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What You Need To Know About Leasing A Store

So you own your own retail business, excellent!  Aside from the “4 P’s” of marketing, there is another acronym that is ultra important to the success of any retailer, “The 3 L’s”…..Location, Location, Location!  Let’s take a look at some critical pieces of information you will need to know in order to be successful at taking your retail business from your garage to Main Street, USA. 

Important First Steps

[tweetmeme]An important step in being able to strategically locate your business in any retail environment, is knowing who your clientele is.  Once you have identified that, then you are ready to begin your search for leasing retail space. 

So now that you know what demographic you intend to market towards, what are some of the keys to successfully leasing your first retail space?  Use of a professional Broker could be very helpful since more than likely, that Broker knows the Landlord and/or the Broker who is representing the Landlord on a piece of property that you may be interested in.  Your Broker also acts as the “buffer” between you and the Landlord during the negotiating period, which he or she can implement “tricks of the trade” to ultimately get you the best possible deal.

The “In’s and Out’s” of Leasing Your Store

Let’s look at the “in’s and out’s” of how to successfully lease your first retail store:

The first thing that you should do is get in your car and drive an area looking for vacant spaces in shopping centers.  When you drive your target area, look for the following:

 –          “For Lease” signs in windows or board signs in the grass area.  That’s your starting point for getting all the necessary information that is available.

–          Look at the co-tenants in the shopping center.  Are they complimentary uses to yours? 

 Once you have identified a site, or multiple sites of interest, you should then call the Landlord or Listing Broker to obtain all information like asking price per square foot, size of the available store, and set up a showing so that you can view the interior of the space.  Keep in mind a few things:

 –          Does the frontage (the number of feet of window space you have open to the street) provide enough visibility to the road?  Is there enough depth to the space?

–          Is the bathroom strategically located in a spot that will not take up valuable floor or storage space?

–          Is the ceiling in good shape?

–          What is the age of the heating and air conditioning unit?

–          What are the 1-3-5 mile radius demographics?

–          What are the traffic counts at the intersection of the roads at the property?

–          What is the access in and out of the property from the streets?

–          Is there pylon signage available to you?

–          Is there plenty of parking available to you?

Let The Negotiating Begin

So you have now viewed each space and selected the one location you want, what’s next on the agenda?  Traditionally speaking, you will begin negotiations via a Letter of Intent (“LOI”).  An LOI is a non-binding, which means that you are not legally obligated to rent the space even if you sign the LOI, agreement that depicts the terms of the deal.  It essentially lists who the Tenant is, who the Landlord is, the premises you will be renting, the term of the lease in years, any options to renew your lease, the base rent you will be paying, the expenses of the shopping center, any free rent you will get in order to build out your store, the security deposit, and Lease Guarantors.  This is your opportunity to negotiate!  Keep in mind that most of these points are negotiable, such as the asking base rent, the security deposit, and base rent abatement rent period.

Once you have had all the back and forth’s with the Landlord or the Landlord’s representative, a Lease will be drafted based on the terms and conditions you negotiated in this LOI.  Landlords will require you as the Tenant, to provide them with a Personal Financial Statement so that they can assess the viability of you as a Guarantor of the lease as well as the viability of you being able to pay the rent.  Additionally, the Landlord or its Agent will run a credit check on you.  If you are married, your spouse may be required to sign the Guarantee as well since assets are typically joint when married.

What does a Personal Guarantee mean?  Essentially it is a promise from the Tenant to the Landlord that IF you default on the Lease, close the business, but still have term left on your lease, that you will continue the payment of rent to the Landlord until the space is either subleased or leased to a brand new Tenant.  In the event of a default on the Lease, such as non-payment of rent, the Landlord has the ability to gain a legal judgment against you for any outstanding rent owed.  This is a very critical topic, so discussion with an attorney on this matter once you get the lease to ensure awareness of what you are signing is important.

Moving forward, you now have a lease draft in your possession, what do you do with it?  Unlike the LOI, a lease is a binding agreement.  Once you sign this lease, you are bound to it for the terms and conditions you agree to.  Therefore, the use of an attorney to negotiate the legal aspect of the lease would be a wise investment, but don’t use bad form and have your attorney try to renegotiate business terms, Landlords don’t like nor appreciate that.  Typically speaking, commercial leases are more favored towards the Landlord and protect them, which is why the expertise of an attorney is needed in order to make the lease fair between the parties. 

