Understanding the Term of Your Lease

When I speak with first time retail business owners or single unit business owners, I am often asked, "How long is the lease for?". Depending on the wishes of the landlord, I usually answer FIVE (5) years or TEN (10) years. Many times, the potential tenant asks whether they can get a THREE (3) year lease and 8 out of 10 times, I say NO. In today's blog, I am going to explain why...

1. Confidence: Unless, there is a very calculated business reason for having a less than five (5) year lease term, it does not really inspire confidence in the landlord or leasing agent that you are sure about your business. In fact, in my experience, the people that ask for very reduced terms are the ones that tend to go out of business quickly or really do not have a clear plan. Now there are some cases when a short term lease is strategic to your business. One example would be a business that is developing its own building and needs a place to operate while waiting for the new building to be completed. This is a reasonable example, but telling the landlord or leasing agent, " I am not sure my business is going to make it, so I think 3 years is safe." That just doesn't inspire confidence, but...there are exceptions to the rule.
2. Value: Landlords often like longer term leases because they add value to the shopping center/building. It is easier to sell the shopping center because the lease value adds to the overall value of the asset. The value of your business also increases with longer term leases. I have a client who starts retail operations for his business in various shopping centers and then sells the operation to somebody else. He only does ten (10) year leases because this allows the new owner to carry on the business after my client has set things up for the first few years. If you have very short term lease, without options, you are going to have a VERY difficult time selling or assigning the business because it will be very hard for the buyer to get her money back in such a short amount of time. The buyer just will not be able to realize a fair return on investment (ROI) from buying the business with only 1 year to make it back.
3. Build Out: If you spent your personal money or the bank's money to build out/design the interior of your space then you are going to want to stay in business a while to make sure you get your money back. Also, you are much more likely to get some form of an allowance from the Landlord if you chose to stay in the space for a longer period of time. Explaining the tenant improvement allowance is a whole different posting, but the quick and dirty is that Landlords amortize the value of an allowance given to a tenant and if the term is too short, there is no way to get that money back, so the landlord is going to avoid giving the allowance.

These are some general rules and something that is truly important, but these are not hard rules. Sometimes a short term lease is ideal, but in most cases it shows a lack of strength/confidence in business. Other things impact the term, but if you are getting started in business take the time to plan things out and aim for a 5 to 10 year term.

Renting vs. Leasing

On a daily basis I receive calls from people interested in leasing retail space in some of the shopping centers that I lease and when I tell them the price, most people do not flinch...at first. The dialogue is usually starts off with someone asking me the price after seeing a sign. They almost always ask, "how much is the space" and my answer is always something like "$25 per square foot(psf)". My response is always followed up with, "oh ok, so its around $2,500 a month. That's not too bad". Well, my friends...this is where retail education is lacking. When one rents a house, apartment, mansion or even a ballroom, 9 times out of 10, the price to use that space will be quoted in the monthly value. So, if you rent an apartment in Brooklyn, you will have to pay $2,000 a month to live there. And if you earn $5,000 a month, you figure that this apartment is within your budget. But...you see, in the world of construction, commercial real estate, and even architecture...this are priced at a dollars per square foot. The reason is because the space is measured on a square foot basis as well. Every piece of real estate has a value per square foot, square meter, hectare, etc. And there is a leasing value per square foot and the sales value per square foot, but for our purposes, we will stick to the leasable value per square foot. Let's do an example for educational purposes: I see a sign that says retail space for lease - 2,000 square feet (sf) available. Great! I make the call and speak with Ms.Broker. I ask her how much does the space cost and she tells me $20 per square foot. Okay, for someone new to leasing a space, that does not really mean much...at least not yet, but here is what you do: Take the size (2,000 SF) and Multiply that by the dollar amount provided ($20): 2,000 SF x $20 = $40,000 This $40,000 equalts the amount you would have to pay annually to lease this retail space. So at this point if you need to understand things in monthly payments, the space will cost you $3,333.00 a month (without operating expenses which is a different blog for a different day). The WHY Now, you might ask...well, why doesn't the landlord just say everything in monthly payments...thats what most people are familiar with. Excellent question! In a shopping center, there can be a range in the number of tenants and spaces available for lease. Well, it would be very difficult to set a standard when there is a strong likely hood that each space is different. A 4,000 SF space is not going to have the same monthly rate as a 2,000 SF space, but they are very likely to have the same cost per a square foot. So, the price per square foot is a gauge for the shopping center as a whole. Keep in mind, this is also the best way to get a feel for your market (the area where you live or plan to start your business). Prices per square foot in the Georgetown area of Washington D.C. are running between $80 SF and $110 SF while a similar space in the China Town area of D.C. will cost you about $55 SF. Any reason for the difference? YES!!! Location, location, location mixed with a good dose of supply and demand. So, I hope this helps you in finding your next space and when you hear someone quote you $25 a square foot, counter them with an offer in their language...the square foot language of commercial real estate.

What's with the name? Stay Tuned...

It amazes me how misinformed and in the dark people are when it comes to leasing retail space for their business. Even those people who get involved with a franchise are often lacking the facts. It's not their fault or anyone's fault to be specific. The problem can be identified in the overall lack of information available to people looking to lease retail space for their business. And there you have it, the motivation for this blog. It is my hope and mission to make sure you understand as much as possible when looking to lease a space for your business. Okay, so you still want to understand the name. In retail real estate, most deals are done on a Triple Net(NNN) basis. The Pro-Rata(your portion of the shopping center in square footage terms) share of real estate taxes on the building, insurance on the building, and common area maintenance (CAM) are the elements that put the triple in triple net. The NET refers to the fact that everything passes through to the tenant (you). In essence, you are in charge of everything inside of your space and any other area of the shopping center that you use AND you are paying for someone chosen by the landlord to maintain the areas used by everyone, like the parking lot. So, there you have it...the reason for the name is that 97% of the time, you will be signing a triple net deal.