Landlords and Leases
With all this talk about location comes a frank discussion of how to rent or lease a site to your advantage. Some small retailers in downtown areas may be able to purchase their stores, but the majority of retailers—especially those in shopping centers—must sign a lease.
A lease is a property rental contract with a specific term or length. There are three common types of leases: fixed rent, straight percentage, and percentage with minimum. Following is a discussion of how they work.
Under a fixed-rent lease, the tenant pays the same amount every period (typically a month), regardless of the sales volume. The lease payment, sometimes referred to as rent, usually is based on the size of the store in square feet. In fact, most commercial properties are priced and compared using square footage.
Many tenants prefer fixed-rent leases because their rent costs do not go up if their sales increase. It is a fixed expense for their business. Tenants also prefer longer leases, such as three or five years, though the term can be an obligation if your store closes before expiration. Some fixed-rent leases are adjusted annually, based on indexes such as the Consumer Price Index or other economic indicators.
Downtown stores and smaller shopping centers, especially in outlying areas and small towns, tend to be offered on fixed-rent leases. Retailers who prefer fixed-rent leases may lease a downtown store rather than a mall location because the downtown location has fixed rent.
Before you select a retail site, do some research on the local rates so that you can accurately compare them. Talk with property managers, landlords, and other retailers to determine what fair market rates are in your area.
Under this less popular agreement, the retail tenant pays rent equal to a stated percentage of the periodic sales figure. Quarterly payments are common, though monthly and even annual payments are done.
For a tenant, a straight percentage can be great or a drain. If sales increase, you will be paying higher rent. If they fall off, you will pay less. Because a straight-percentage lease is riskier for landlord and tenant, it is not as popular as other lease forms.
A percentage-with-minimum lease is a combination of the previous two lease forms. Rent is a percentage of sales, but there is a minimum that must be paid even if sales fall off. There is less risk for the landlord and more for the tenant, so the percentage is less than in a straight-percentage lease. If your store's sales dramatically exceed expectations you will pay a higher rent.
Percentage-with-minimum leases are the most popular type of shopping center leases. It protects the center owner from an unsuccessful tenant yet rewards the landlord for higher sales levels. The shopping center has an incentive to increase sales for tenants through advertising and promotions.
How Shopping Center Leases Differ
Larger shopping centers and malls use a modified version of the percentage-with-minimum lease structure. The primary reason is that they provide not only the retail space, but also common space and services shared by all tenants within the mall.
Shopping center leases get more complex as the landlords and tenants divvy up the risks and rewards of real estate and retailing. The lease for your retail space will be dictated more by the landlord than by you, the tenant. However, you must know what common leasing terms mean:
Net or single net lease: the tenant pays the base rent plus property taxes. The leasor pays the building insurance and building maintenance costs.
Net-net or double-net lease: the tenant pays the base rent plus property taxes and building insurance. The leasor pays the building maintenance costs.
Net-net-net or triple-net lease: the tenant pays the base rent plus property taxes, building insurance, and maintenance.
Under a triple-net lease, the risks are reduced for the landlord and shifted to the tenant. That means the total rent paid to the landlord is lower. It also means that the tenant can shop around and reduce secondary (net) costs rather than rely on the landlord to do so, thus saving money that adds to the profit.
In addition to rent, shopping center tenants typically must pay into a tenant association that coordinates cooperative advertising and funds other common promotions. Make sure that you are aware of these costs as you sign a lease. They must be in your budget, as they are expenses that will reduce your profits. Also, if you are comparing two locations, make sure that you compare the occupancy costs (fixed rent, overhead, common area costs) and the promotion costs (advertising, signage, and so on) as well as estimated traffic to determine a cost per customer.