If you are a small business owner who is looking to lease retail space for your business, then this article is for you. We walk you through the 5 steps you need to take to find and lease the perfect spot for your store.
Table of Contents
- How To Determine Your Budget
- How To Decide How Much Space You Need
- Your Options For Finding Commercial Properties For Lease
- The Factors You Should Consider When Choosing a Location
- How To Negotiate Your Lease
In order to get the most helpful information possible, we have talked with various retail experts. The majority of information in this article is based on their input. Be on the lookout for specific “Pro Tips” throughout the article as well.
Before we dive into the details on this topic, we suggest you check out Square, a free POS system that can manage inventory, process credit cards, and track sales by item. Visit Square to learn more.
Step 1: Determine Your Budget
How To Estimate Your Budget
Knowing your budget will help you narrow down options quicker and keep you from getting sucked into paying higher payments than you can afford. This list from BizStats.com shows average rents as a percentage of gross sales for over 150 industries. The data below for retail is taken from that list, and can be used as a general estimate of what similar retail businesses to yours are spending on rent.
2011 Sole Proprietorships: Rent as a Percent of Sales
General Merchandise Stores
Health-Personal Care Stores
Misc. Store Retailers
Motor Vehicles -Parts
Monthly Lease Payment
Monthly lease payments are generally calculated by $’s/sq foot. In order to get a better idea of what factors influenced pricing, we talked with Alejandro Aguilar, Sales Director for Merca Property Management.
Although this list will vary from city to city, here are some of the main factors that influence retail leasing costs:
- Location of the Land/Property Whether in a big city or a rural town, the closer you get to the main hub of activity the more you are going to pay. Higher foot/customer traffic generally means higher sales, which in turn generally means higher rent.
- Location Among Other Stores in Same Development If you are next to an anchor store such as Publix (grocery store) or a higher-end brand (Barnes and Noble, Starbucks, etc) you can expect to pay more.If you have a space facing a main corridor or parking area, you are probably going to pay more than you would if you were located on an auxiliary hallway or on a back corner where your building is not as accessible/visible.
- Condition of the Space If a retail space is basically move-in ready, you are going to pay a lot more than you would for a similar size space that needs improvements/remodeling.
- Length of Term In general, the longer the lease term the more bargaining/negotiating power you have. This often means you can negotiate a price-cut on lease payments or other other fees. However, if you only have a 1 year lease agreement, you basically have no bargaining power and have to pay whatever is asked.
- Availability Newer strip malls/shopping malls with multiple spaces still available generally have cheaper lease payments. However, if you are trying to snag a property that just became available in an established strip mall/shopping mall, expect to pay top dollar.
In most cases, other costs are stipulated in your lease agreement. Which costs you pay will depend on the type of lease you have. The Triple-Net-Lease is the most common retail lease type.
Here is what you can expect to pay for in a Triple-Net-Lease agreement on top of your lease payment:
- Property Taxes – Most listings show previous years property taxes. If not, ask your broker, who will have that information for sure.
- Utilities – Factor in Electric, Water, Heat, Sewer, Internet provider (check with landlord, often will have estimates. If not, call companies to get general estimates)
- Maintenance – Factor in possible HVAC repairs, snow removal services, lawn care, etc
- Property Insurance – Again, check with landlord, broker, or local insurance agency for quote
To learn about the other types of retail space rentals and their associated costs see our commercial real-estate article.
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 broker’s 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, let’s 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).
Step 2: Decide How Much Space You Need
Space needs will vary for each business, but here are some common areas for which you may need space:
- Sales Floor
- Dressing Rooms
- Additional Storage 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.
Here’s a basic formula for estimating the size of your sales floor based on sales goals.
Sales Volume ÷ Sales per Square Foot = Size of Selling Space (Here are some retail sales per square foot averages based on business type)
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.
