By Sheila Laderberg Tarasiuk Founder, Pedal Retail Advisors
Renting a commercial retail space is a whole thing. The journey from deciding that you want to open a bricks and mortar space and getting open is long, rocky and surprisingly confusing. For first timers, the journey is challenging at best and financially catastrophic at worst. Yeah, it can be scary. But it doesn’t have to be that way. Here are five tips to making it through the process with minimal bruising. I wish I could say I’m just an all-knowing wizard, but the truth is that I learned these things the hard way.
I get it. Your expertise is kombucha, not financial models. That’s okay. But if you want to open a kombucha store, you’re going to have to cozy up to the numbers behind your business.
The only way to know how much space and rent you can afford is to determine how much income your business can generate. That’s seemingly obvious, but you’d be surprised at how many would-be retailers are paralyzed by the thought of making revenue projections. Of course, you don’t know how much business you’ll be doing next June because your business isn’t even open yet. How could you possibly know how much rent you can afford? You can’t.
Spending time figuring out how many things you can sell and for what price is primary to business planning. You can start with one week, then push it out to one month, then one year, and then make some assumptions about how you’ll grow year-over-year. Once you project what the first year looks like, you can start to have some notion of what kind of rent you can afford.
Depending on your industry, you’ll want your costs to occupy your space (aka occupancy cost) to be between 6% and 12% of your total revenue. So, working backwards from there. Here’s a fun party trick: if you know a certain space has a rent of $40 per square foot, and the space is 1000 square feet, then the annual rent is $40 x 1000 = $40,000. Divide that annual rent of $40,000 by 10% ($40,000/0.1) and you’ll get $400,000. That’s how much revenue you need to bring in for your occupancy cost to be at a reasonable 10%. This is a super simple way of determining if the space you’re drooling over is going to require you to sell a ton of kombucha in year one.
So, what do I mean by “have a plan?” Well, what landlords (and bankers and investors) really want to see is a comprehensive business plan where you talk about the concept, the market, the target customer, and much more. But understand this: there is no business plan without the financials. You need to think through both the vision and the math. Once you see your business in stark financial form (even if the numbers are just educated guesses), it’ll be a whole lot easier to walk away from space that you just can’t afford.
If your back hurts, you wouldn’t go to a dermatologist, right? Specialization matters, and this is especially true for real estate. Even within commercial real estate, brokers focus on certain types of deals, so you want a broker partner whose specialty is leasing retail spaces. There are so many nuances to retail spaces, and when you’re new to retail deal making, you need an advocate who has already seen a hundred similar deals and knows how much leverage you can reasonably expect.
So, what should you look for in a retail broker? It’s easy to be seduced by flattery, big talk, and promises of all the best off-market opportunities. The truth is that any retail broker worth her salt will be able to identify spaces for you (both on and off the market). A broker telling you they can find great listings is like a hair stylist telling you they have scissors.
What you really want to look for is someone you connect with and trust—especially when this is your first rodeo. You’ll need more handholding than an experienced retailer. You’re most likely going to be considering and negotiating multiple spaces at once, and your broker is going to run point on all of this. And guess what? You’re probably not your broker’s only client. So, you need someone who is organized, prepared, and patient. Otherwise, you may end up feeling like you’re not getting the attention you need…and that is not how you want to feel before you sign a lease where you’re on the hook for hundreds of thousands of dollars.
Do you know what kind of person asks dumb questions when they’re leasing a space for the first time? A smart person. Smart people understand that when they’re considering making a major, long-term financial and emotional commitment, they’d better get up to speed and understand what they’re considering signing.
There are many, many terms that are specific to commercial real estate that are majorly consequential to your business’ future success. So, when you get a document with a bunch of words like “permitted use,” “escalation,” “default remedy,” “NNN,” and “delivery condition,” you may be inclined to throw up your hands and say, “Come on, man! I’m just here to make some kombucha! I don’t know what these things mean!” And you wouldn’t be the first new retailer to stick their head in the sand and hope that the magical fairies of real estate fix you up a deal that’ll be perfect for ten years. But guess what? There are no magical fairies of real estate. There are, however, shady brokers and landlords who will take advantage of your ignorance and write you a bad deal. Consider it a warning.
The point here is that you’re negotiating your future. So, you’d better understand what you’re agreeing to. Yes, there will be lots of legalese and each section will feel thick but take it slow and really seek to understand. At the end of the day, you’re going to come to understand all these terms one way or the other. Better to understand what you’re agreeing to before you sign. Because after, you’re pretty much never going to look at your lease unless you’ve got a problem.
See above regarding dermatologists. While a divorce attorney can absolutely navigate a contract, an attorney who specializes in commercial retail leases will have a deep well of knowledge about the minutiae in your lease that could have major consequences for you as a tenant. Not only will an experienced attorney more easily identify potentially problematic parts of your lease, but they will also know how much leverage is typical for a tenant like you. This is incredibly valuable, because what’s the point of identifying an issue if you don’t know how you should approach it? And unless you’re experienced in leasing retail spaces, no one would expect you to know what the critical issues are…much less how to negotiate in your own best interest.
Commercial real estate leasing attorneys only work on (you guessed it) commercial real estate leases. This means that they can confidently guide you through what can be a drawn-out process. Even tiny retail spaces can have leases that run 40 or 50 pages, so there is a lot of ground to cover. If your attorney doesn’t have the experience to know how certain terms affect businesses like yours, how can they really be your best advocate? It shouldn’t be hard to find the right attorney, and your broker (since you hired a great one) will have reliable referrals.
“But wait! Isn’t this going to be crazy expensive?” you may ask. Well, yes and no. Any good attorney will have an initial free consultation with you and should be able to give you a rough ballpark of how much a lease negotiation like yours will cost. Your attorney will assume a typical amount of back-and-forth in their ballpark quote, but the more you want to fight the landlord, of course, the higher your legal fees will be in the end.
A solid lease is critical to the health of your retail business. So don’t try to avoid spending money on important legal representation. Because while five to ten thousand dollars is a lot of money, you know what’s really costly? Bankruptcy.
You are not married until the clerk of the court gives you the paper, and the same is true for your commitment to a retail space. It’s not final until both you and your landlord have signed, and there is a lot of dating and tough conversations along the way.
Speaking from experience, there’s a strong temptation to fall in love with spaces early in the search process. This is normal. There is a tremendous amount of important emotional investment required to get to opening day.
One day when you’re a seasoned retailer, landlord brokers will be hitting you up all day long with sweet deals to get you into their developments. Until then, you’re basically sitting by the phone waiting for someone to call you to hang out on a Saturday night (remember when we did that?!)
Anyhow, when the phone finally does ring and you’re going out on your date with the landlord, you must play it cool. Even though this is your first or second date ever in your entire life, you should not be naming your unborn children yet. You don’t even know if you’re compatible. What if they have terrible table manners or freely admit they have a gambling problem?
See my point? Even though you’re convinced that space would be perfect, and you would 100% be amazingly successful there, you do not have enough information yet to know if this is a good deal for your business or the best long-term commitment you can get. So don’t let your feelings of desperation cloud your judgment or critical thinking.
Finding the perfect space for your retail business is tough and operating the business will challenge you in ways you didn’t think possible, so it’s well worth the extra effort on the front end to ensure that you’re setting yourself up for success. Remember the old high school math teacher adage—prior preparation prevents poor performance. Being willing to put in the hard work, invest in an experienced team, and keep a level head throughout the process will pay major dividends in the end.