Types Of Leases

So what types of leases are there?  There are gross leases, modified gross leases, and triple net leases.  Most commonly used are the triple net leases.  A triple net lease means that you, the Tenant, are responsible for basically everything.  You will have two rents that will make up into one.  You will have your base rent, which is more commonly known as fixed minimum rent, and then additional rent of the expenses of the shopping center: real estate taxes, common area maintenance, and shopping center insurances.  You will also be responsible for maintenance, repair, and replacement of your heating and air conditioning units.

Typically speaking, your base rent will increase by 3% annually, unless you negotiate an alternative with the Landlord.  However, the unknown is what the expenses will do each year.  It is rare that expenses decrease from one year to another, but not impossible to occur. 

As part of your LOI negotiations, a Landlord may offer you 30 days of free base rent.  As a start up business, a Landlord will more than likely have you take Possession of the Premises in an “As Is” condition.  You will have to do any demolition of the space as well as the build out.  Now, general building code issues that are not related to the type of business you will be opening, should be handled and corrected (if need be) by the Landlord.  You will still be required to pay the expenses of the shopping center during that base rent abatement period, however. 

So there you have it!  A general glance at what to look for and expect when you make that leap from your business out of your garage to Main Street! 

Copyright © Jason Lenhoff: Jason Lenhoff has been a commercial real estate broker for Horizon Realty Services, Inc. since 2000.  Horizon Realty Services is a full service commercial real estate company specializing in retail shopping center leasing/sales, tenant representation, construction, development, and shopping center management.  Specifically, Jason Lenhoff specializes in leasing shopping center space as well as tenant representation.  For more information on Horizon Realty Services, Inc. please visit our website at www.horizonrealtyservices.com or email Jason Lenhoff at jlenhoff@horizonrealtyservices.com.


Comments

  • This is so helpful, thanks so much! A friend of mine who now owns 4 different local retail locations also mentioned checking the ceiling – I think that’s something that a new retail owner could easily overlook, but would be a major problem later on!

  • Justin
    June 10, 2010

    I don’t know all that much about the commercial real estate industry but this article really opened up my eyes. I truly feel that contacting Jason would be a great move for me and plan on doing so. He appears to be very educated and creative and that is what you need in your negotiations and big decisions. Talk to you soon Jason.

  • Jason Lenhoff
    June 10, 2010

    Mallory,

    Looking at the ceiling tiles are important because it could tell you whether or not you have a roof leak. 9 times out of 10, any water discoloration on tiles is due to condensation from HVAC ductwork or water lines, instead of a roof leak. Trust me when I say you’ll know the difference between a roof leak and just some condensation!

    Justin, thank you for the kind words, I look forward to talking with you more. I have been in this business for 10 years now. Please feel free to contact me at 847-870-8585 or via email if you would like to discuss further any retail opportunities I may have for you. Our office has about 150 listings all over Chicago and the suburbs, in addition to the Tenant represenation we have as well.

  • Cassandra
    April 6, 2012

    Please help! I have been a business owner of swimwear store for 16 years and recently the building I rented a storefront from changed ownership. Unfortunately I had to vacate. The store was established in 1979. Being a swimwear store, and no need for a brand new location in wintertime, my merchandise has been in storage for 6 months. It is now April 2012 and I have been looking for a new location (in San Diego). I have applied for 3 stores (Rent is between $700 and $900;very inexpensive compared to my former store at $1975) in the past month and have been turned down by all 3. The reasons are as follows:
    Store #1 – The retailer they chose to rent to “had financials that looked better than mine in 2011”. In 2010, apparently my sales were higher, but in 2011 their sales were higher. (My gross profits are aprox 35,000 a year)
    Store #2-The land lady felt swimwear would not sell in her part of town because it is located 3 miles from the beach, not right on the boardwalk. She also felt that a swimwear boutique catered to a “younger crowd” and in this part of town it is mostly consumers over the age of 35. (I was not aware that people over 35 do not swim. I am 39 years old and frequent the beach quite often, as most of my customers).
    Store #3 – 2 blocks from the Ocean- Landlady “refused my application” after reviewing my profit and loss statements for 2 years because she felt that having a retail store in her rental property was problematic due to having to sell merchandise. The previous two tenants were nail salons.

    If anyone has any suggestions for “talking to landlords” or “securing a storefront” please email me at LadyLawfree@gmail.com. I feel as if I did or said something wrong, but in fact, I have been totally honest with every landlord (maybe that is my problem?). I have been in retail for over 25 years and owned my store for 16. I am not a novice, but I sure could use some advice from fellow retailers. Thank you!

  • Derek Mcdoogle
    December 28, 2016

    In your article, you stated that an important step in being able to strategically locate your business in any retail environment is knowing who your clientele is. It seems that finding the right location could mean everything for a certain type of business. I wonder what type of training a real estate agent would need for this type of real estate as opposed to residential properties.

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