How To Find & Lease Retail Space – Fit Small Business: Get …

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Before you go out and scout potential locations for your business, you need to know what you can afford. This will help you narrow down your choices and prevent you from jumping on a place simply because it looks appealing. Remember, your lease amount will take big chunk out of your monthly budget so its important to stick to a figure youre comfortable with.

The maximum percentage a business should allocate to their lease payment differs depending on the industry. However, the range is typically 3 % to 10 % of gross monthly sales. Ideally, you should spend no more than 10% of your monthly gross sales on your lease payment.

Below are sample figures from property management company, Hartman, to give you an idea of how much different types of retail stores typically spend on rent.

In order to determine what percentage of your business profits will go to your lease payment, simply take the annual cost of rent and divide it by your gross annual income.

Here is a quick sample calculation:

Annual rent: $150,000.00

Gross Annual Income: $2 million

Equation: $150,000.00/ $2 million = 8%

This means that 8 cents of your profits go to rent for every $1 dollar your business earns.

Although this list will vary from city to city, here are some of the main factors that influence retail leasing costs:

Apart from the lease base rate, there are other one-off and recurring items you need to take into consideration and include in your budget such as:

Be conservative when setting your lease budget because youll need extra cash on hand to run your business day to day and pay for unexpected expenses. These experts agree:

Cedric Stewart, Residential & Commercial Sales Consultant, Entourage RG at Keller Williamssays:

Depending on your type of business,

Carrie Wood, Chief Marketing Officer, Leaseref.comagree:

Its easy to analyze the gross rent,

If you work with a broker, be sure to also factor in their fee. Commercial real estate brokers who lease retail space generally charge from 7 to 10% of the total lease costs. For example, if you sign a 3 year lease at $50,000 a year ($150,000 total), and your broker charges 10%, then the brokers fee would be $15,000.

It is also possible that the fees may be charged on a per square foot basis, generally $1-$5 dollars depending on the length of the lease. For instance, lets say you lease a 5000 square foot building with a 3 year lease term. Your broker fee would be around $15,000 (5000 sq. ft x $3).

To learn more about broker fees and whether you should use a broker, see our commercial real-estate article.

Different landlords offer different types of leases. The main differences between lease types are the kinds of costs each party will shoulder. Below are the types of leases you may come across, what they mean, and how they will impact your monthly lease budget.

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When you lease retail space, you dont want to pay for space that you wont need, but you also want to have enough space to accommodate business growth. Space needs will vary for each business, but here are some common areas for which you may need space:

Come up with a general calculation of how much space you need, within 250 or so square feet, and you will narrow down your property significantly.

Heres a basic formula for estimating the size of your sales floor based on sales goals:

Here are some more tips on how to determine ballpark figures of finding the average sales per square foot.

Check out our articles on Planning Your Store Layout and Store Displays How To Pick The Right Ones For Your Business for additional information concerning how to setup your space.

Now that you have your budget figured out, it is time to locate 4 to 5 quality options for renting retail space. You do not want to limit yourself to one right from the beginning. Instead, find 4 or 5 options that could work and then compare and contrast them to one another to determine the best fit. Having multiple options also gives you more leverage when you negotiate cost later.

Here are the best ways to locate property:

There is no substitute for local knowledge. That is why local brokers are still the top option for locating property for your retail needs. A local broker should have in-depth knowledge of your area, knowing exactly who lives in what sections of town and where the retail traffic is. Even better is if they have previous experience working with the landlord.

Several sites have free commercial real estate listings, such as Loopnet, Craigslist, and Catylist.

These sites usually include featured listings, lease prices, types of businesses that are allowed to operate in the space, property addresses, and agent contact information.

Property listing subscription services help you locate retail properties. The advantage of this is that it is much more than a location tool, also offering in-depth analysis of local markets, demographics, and other pertinent information. However, it will also cost you, around $300 $1000/month depending on the package selected.

Check out our reviews of real estate listing websites and see if its something youd like to consider when hunting for your retail space.

