss of sales, or bankruptcy.
- Down Payment – Most commercial leases require the renter to make a down payment of at least three months rent. Negotiating this down to two months will free up some much needed cash to help pay for move-in costs.
Finding, and leasing, the ideal retail space takes time and careful consideration. The location you choose, and property you ultimately inhabit, will have a profound impact on your business and its ability to thrive and grow. Take your time and thoroughly investigate all of your options.
Above all, seek professional advice and support before you sign any lease. Remember, the contract you sign will be binding so you want to ensure that you have found the best possible location for your business at the best possible terms.