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Shopping Center Questions and Answers
There are many things to consider when deciding on starting a business. Below is some information to help you make that decision.
What makes shopping center locations superior to other retail buildings in the same commercial district?
You have probably heard the old adage, "there are three rules to buying or leasing real estate: 1) Location, 2) Location, and 3) Location." Experienced retailers know that the right location makes all of the difference in the world. And generally speaking, retailers have learned they will do more sales volume in a shopping center than any other type of commercial building. Shopping Centers are usually strategically located, convenient to the heart of a large residential area, or on the fringe of high-growth areas such as suburban communities. People are creatures of convenience and prefer one-stop shopping. Consider your own habits. Say you need to get a prescription filled, drop off dry-cleaning, pick-up groceries, and get a haircut. Would you rather drive to four separate locations or one? Abundant convenient parking is something today's consumers insist on. People will rarely shop at a store without parking. Simply stated, the less parking, the less you will do in sales. And then there's "exposure" in a shopping center, which is invaluable, particularly to the smaller retailer. The large retailers, especially grocery and department stores, often spend hundreds of thousands of dollars advertising to bring customers through their doors. As a smaller retailer, these same customers will be driving past your doors too.
What will my rent be? What are Net-Net-Net charges?
Rent is usually charged based on the size of the storeroom you will occupy measured by square footage based on the outside walls of the storeroom. So a space that has outside walls of 22' by 101' is 2222 square feet. The rent is usually calculated at a specific rent per square foot of space occupied. In Columbus area shopping centers, rent can range from $5 to $15/square foot, depending on the quality of the general location and the size of the storeroom. Generally speaking, a shopping center with large "anchor tenants" such as food stores, discount department stores, etc., with high exposure to local traffic and abundant parking will be at the higher range; the older centers without anchor tenants and limited off-street parking will be at the lower end. When you inquire about the rent, ask if the rent is "gross" or net-net-net (NNN). A gross lease means the rent includes all of the landlord's expenses in owning the property including the base charges for real estate taxes, property insurance and building maintenance. Sometimes a gross lease requires an additional charge for common area maintenance (CAM) expenses. CAM charges are the cost of providing cleaning of the parking area, snow removal, and other expenses associated with the outdoor areas. Many times, rent is quoted as a net-net-net (NNN). This means the landlord charges rent plus the cost of all the expenses incurred in maintaining the shopping center (real estate taxes, insurance, building maintenance, and common area expenses.) If the landlord charges $7/square foot NNN, and the NNN charges are $1.50, then the equivalent gross rent is $8.50. Make sure you understand all the rent charges before you sign a lease, and before you choose a specific location. Most landlords will estimate the NNN charges, but these expenses can vary from year to year, and most landlords will bill the tenants the additional expense they incur if expenses are higher than estimated.
Generally speaking, the rents quoted by landlords are the minimum rent you will pay. With percentage rent, a landlord will be entitled to collect a maximum rent based on the tenant's annual sales. At the end of the tenant's first full lease year, and annually thereafter, the landlord will send the tenant a statement to sign wherein the tenant must state the annual sales. This sales figure is then multiplied by the agreed-on sales percentage (which runs from one percent (1%) for large tenants like food stores up to 10% for high margin specialty stores like jewelry stores. Most small merchants will be charged 5-8% depending on the nature of their business.) Once the percentage rent is calculated, the annual minimum rent already paid by the tenant as monthly rent is deducted. If the percentage rent (maximum rent) is less than the minimum already paid (as monthly rent), then the tenant will not owe additional rent for that lease year. If the percentage (maximum rent) is more than the minimum rent already paid, then the tenant must pay the difference. When a tenant pays extra percentage rent, this is called "overage rent".
Here's an example. Let's assume that a tenant does annual sales of $150,000 the first year, $200,000 the second, $250,000 the third year, and that the minimum or "base rent" is $1,000 / month ($12,000 / year). Here is how the annual rent would be calculated:
Percentage Rent Information
Year 1 |
Year 2 |
Year 3 |
|
Annual Sales |
$150,000 |
$200,000 |
$250,000 |
Percentage Rent Factor (8%) |
X.08 |
X.08 |
X.08 |
Percentage Rent (Minimum) |
$-12,000 |
$-12,000 |
$-12,000 |
Overage Rent Due |
-0- |
$4,000.00 |
$8,000.00 |
Nearly all shopping centers require this minimum-maximum rent structure with few exceptions. Some shopping center owners may agree to pre-negotiated increases in annual rent instead of percentage rents based on annual sales, but this is not always in the tenant's best interest.
