Location. Location. Location. Any real estate agent will tell you it’s the most important consideration when you’re purchasing a space. In the commercial real estate world, it’s even more important.
When you find that perfect location to grow your business, you want to be ready to sign your retail lease and secure your space. Before you start reaching out to landlords, know what to expect and what can be negotiated in your retail lease.
Here are the key items to keep in mind before you get started.
Rental fees and other charges in retail leases
When you’re searching for retail locations, you’ll likely have a maximum rent amount in mind that fits within your budget. Your rent is an important piece of your retail lease, and will be based on either a rent schedule or an escalation rate.
Every landlord will have a different perspective on and appetite for negotiating the price of rent. Regardless of their stance, you may want to think about potential lease extensions from the beginning and come to an agreement on future increases.
Other fees you may be able to negotiate are annual common area maintenance (CAM) fees and property taxes.
Landlord and tenant work in your retail lease
Before you move into your retail location, your landlord will expect you to do some work in the space to make it your own. The cost of building out your business isn’t entirely on you. Your landlord can pay for some of the construction costs as well.
Why would a landlord do that? Because the improvements you make to the space will benefit future tenants when your lease expires, and potentially increase the rent your landlord can charge. Keep in mind that construction costs that are specific to your business (like building out rooms or a kitchen) will need to be covered by you. Your landlord likely won’t agree to contribute to costs that won’t bring them greater value down the road. Once you’ve identified the costs that should be covered by you or your landlord, you’ll need to consider how to include them in your retail lease agreement. There are two ways to go about this:
- You can include your improvements in the delivery conditions of the space. This would require your landlord to hire contractors to make the improvements you agreed on and cover the costs of their services. All of the work would be completed before you could move into the space. Some examples of costs that could be handled through this method include upgrades to the electrical, HVAC, water and sewer systems.
- You could also set up a tenant improvement funds to cover the cost of improvement. This method would require you to hire and pay for the contractors making improvements, and then your landlord would reimburse you for the costs through the tenant improvement funds.
When will you start paying rent on your retail lease?
With a residential lease, you agree on a move-in date and usually start paying your rent within the first month. Retail leases are a little different. You’ll need to estimate how long you’ll need to get the space ready to determine a target date to start paying rent.
Most business owners aim for a date that’s four to five months after your landlord hands the space over to you. This should give you enough time for most of the construction to be completed without having to pay rent.
Something to note: you need to balance how much money you put down upfront (as a deposit or pre-paid rent) and how much your rent is each year throughout the term of your lease. For example, you can negotiate a later rent start date by offering to pay a higher rent in later years or by paying a larger deposit up front.
Paying rent through a percentage lease
An alternative way to pay your rent is through a percentage lease. In this agreement, your business’s rent is based on a percentage of your revenue rather than a fixed monthly amount. This can be helpful when your income is low and results in a lower rent payment. Just keep in mind that as your revenue grows, your rent will increase with it.
When negotiating a percentage rent, you and your landlord will need to agree on a minimum amount of rent you’ll pay even if your sales are low. You’ll also need to decide what sales count towards your percentage rent. When negotiating, make sure you’re excluding any discounts or refunds as well as any fees that are passed on to your customers.
Early termination clauses in retail leases
All retail leases are personally guaranteed by the owners of the business. That means that if your business closes in year two of a 10-year lease, you would still be responsible for covering eight years of rent.
That’s where an early termination clause comes in. These are also known as good guy guarantees and allow you to end your lease without being responsible for the remaining years of rent. You’ll still be considered in default of your rental agreement, but that’s much better than being on the hook for hundreds of thousands of dollars of rent.
Normally, an early termination caluse is negotiated based on a notice period. This is the number of days you have to give notice before being released from the lease. A typical notice period for retail leases is three to six months.
Buying vs. leasing your retail space
Many business owners choose to lease their space, especially as they’re getting started and proving their business model. As your business grows, you might want to consider buying your own space for your business.
When you own commercial real estate you have more control over the space and can plan for your business’s future. For one, you won’t have to worry about a landlord selling your building and potentially losing your space. You’ll also be able to completely customize the space to your needs and build equity in a fixed asset.
You can talk to your business bank about commercial mortgage options when you’re ready to buy your own location. Also keep in mind alternative options like the SBA 504 loan program which can finance up to 90% of your commercial real estate project in partnership with your bank.
Get the funding you need to keep your business growing
Finding the perfect spot for your business takes time, preparation, and planning. Taking the time to understand the negotiable aspects of a retail lease before you contact a landlord will put you in a better position to get the best deal for your business.
Pursuit works with small business owners in New York, New Jersey, Pennsylvania, and Connecticut to secure affordable financing to grow and thrive. With more than 15 small business loan options available, you can work with us to find the funding that fits your needs. Contact us today to learn how we can work together.