Whether you’re looking to move into your first retail space or you’ve outgrown your current space and need something larger, signing a business lease is an exciting and stressful time for anyone looking to start a new business.
At first glance, it may seem like costs would be the primary factor when considering rental spaces. However, when you’re looking for the right space, there are a few things to keep top of mind:
- Location, location, location: Do your research! Find where your audience is spending their time and where your competitors are having success. You can find demographic information through a real estate company, census data, analytics for visitors to your ecommerce site, and combing through your own customer data you’ve collected in your point-of-sale system.
- Size matters: Figure out how much square footage you need before you start looking at spaces, you don’t want to fall in love with something that doesn’t work for your needs. You can get a sense of the amount of space you’ll need by examining your inventory, analyzing the average size of spaces in the area you want to rent, and/or creating a rough plan of your intended store layout.
- Look into business lease timeframes: Most retail lease terms require businesses to sign multi-year agreements. If you’re just starting out and want to test the market before locking into a multi-year business lease, consider running a pop-up shop to get a feel for things. For more on how to negotiate a short-term lease for a pop-up shop, check out our post How to Successfully Close the Deal on Your First Pop-Up Location.
Once you’ve completed all your research and you’ve found the perfect location for your retail business, then comes the all the necessary paperwork. Negotiating a lease for your business doesn’t need to be daunting — there are just a few things to keep in mind to make the process smooth so you can stay focused on the excitement of opening your new location.
Getting Started With Your Business Lease
First things first: who are you dealing with for the negotiating process? Whether you’re leasing a small storefront or a large warehouse in a commercial compound will affect the amount of negotiating that you can do. In a recent Entrepreneur article, retail business owner and consultant Ronald L. Bond explains: “Obviously, it's simpler if you're dealing with an individual owner who's very flexible or a large corporation whose policies allow for no negotiations.”
Essentially, you could be dealing with a landlord who is an individual owner, a professional property management firm, or a representative from a real estate investment trust (REIT). Depending on the ownership of the property you’re eyeing, the process will differ a bit from one type of owner to another.
Depending on your comfort with negotiating, now is the time to decide if you want to move forward with the negotiating on your own or with the assistance of an agent. Bond warns: “After you receive the proposals from the leasing agents or center managers, don't let them pressure you into signing a lease prematurely.” Now is the time to negotiate the business lease rate, the lease term rate, and the clauses of the lease.
Next, you’ll want to work with an attorney to go over the business lease in detail. If you need to find an attorney, look for a local lawyer directory in your area or ask your lease agent to recommend one for your needs. So what should you be looking for when reviewing the lease with your attorney? Let’s take a look at the terms that you’ll be reviewing and negotiating.
What’s Included in a Business Lease?
When it comes to a contract as important as your retail lease agreement, ensure you’re covering all your bases. A recent Entrepreneur' summarizes a few essential items that should be included in a retail lease, such as:
- A basic term: The lessee — that's you — is obligated to pay for the space for a specific time period (usually three years or longer), whether or not your business survives that long.
- A basic rental rate: This is calculated per square foot or as a percentage of gross sales, whichever is greater. Typical rents may range from $.90 to $3 per square foot per month, or 6% of gross sales.
- Assignment of maintenance responsibility: The lessee is normally responsible for maintaining all equipment serving the space, including electrical, plumbing, heating, air conditioning, and structural components.
- Water and sewer: These are usually included in the lease rate, but expect to pay extra for gas, electricity, and trash removal.
- Triple net: This is a monthly charge, usually for the expense trio of taxes, insurance, and common area maintenance, hence the term "triple net." This charge is designed to allow the lessor to pass on his or her variable costs to you. They can represent an additional 10-35% added to your basic rent.
- Finish-out allowance: In return for the typical three-year-plus rental term, the lessor will usually provide you an allowance to finish out the space to your specifications. This is typically $10 to $30 per square foot, which is sufficient for basic walls, ceiling, lighting, electrical, plumbing, heating, air conditioning, and insulation. It doesn't normally cover wall finishes, carpet and floor tile, signs, and any custom work to suit your specific needs.
- Prepaid rent: This is typically one to three months.
- Security deposit: This is usually zero to two months' rent, depending on your lease’s terms.
Each lease and property is unique, so use this checklist as a jumping off point but consult your attorney and lease agent about specific needs for your business and trust your gut about what your retail business requires. For example, if you want to operate your business during non-conventional business hours, ensure that you’re discussing this with the landlord during the negotiations because certain buildings will have operational restrictions.
Aside from the agreed-upon rental rate, maintenance responsibilities, and details about the property, there are multiple ways that the lease agreement can be structured. In a recent Forbes article, Clint Gharib, Founder of The Gharib Group-Integrous Investing, outlines the different responsibilities structures as:
- Single Net Lease, Net Lease: Tenant only pays utilities and property tax; landlord pays maintenance, repairs and insurance.
- Net-Net, or Double Net Leases: Tenant is responsible for only utilities, property taxes and insurance premiums for the building; landlord pays maintenance & repairs.
- Triple Net Leases: Tenant is responsible for all costs of the building, except the landlord is generally responsible for structural repairs.
- Full Service Gross, or Modified Gross Lease (also called modified net lease): The lessor and lessee split structural repairs and operating expenses (property taxes, property insurance, common area maintenance (CAM), and utilities).
Which structure is right for you and your business? You can attempt to negotiate a lower monthly rental rate, but be prepared to pay for things like maintenance costs, garbage removal, repairs, insurance, and security. This is a good option is you’re looking for a low monthly payment but know you’ll have a contingency available for any unforeseeable costs when they arise. For peace of mind and consistent payments, you’ll pay a bit of a premium to have everything lumped into one cost. This is a great option for businesses that are starting out — figure out the top of your budget, negotiate within your budget, and rest assured that your bases are covered every month.
Keep in mind that large mall spaces will have more luxury offerings that you can negotiate for, as these spaces usually have a set price per square foot that is difficult to budge. If you can’t adjust the price then negotiate for other perks, including in-mall marketing, free WiFi for your customers, and dedicated staff areas and parking.
After the Negotiations
Finally, be prepared for when the lease is signed, sealed, and delivered. After you’re done celebrating, it’s time to pay the upfront costs. This will probably include the first and last months’ rent, a security deposit, and any deposits for services like security and utilities.
Have you had a successful retail business lease negotiation? Share your experiences in the comments section.