This is a term used for all services associated with maintaining the building the parking lot and grounds about the shopping center. These expenses cover the cost of removing litter, asphalt repairs, landscaping, snow removal, improving, repairing, insuring and lighting the shopping center, any onsite employee and/or contract personnel expenses, all as deemed appropriate by Landlord.
Why aren't these expenses just included in my rent?
If you owned your own building, you would also have to pay these CAM expenses, and would probably pay more since small properties are more expensive to maintain than larger ones.
Rent is a measure of the property's worth, and the expenses are a cost of doing business. The landlord charges rent based on the value of the land and building. CAM charges are expenses the landlord incurs in keeping the parking and common grounds maintained for the benefit of the tenant and his patrons. NNN expenses are all the expenses the Landlord incurs in offering the tenant the exclusive use of a storeroom within the center.
Here's another way to look at it. Imagine the space you occupy could be bought for $200,000 and you decided to buy it. You would either have to tie-up a lot of your cash without earning interest (as if you kept it in an interest earning savings account) and / or have a mortgage payment as well. You would still have to pay all the expenses associated with owning the land and building (NNN charges,) but in a shopping center, the landlord invests the cash and pays the mortgage instead of you. The rent therefore represents the value of his investment in the property. The expenses, however, are still the same if you owned it, so he asks you to pay your fair share in the form of a separate NNN charge.
Are utilities and trash dumpsters included in my rent?
Most storerooms are offered on "AS-IS" basis, and you the business owner, must pay the cost of remodeling to suit your business needs. In some cases, this may be negotiable in exchange for a higher rent, depending on the tenant's financial credit and market conditions.
How long is a normal retail lease term?
Usually, lease terms are three (3) years and sometimes longer. Longer-term leases usually include some increases in the amount of minimum rent that is paid to provide for inflation.
This explanation of shopping center leases was written for small business owners or those considering starting a new business. There are many pitfalls to avoid. First of all, make sure you have more money to invest than what you think you'll need. The store fixtures, remodeling expense and other pre-opening and advertising costs can turn out to be more than estimated. It also takes time for most businesses to "break-even" - often a year or longer! Make sure you have access to additional cash, as you may need it until your business matures.
The #1 reasor for failure of small business is lack of capital! You can avoid this if you plan ahead and invest or borrow more money than you think you need.
We also recommend that you thoroughly research the business you want to start. Write a detailed business plan with sale projections and estimates of all expenses including payroll and payroll taxes, cost of goods (or service), reasonable gross profit margins based on industry averages for the product you are selling, in addition to your rent and other occupancy expenses.
All libraries have numerous books for starting businesses and writing business plans. If you fail to plan, you're probably planning to fail. If you don't care enough to thoroughly plan your business operation, then you probably shouldn't start one. You can make a lot of money if you do things right, and you can and probably will lose a lot of money if you do things wrong.
Here are some other resources:
- Join a trade industry organization comprised of other business owners who offer similar products and services. Subscribe to their magazine; take courses they offer; attend their conventions if possible.
- Check out competing stores that offer similar products or services. What are their strengths and weaknesses? What will you need to do to offer a store as good or better than theirs? What stores failed and why did they fail?
- Surf the Internet! There is so much information available on the web for free that it's a resource you can't afford not to use.
- Check out S.C.O.R.E (Service Corps of Retired Executives) This is a volunteer organization comprised of retired executives and business owners. Their mission is to help small business owners succeed. The offer low-cost seminars including an excellent course on how to write a business plan. There are also opportunities to meet with S.C.O.R.E. advisors one-on-one to discuss your particular business plans.
- Consult an Accountant to review your business plan. He can also handle your payroll and payroll taxes, local, state, and federal tax returns, and also look for flaws in your plan and suggest needed changes.
- Consult a Banking Loan Officer to determine your borrowing ability, and special loan programs that may be available through the SBA (Small Business Association, a government agency tht lends money to small businesses to start or expand their business.) The best place to begin is the bank you already have savings and checking accounts. with.
Updated: March 30, 2010
"Under All Is The Land"
The Hadler Companies
2000 W. Henderson Road, Suite 500
Columbus, Ohio 43220
614.457.6650 •1-800-753-3051• Fax#: 614-457-0095 •
Leasing Line: 614.545.6222