Step 3: Find 4-5 Quality Retail Space Options
Now that you have your budget figured out, it is time to locate 4-5 quality options for renting retail space. You do not want to limit yourself to one right from the beginning. Instead, find 4-5 options that could work and then compare-and-contrast them to one another to determine the best fit.
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 an in-depth knowledge of your area, knowing exactly who lives in what sections of town, where the retail traffic is, and might even have previous experience working with the landlord.
After clicking the “advanced search” link on the homepage of Loopnet.com you will see a scrren that allows you to narrow down properties based on a wide variety of factors.
Loopnet.com Advanced Search Screen
Co-Star is a subscription service that helps you locate retail properties. However, 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, probably around $300 – $1000/month depending on package selected.
Many brokers subscribe to Co-Star, so it is probably better to just find a broker instead of paying Co-Star yourself. That way you get access to good information and the services to help interpret it.
Step 4. Lease Retail Space That is Best For Your Business
Now that you have 4-5 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.
Here’s a summary of the things you should consider when choosing a location:
- Locate Your Business in a Safe Area – If customers do not feel safe, they are not going to want to shop. Check out mylocalcrime.com, put in your zipcode, and see how your potential location measures up to surrounding areas.
- Locate Your Business Where Your Customers Are – Know your target market and be sure that your business is located in an area that attracts that demographic. You can use census.gov’s fact-finder tool to look up general demographics for an area/city.
- Locate Your Business Near Your Competitors – Although it may seem counter-intuitive, locating near your competition guarantees that you will have customer traffic that is interested in your product. This can be especially invaluable for new businesses who do not have an established customer base.
- Locate Your Business Near Other Compatible Businesses – Retail Spaces work great with restaurants, coffee shops, etc and vice-versa. Your customers can shop and eat.
- Locate Near Public Transport/Major Highways – Your retail location needs to be visible and accessible for customers.
Step 5: Negotiate Your Lease
Now that you have a space picked out, it is time to negotiate your lease. This can be a complicated process, especially considering all the legal terminology and lease-speak that is often more confusing than it is helpful. 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 is a summary of the main points from that article:
When dealing with retail spaces, you are probably going to deal with a triple-net lease or a percentage lease. Lease terms vary from state-to-state, but are often 1-5 years in duration.
- Property Taxes
- Maintenance Costs
- Fixed percentage of your monthly income
Here are some tips to help you navigate the lease-negotiation process successfully.
- Use a retail-experienced attorney whenever possible. When you sign on the dotted line, you do not want to be worrying whether or not you remembered everything. Leave it in the hands of a professional
If you don’t have an experienced real estate lawyer, Avvo is great place to find one. You can start by asking general questions for free here.
- Negotiate Build-in Clauses that Protect Your Business. There are certain clauses that can be included in your lease contract that will help protect your business. Here are three of the most common (See the Small Business Administration’s leasing guide)
- Sublease – A sublease clause gives you the option to sublease the space to another business.
- Exclusivity – An exclusivity clause prevents the landlord from leasing any other spaces on the premises to a direct competitor of yours.
- Co-Tenancy – Certain shopping centers have one major business that brings in the traffic. This is known as an anchor tenant. A Co-tenancy clause allows you to break your lease if an anchor tenant would happen to leave and the landlord did not replace the anchor tenant within a specified period of time.
- Make Sure the Contract Has Clear Expectations Concerning Building Occupation, Build-out Period, and Source of Truth. You need to know when you are supposed to move in, how much time you have to remodel the space (hopefully at a discounted rate or rent), and what document will be consulted to settle disputes between you and your landlord. These all should be clearly spelled out in the lease contract.
To lease retail space for your small business can be a complicated job. However, now that you have read this article, you should have all the tools you need to find your retail space and negotiate your lease.
Find the retail space that best fits your budget, is nearest to the size you envisioned/require, and meets as many of the 8 location criteria as possible, along with any specific location needs your specific business may require. If you have the main things figured out, the little things will work themselves out as you go.
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