Now that you have 4 or 5 good options, it is time to narrow them down to the one that is best for you. Finding the right retail store for lease really comes down to three things: cost, size, and location. Once you know your budget and the approximate size you are looking for, it all comes down to location.

Heres a summary of the things you should consider when choosing a location:

Now that you have a space picked out, it is time to review and negotiate your lease. This can be a complicated process, especially considering all the legal terminology and lease-speak.

Use an attorney who is experienced in commercial lease agreements and commercial property transactions whenever possible. We recommend LawTrades, an online legal service provider that will match you with a dedicated attorney. You can sign up for a no commitment free trial here.

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In evaluating your lease, do an extensive review of what you can or what you cant do with the space youre leasing. Below are some items and clauses to watch out for before considering a space for your business:

If your business depends on foot traffic, then you may want to try and negotiate an exclusive use clause into the contract. An exclusive use clause prevents your landlord from renting space out to one of your competitors in the same building or shopping complex.

If you need to make alterations to the space, then you want to make sure it is clearly outlined in the lease what alterations you are allowed to make.

Some space improvements that the tenant has to take on can be counted towards rent, advises Kevin Godfrey, a realtor at Douglas Elliman. If you are replacing a toilet for $500, you can request for that amount to be deducted from next months rent. When a property is not in a good condition, ask for anything and everything you can think of. A broker wants to close the deal and will be more than happy to pitch to the landlord additional requests you may have.

If you want to post for sale signs, open/closed signs, or other signs in your storefront, then make sure that you understand what is and isnt allowed to be installed in the space.

Whenever possible, you want to have the ability to sublease your space. This offers some protection if you are no longer able to pay the rent, or if you have expanded to the point where you need to move into a larger space.

If your business depends on the foot traffic that another nearby business brings into an area, then you should consider adding a co-tenancy clause which allows you to break your lease if the anchor tenant leaves. This is especially important in shopping centers and malls which have one or two very large stores that are responsible for a large portion of the malls customers.

We have an in depth explanation of all the things to consider in a commercial lease in our article How To Lease Commercial Real Estate.

Here are some items you can negotiate on.

You can try to bring this down, especially if youre looking at renting the space long-term. However, if youre looking to stay for less than 3 years, you have less negotiating room here and should focus on your efforts in other areas.

Landlords will generally try and work into the lease an annual increase in rent based on the consumer price index or some other measure. These are also called escalations and should be fully understood before entering into any lease.

Utilities also take a chunk out of your profits, so try to see if this is something the landlord can include in the base rate. While they might not agree to include all, try to negotiate some items such as water and sewage.

Lease terms vary from state-to-state, but are often 1-5 years in duration. Long term lease terms can be daunting, especially if you are just starting out. The majority of lease agreements require a tenant to pay the rent whether their business survives or not, so it can help to be conservative and negotiate down your lease duration. However, do note that a shorter lease duration increases the lease base rate.

You dont know whats going to happen to your business, so try to see if you can include a clause that will allow you to get out of the lease prematurely under unexpected circumstances, such as damages within the space vicinity, loss of sales and bankruptcy, environmental contamination, etc.

Most commercial leases ask tenants to initially pay up to 3 months rent upfront. Try to negotiate this to one or two months to conserve cash flow.

Carrie Wood of Leaseref.com gives a final parting tip. Dont give the impression that you are so interested in the space even with your own broker. Negotiations are won by whomever cares the least. So always leave the impression that you could walk away from the deal.

The best thing to do is to give yourself some time to weigh and consider the options so that youll avoid making hasty decisions. After all, your retail space is the truest representation of your business. If you want to lease retail space for your business, youll need to do a lot of planning, but we hope that this step by step guide gave you a good idea on how to get started and ultimately, close a great and cost-efficient deal with a broker.

Dont forget to find the perfect POS for your business. Click here to start a free trial of Lightspeed and see how it can make managing your business easier.

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How To Find & Lease Retail Space - Fit Small Business: Get ...