​​Negotiations broke down after that. Apparently, she had, in fact, inherited the building.

TIPS & TRICKS

Opening Your First Storefront? Here’s What You Need to Know

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We do a lot of business in the digital world on platforms such as Amazon, Walmart, or even our own websites and apps. Nevertheless, we live in the real world, and the need for a physical presence, in many industries, is a necessity that is never going to go away.

If you are opening a brick and mortar location, there are a few things it’s helpful to know before you take the plunge.

Different Types of Commercial Leases

The first thing you need to know is that not all leases look the same, and you should familiarize yourself with the possibilities. Today, Triple Net (NNN) and Modified Gross may be the most common types of commercial leases currently available, though this will depend on what kind of building you are looking to rent, as well as the area where you are doing business.

Rent is usually calculated on the basis of cost per square foot per year. So, if the cost per square foot is $25 and the unit is 2,000 sq. ft., you would be paying $50,000/year to lease the space, or just over $4k a month. This is simple enough, but there is the matter of insurance, utilities, repairs, tenant improvement (T.I.) and common area maintenance (C.A.M.) that can cause that monthly bill to sharply increase.

Here’s what that can look like in two common lease agreements:

A Triple Net Lease is essentially a situation in which the landlord who owns the entire property, let’s say a strip mall, passes all of the fees, insurance costs, and common area expenses to the tenants, proportional to how much square footage they are renting. In this case, you would pay a C.A.M. fee of somewhere around $4-5 per square foot per year to cover landscaping costs, repairs to the parking lot or street lights, etc. Property taxes and general insurance costs are usually not included in this number, so check your lease offer for details. On the plus side, triple net leases often offer T.I., which is a reimbursement of some or all of your renovation expenses that you incur while setting up your physical location.

A Modified Gross, on the other hand, is a form of a gross lease, where the landlord is going to absorb some of the costs of ownership and rely on simple rent payments to pay the building expenses. In many cases, the tenant in a modified gross commercial lease will not have to pay CAM fees or insurance but will still have to pay for utilities, and the landlord might be less open to providing T.I. funds, so it is more likely that you will be on the hook for your own construction/renovation costs here. The good news, however, is that your expenses will be more predictable.

There are other types of commercial leases available, so make sure and read up on them before you start submitting letters of intent.

How to Negotiate

Renting a commercial space is not like buying a pair of shoes from a local outlet. It’s more like buying a car. There is a certain amount of haggling over the particulars.

Having an empty space in a commercial building is a big drag on the landlord’s cash flow, and a potential tenant has some degree of leverage. Be sure to work with a commercial real estate agent and read up on negotiation strategies in a commercial setting, but here are a couple of things to know upfront:

Supply and demand still apply. If the space you want to lease is highly sought-after, in a high-traffic area, and if it has not been vacant for long, you are going to have a harder time getting concessions out of the landlord. That said, certain accommodations are regarded as common practice, and you just need to ask.

For example, “rent abatement” (not having to pay rent) is something that isn’t too hard to get for the period when you first move in and begin renovations. If your doors aren’t open for business yet, the landlord is usually understanding and will often grant a month or two of free rent so you can get up and running. They want you to be successful, because a successful business means a reliable source of rent every month.

Also, even when you do not have to do extensive renovations, you can negotiate to have rent abatement for a few months upfront in exchange for a back-end payment on the lease, giving you time to establish your business in the meantime.

T.I. funds are negotiable, and in a situation where the space has been vacant for a while, you may even be able to get them to knock a few cents or dollars off of the cost per square foot. Good luck if you try to negotiate your way out of CAM fees, however – all the other tenants in a triple net situation pay them, and a landlord isn’t going to want to tick off his other tenants.

A Few Easy Resources

If you’re interested in finding a commercial space to lease, calling a trusted commercial real estate broker is a good first step. If you just want to see what’s out there, however, head over to Loopnet.com and put in your search criteria. It will tell you how much traffic passes by the location each day, what the lease terms are, and other pertinent information on available leases.

A business’ success is so often, as the old saying goes, all about location, location, location. So, you’ll want to check out demographic information on a given area with as much specificity as you can. You aren’t just looking at the median household income of Los Angeles County – a sprawling metropolis spread over a wide area – you want to zoom in on the neighborhood where your store could be. How is crime in that very particular area? How about income? Family size? Average age? You can use U.S. Census Bureau data or do a Google search, but keep in mind that copying the big guys is also a good strategy because large corporations spend hundreds of thousands or even millions of dollars on demographic research before committing to building a new location. Thus, if your business is going to rely on families with disposable income and more than one child, it’s a good idea to look for locations where an upper-scale grocery store has just been built or ask where Chik-fil-A is putting new restaurants these days.

Be smart, be flexible, and do your research so you can be poised for great success in your brick and mortar location.

Quick Hits

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• If inflation has you down already, just skip this article on the average impact of inflation on your income.
• Amazon has successfully increased its delivery speed for Prime customers in 60 key metro areas after a heavy investment in fulfillment.
• Relevant Magazine urges Christian workers and businesspeople to take the command to rest on the Sabbath seriously.
• The Wall Street Journal reports, “The Dream of Fed Rate Cuts Is Slipping Away.”
• Walmart is removing self-checkout from two of its stores due to theft. This is the most recent generalized trend of retail brands scaling back on self-checkout for the sake of security.