Don’t Get Surprised by These Common Expenses When Leasing a Retail Space
When beginning your search for the right retail space, rent is not the only cost to consider. While it is a primary driver in your decision-making, understanding ancillary fees, build-out costs, and furnishing expenses can alter your budget and timeline when moving into a retail space. Factoring these additional expenses into your budget as early as possible will help you understand the full costs of operating in a new space. This will make your commercial real estate journey easy and stress-free.
Build out costs
A retail space will rarely meet every single one of your needs without some customization. Just as your business is unique and the opportunity it presents is one of a kind, many retail spaces are also unique and not one-size-fits-all.
Some spaces will offer a clean white space with an HVAC system but little to no furnishings. Other retail spaces will come with previously installed items. Knowing what your business needs to thrive will allow you to narrow down potential locations and find the right space for you. Consider what amenities are necessary for the interior build-out and what amenities you need when the business is up and running.
Making a list of “must-haves” will give you a better understanding of what lease rate you can afford. Any extra items will need to be paid for on top of the lease itself. Some common build-out costs include shared walls, printers, shelving, and storage spaces. Your lease agent will also want to know your expected build-out projects since they’re considering the timeframe for occupancy. For many businesses, managing the build-out while also paying rent can be perilous. However, many retail leasing outfits specialize in mitigating tenant improvement costs and lease payments. Ask questions during the leasing process and work with a lessor to explain your needs.
Just as you do for your own home, you have to pay the electric, water, gas, etc. in a leased retail space. When creating your lease budget, you should include the estimated monthly utility service cost. In a multi-tenant leased space, it’s common for leases to share common utility costs (e.g. those related to parking lot lighting, landscape management, etc). These expenses are handled in various ways, the 2 most common being Triple Net Expenses (NNN) and Modified Gross.
Ultimately, you as a business owner should know what type of utility consumption your business needs in order to support operations. Your unique business needs should factor heavily into the location you chose. Can the location support your business’s utility demands? Whether you are running a nail salon or a Bitcoin mining operation, you will want to understand your anticipated water, sewer, electric, gas utility consumption in order to determine which space is right for your business.
Triple Net lease fees, CAM fees, and Tenant improvement costs
Not every retail lease is a Triple Net or NNN lease, but it is the most common lease in the market. In this lease, the property owner passes on the taxes, insurance, and maintenance fees to the tenant. This is important to understand as a tenant because it clarifies what you are responsible for and what the landlord is offering.
These costs are typically passed on to the tenant because the rates themselves vary by the type of business present in the space. From property taxes, liability insurance, to common area maintenance (CAM) fees, these expenses are divided up based on the renter’s space allocation, usage rates, and other negotiated terms. Businesses who are considering leasing space in an office park or business center need to factor these types of costs into their price estimation for leased space.
Unlike a stand-alone warehouse, a single home zoned for business, or another mixed-use facility, the lease rate in a business park or office building has the expectation that tenants will pay a prorated portion of the combined costs for upkeep and maintenance. As a business, you should consider what your business demands and negotiate terms that work for both parties. An open dialog with a leasing agent will help get you and your business into a building that meets your operational and financial needs.
Furnishings, Fixtures, and Technology Needs
Whether you are a high-end boutique, a new restaurant startup, or a pet toy company with a hundred or more employees, the interior needs of your retail space may matter as much as the facade when it comes to the success of your business. You should know upon entering a space what you can afford to purchase when it comes to computers, desks, lobby amenities, displays, kitchen equipment, etc. Because these items are necessary for you to open your business, it’s important to budget for these items from the outset.
Factoring in purchase costs, build-out costs, and base rent will be important in setting a move-in and opening day timeline. You will want your business to be in good form when you open your doors to the public, so working out the details on interior pieces and technology during the build-out process will save you valuable time and energy as you prepare to open the doors.
Working with the right team to help you navigate the market
If you read this article and feel stressed or overwhelmed, know that you’re not on your own. All of these costs and considerations are part of any commercial lease process. Most businesses wrestle with these same questions at the outset, and leasing professionals are well accustomed to business owners who are considering their first move out of the garage into a brick and mortar space.
The trusted team at The PM Company will help you crystallize your vision, find a space that fits your business, and leverage your unique value proposition to the market looking for your services. Engaging with a real estate professional early in your search will deliver the most value and return on your investment.