From timing to location, there are many factors for retailers to consider when signing a new lease or re-negotiating an existing one. Whether its deciphering legal jargon or considering alternative comparable spaces in the immediate area, its important to analyze all the options before putting pen to paper.
Doug Works, a First Vice President at CBRE, specializes in representing and advising action sports related companies on the tenant and buyer sides on all product types (retail, industrial, office, and land) around the world. Here’s his take on ten things every retailer should know before renewing or entering into a new lease.
10. Location – You must know that the neighborhood, area, or submarket that you have chosen is the best location for your specific business needs and customer preferences. The location of your operation can make or break your company, especially in this economy. This has as much to do with attracting customers (demographics) as it does attracting product accounts as you may be precluded from carrying certain brands if you are too close to a specific competitor. It is crucial to take traffic and parking into account, as well as the ability for skateboarders to skate to your shop or park.
9. Length of Lease – You must know the length of lease (minimum and maximum) for a specific location that you are comfortable committing yourself to. The length of the lease that you should commit to depends on your growth strategy and your ability to justify the cost and downtime involved with a move. Keep in mind that shorter leases can provide more flexibility if the needs of your shop change. A long-term lease ensures that you will have an affordable retail space for a predictable period of time. Landlords are sometimes willing to make more concessions on longer-term leases. It is also important to know that it is possible to negotiate specific options to renew under similar terms and concessions while negotiating a new or renewal transaction depending on the amount of leverage created. The term of the lease has as much to do with the negotiations as the rental rate.
8. Square Footage – You must know the minimum square footage that can accommodate your needs based on the length of lease that you have determined. In many markets, larger spaces lease for lower amounts on a per-square-foot basis, but if you are not going to be utilizing the additional space over the term of your lease, it is not worth paying more per month. It may be helpful to break your square footage down by revenue-generating areas allowing for additional inventory storage, room for growth, and possibly a small video-viewing area in order to better determine your space needs. That extra 800 square feet for a mini-ramp may be well worth the cost as it can attract additional customers who may not otherwise drive across town to visit your shop, but it is critical to determine if this is quantifiable and worth the additional monthly cost.
7. Budget – You must know your realistic monthly leasing budget. Not only do you need to budget for your monthly rental payment and moving costs, but depending on rent structure you may need to budget for property taxes, property insurance, liability insurance, HVAC maintenance, common area maintenance (CAM) expenses, janitorial, electrical service, and telephone/data service. In some cases, you will be responsible for your pro rata share of the overage in some of these costs after the first year. This can be significant so make sure that you have determined a realistic budget taking into account annual increases for all of the aforementioned items given your projected revenues and your other expenses prior to entering into negotiations. If you don't have a budget, you are absolutely not ready to take the next step. If the space fits all of your other needs like a glove but does not fit the realistic budget that you have determined, do not sign the lease or lease amendment.
6. Timing – You must know when to begin to take steps to identify and negotiate on a new retail space. Most tenants wait far too long to address the issues related to their expiring leases, simply ignoring the issue until the landlord initiates a conversation. Conducting the due diligence necessary to effectively create leverage typically takes at least three months. The lease negotiation and relocation process ranges from three to six months at a minimum. The other consideration to keep in mind is the two to four months needed for space planning, permitting and construction of tenant improvements. The entire process should be finalized no later than three months prior to lease expiration, which means the tenant should start addressing lease negotiations twelve months before the expiration date. Even if you intend on staying in your existing space, you need the same lead time to convince your landlord that you will move if they do not accommodate your needs.
5. Improvements – You must know generally how you will lay out your store prior to reviewing alternatives. Depending on the lead time that you give yourself and the tenant improvement dollars that a landlord will be willing to provide, you may need to occupy a space in its "as is" condition. It is critical to know your desired layout prior to touring spaces so that you do not waste any time viewing alternatives that just won't fit. For example, if you envision a massive bowl in the back of your shop, a) you cannot expect the landlord to pay for it, and b) if there is a restroom in the area where you envision your bowl, the restroom stays and the bowl gets much smaller or goes away. In most cases, landlords will not pay for tenant-specific improvements such as shelving, dressing rooms or counters so it is important to budget for those items as well.
4. Holdover Clause – You must know about this clause and understand how it can affect you. Leases are generally written with complicated legalese designed to give the landlord an easy out on every commitment. One area that is often overlooked is Holdover. A Holdover clause, which states the amount of rent that you will be obligated to pay for every month that you stay past the lease expiration, is included in most leases. This amount can range from 120% to 300% of your monthly payment. This can be negotiated when entering into a new agreement and sometimes when renewing, but it is crucial to be aware of as it relates to the timing mentioned above. Other troubling clauses should be identified and understood prior to signing the document.
3. Lease Comparables – You must know where to find reliable market information that can be used to create leverage. By obtaining and understanding where your prospective landlord and other landlords in the area struck their most recent deals (including free rent, annual increases, tenant improvement dollars, rental rate, and other concessions), you will have much more leverage when negotiating a renewal or new deal. This type of information can be obtained by spending weeks interviewing your neighbors and other tenants in the area, but it is much more easily obtained, reliable and useable through a professional commercial real estate advisor.
2. Alternatives – You must know everything about alternative comparable space in the surrounding area. Knowledge of the quality, quantity, and cost of relocation opportunities provide leverage for you when negotiating with your current landlord, as does knowing the length of time comparable commercial spaces have remained vacant. This type of information can be obtained by driving around and making hundreds of sign calls or pulling information off of one of the fragmented multiple listing services available to the public, but it is much more easily obtained, reliable, and useable through a professional commercial real estate advisor.
1. The Negotiation – You must know how to set the tone for the negotiation. Negotiating a new lease or a lease renewal can be a daunting task. Landlords will do everything they can to achieve the highest rent possible while giving up or spending as little as possible. That is, of course, how they make their living, and you should not blame or disrespect them for that. You should, however, fight for your best interest. But keep in mind that establishing a healthy, long-term relationship with your landlord is crucial. A high-quality commercial real estate advisor can negotiate fiercely on your behalf while keeping you in good graces with your landlord. Landlords know that a commercial real estate advisor will educate you and ultimately cost them revenue. To avoid this, some landlords approach their tenants early and propose two sets of lease terms: the first proposes a lower rent if the tenant is not represented by a broker; the second imposes a higher rent for broker-negotiated deals. The landlord blames the extra cost of the latter on commission fees, but the truth is that a high-quality commercial real estate advisor can negotiate much better terms than either scenario offered by the landlord at little or no cost to you.
CB Richard Ellis (CBRE) is the global leader in commercial real estate services. Doug Works, a lifelong skateboarder with a Masters degree in Business Administration, has been with CBRE for almost 12 years. Doug is a long-time contributing member of the Board Retailer Association (BRA). Works and his global counterparts provide commercial real estate solutions for skateboard, wakeboard, snowboard, surf, and other Action Sports-related retailers around the world, acting as resources to help business owners make the best possible, most informed commercial real estate decisions. In most cases, these services can be provided at no cost. For more information or to discuss your situation further, contact Doug at [email protected] , 858-646-4757, or www.negotiateyourlease.com.
(Top Photo: Creative Commons, freddyfromutah)