How to Negotiate a Lease -- A Beginner's Guide for Retailers
Entrepreneur's New Year’s Guide
In the fifth edition of his book Retail in Detail, retail business owner and consultant Ronald L. Bond offers small-business owners an updated, no-nonsense guide to the world of retailing. In this edited excerpt, the author offers expert advice on the ins and outs of leases and how to get just what you want in your retail lease.
Negotiating a lease can be as simple as buying a toothbrush or as complicated as buying a new car. Obviously, it's simpler if you're dealing with an individual owner who's very flexible or a large corporation whose policies allow for no negotiations. But we'll assume you'll be dealing with a leasing agent or shopping center manager and that there will be some room for negotiation, as is usually the case.
Leases for retail space usually have a minimum term of three years. The following are usually included in retail space leases, in various combinations.
- A basic term. The lessee -- that's you -- is obligated to pay for the space for a specific time period (usually three years), whether or not your business survives that long.
- A basic rental rate. This is calculated per square foot or as a percentage of gross sales, whichever is greater. Typical rents may range from $.90 to $3 per square foot per month or 6 percent of gross sales.
- Assignment of maintenance responsibility. The lessee is normally responsible for maintaining all equipment serving the space, including electrical, plumbing, heating, air conditioning, and structural components.
- Water and sewer. These are usually included in the lease rate, but expect to pay extra for gas, electricity, and trash removal.
- Triple net. This is a monthly charge, usually for the expense trio of taxes, insurance, and common area maintenance, hence the term "triple net." This charge is designed to allow the lessor to pass on his or her variable costs to you. They can represent an additional 10 percent to 35 percent added to your basic rent.
- Finish-out allowance. In return for the three-year term, the lessor will usually provide you an allowance to finish out the space to your specifications. This is typically $10 to $30 per square foot, which is sufficient for basic walls, ceiling, lighting, electrical, plumbing, heating, air conditioning, and insulation. It doesn't normally cover wall finishes, carpet and floor tile, signs, and any custom work to suit your specific needs.
- Prepaid rent. This is typically one to three months.
- Security deposit. This is usually zero to two months' rent.
As the first step in lease negotiations, contact leasing agents regarding spaces in which you're interested and ask for proposals. After receiving several, you should have an idea of the menu of terms and prices you'll have to deal with in your negotiations. At this point, you may find it desirable to engage a leasing agent to negotiate the lease for you, if you feel overwhelmed by the task or if you're not a particularly good negotiator. You can do it yourself, however, and by following some basic guidelines, you should be able to achieve reasonable terms.
It will help if you can locate at least two spaces that meet your needs, thus ensuring competition for your lease. After you receive the proposals from the leasing agents or center managers, don't let them pressure you into signing a lease prematurely.
You should have an attorney review your lease, but don't let him or her make decisions for you. Attorneys are paid to point out potential risks, and they may be overly cautious to make sure you don't later blame them for failing to warn you properly. Listen to the attorney's advice, but make your own business decisions.
Prepare and submit a counter-offer, in writing, in response to the proposals. Some proposals you might consider including are:
- Lower basic rates
- No payment of percentage of sales or a smaller percentage
- Larger finish-out allowance and coverage of more improvements, such as floor coverings and interior partitions
- Graduated lease rates, starting low but increasing over the lease term
- Limits on "triple net" charges
- Inclusion of some utilities in the base rate
- Shorter- or longer-lease terms
- "Escape" clauses to allow you to get out of the lease in certain circumstances
- Free rent (one to six months, depending on market conditions)
- Lower prepaid rent and security deposit
Include several or all of these in your proposal. You're unlikely to succeed with them all, but it will establish a good position from which to negotiate and help you evaluate the willingness of the lessors to engage in meaningful negotiations. Make sure the lessors are aware that you're negotiating with other centers.
After you feel you've gotten all the concessions you can get, choose the one that's to your best advantage and finalize the terms.