Leasing Retail Space – The True Costs of Leasing Space

Occupancy Cost

After obtaining information regarding the cost of tenant improvements, you should be able to estimate the cost of occupancy for your retail space. This will include rent, CAM charges, utilities and the amortized cost of tenant improvements.

CAM

CAM charges referred to comment area maintenance. Practice may vary from area to area, but in most areas this includes not only maintenance expenses but also the cost of taxes and insurance. Most leases for retail space include a partial or complete pass through for basic operating expenses, insurance, management, and property taxes. The landlord or leasing agent should be held to provide an estimate of these charges for your space.

Amortized TI

The amortized cost of your tenant improvements will be the cost over the term of your lease. To keep matters simple, if you are spending $60,000 to renovate your space, and your lease is for five years (60 months), include $1000 per month for the cost of tenant improvements.

Are You Paying Too Much?

Next research the occupancy cost compared to what others in your industry are spending. You may want to review occupancy cost on a dollar per square foot basis, percentage of sales basis and a dollars per month per location basis. If possible, determine what other similar businesses in your area are spending monthly for their total cost of occupancy.

Occupancy Cost Data Sources

Research the information available from industry associations and related publications for information on occupancy costs. It is sometimes referred to based upon dollars per square foot per year. It is more often referred to as a percentage of sales. If this is your first store, it will be difficult to estimate your sales. If you have other locations, you should be able to make an educated guess regarding the probable level of sales for this location.

Dollars per Month per Store?

In some cases, it may also make sense to review the cost of occupancy on a dollars per month basis. For example, if your existing stores tend to have a similar level of revenue, focus on locating retail spaces which meet minimal criteria and have the lowest monthly occupancy cost. Conversely, perhaps any store will have an excess amount of space for your real needs.

Rent per Month Example

Based on previous experience, there are no locations which will provide the minimal amount of space you truly need. Further, since you are only leasing a modest amount of retail space for 4 months per year, landlords have not been particularly accommodating. Hence, a location which meets minimal criteria and has the lowest cost for the tax season may be your best option.

Criminal Activity?

Finally, research criminal activity in the area for the retail space you are considering. In many cases, it is apparent whether an area is likely on the low crime rate or high crime rate end of the spectrum. However, considering the investment of time and capital necessary to open a store, it would be very disappointing to learn your retail space was near a hotbed for criminal or gang activity shortly after opening.

Example

Consider the following example. A retail center in north Houston had been a prosperous shopping center on a major thoroughfare for 15 years. Shortly after hurricane Katrina devastated New Orleans, many evacuees from New Orleans settled in Houston. For whatever reason, a large number of New Orleans residents who were criminals located in the adjacent apartment complex. During the next 12 months, there were three murders on the retail center property. Occupancy fell from 80% to 30% because of the problems.

Crime Data Sources

Options for researching criminal activity within an area include online crime reports, discussions with tenants at the property, and discussions with police officers who are active in the area.

Speak to Tenants

Tenants at the property where you’re considering leasing retail space can be a wonderful resource. They can provide information regarding crime in the area, tenants who have left the center, problems with traffic, problems with ingress and egress, problems with parking, and the trend in the center. Retailers within a retail center typically trade notes or visit with each other. Ask if business has been getting better, or is business declining for the businesses within the center?

Area and Property Criminal Reports

Area police officers are another excellent resource regarding criminal activity in the area. In most cities, you can obtain information regarding criminal records for any address. The records are public information. All you have to do is request the information and pay for the cost of copies.

Speak to the Source

In addition, in most cities the police are willing to visit with you if you are considering opening a business. Expect them to be very direct regarding criminal activity and trends in the area. It is possible they will discourage you from opening a store in a location you’re considering. However, is much better to not open a store in a poor location then to open the store and have to close the business.

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