Opening a retail outlet is an ambitious, competitive, and costly endeavor.
The capital outlay includes branding, hiring employees, installing fixtures, purchasing stock, and finding that ideal space to showcase your business.
With these expenses in mind, it’s easy to see why many retail entrepreneurs start out leasing the space for their business to minimize their initial capital outlay.
If you’re in this group of leasing entrepreneurs, it’s important to gain a good understanding of your options before entering an agreement.
Keep in mind that negotiating a commercial lease can be a complex process that can seem overwhelming.
However, careful consideration of the following three areas will help you as you go through the process of lease negotiations.
Learn the types of leases available. First and foremost, you must understand the type of lease you are signing. It is important to know the differences between lease types, as there are pros and cons to each. With gross leases, you typically pay a single amount to the landlord, which covers the base rent plus utilities, property taxes, insurance, maintenance, and expenses for common areas. There are two commonly used types of gross leases, known as gross rent leases and modified gross leases.
Net leases, on the other hand, can often result in a lower rent payment to the landlord. However, these leases make the tenant responsible for fluctuating incidental costs such as utilities, maintenance, and, in some instances, lease operating costs. The three main types of net leases are known as net lease, double net lease, and triple net lease.
A third type of lease is known as a percentage rent lease. This type is common in malls and other multi-tenant properties. With a percentage rent lease, you pay the landlord a base rent plus an agreed-upon percentage of your gross sales.
Carefully consider the lease term. Tenants can often obtain a more favorable base rent rate with a longer lease term.
However, if you are a start-up, it may not be feasible to sign a multiyear lease, because the needs of your retail business may change sooner than anticipated.
You may be able to increase your negotiating position by asking for renewal terms with set rent increases, favorable termination penalties, and subleasing options up front.
Define responsibilities of the tenant and landlord. Regardless of which type of lease you and the landlord agree upon, the lease agreement should clearly define the responsibilities of each party. Landlords may offer tenants incentives in the form of modifications to the space to attract the best tenants in a highly competitive market.
It will be important to clearly outline who is responsible for the maintenance of those modifications during the lease term, and who is responsible for removal of any modifications upon termination of the lease. Furthermore, retail spaces tend to be in multi-unit buildings with common areas both inside and outside the building envelope.
Which party is responsible for the maintenance of those common areas, and when, should be clearly outlined in the agreement during the negotiation process.
