by: Peter D. Morris CRX, SCLS, SCSM, SCMD
Greenstead Consulting Group
Specialists in Commercial Real Estate Training and Consulting
Finding the right space and negotiating your lease with a landlord can be intimidating. It is likely that you have searched high and low for the perfect piece of real estate and you don’t want to do anything to jeopardize your position. But the space you rent could well be the single largest expense you have in your business. The value of your lease over a 5 or 10-year period can amount to thousands, hundreds of thousands, or even millions of dollars.
There is a defined process to finding the right location for your business and it doesn’t matter if you are looking for retail space, office space or a warehouse or size of space. The basic process remains the same and is the foundation to both finding the right location and negotiating the best lease possible.
Remember too that obtaining a space for your business is only a part of your business. It is an end to a means. For example, a good retail location for a café is only one part of a good café. The café is your business. Conversely, leasing space is the landlord’s business. It is their bread and butter. Leasing space is not done on a level playing field as a result. By thoughtfully going through each of these steps, you will be on solid footing to properly find the right space and negotiate your lease.
These steps are a progression to opening in your new location. You have to complete one step before proceeding to the next. You may also want to think of the process as a funnel because you will start looking at the big picture and funneling down in detail to the opening of your location.
Although I will focus on using this process for finding a new location, you can — and should — use the same process when renegotiating your existing lease. So let’s get underway with the first step. In subsequent posts I’ll go over each of the other steps.
Step 1: The Business and Marketing Plan
Many entrepreneurs don’t include their real estate needs in the marketing plan and only have a line item in the financials statement in the business plan concerning the cost of rent.
There should actually be a lot more discussed about the real estate, such as:
- the impact of growth on the location(s)
- how the real estate can play into the marketing and company sales, such as making sustainability a part of the marketing
- building signage, etc.
One error I frequently see is a business owner adjusting the business plan to accommodate the rent the landlord quotes. Typically, the businessperson justifies the rent by increasing the sales volume in the business plan. This is a mistake for a number of obvious reasons. The rent should conform to a well conceived business plan and gross rent occupancy cost ratio (aka “GROC”. It is the percentage of the gross occupancy cost to sales and is a common real estate efficiency benchmark). Not the other way around. The only potential exception to this caveat may apply to a retail property and is when the investigation of the potential location uncovers a truly low projection in the business plan as evidenced by the business of other tenants in the same category.
A solid business plan can also help you when negotiating the lease with the landlord. It provides confidence in the negotiation and fact-based arguments to the landlord’s pricing expectations.