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Is Bigger Really Better?
Is your commercial rent too high? Consider that this rate may be the result of your leasing a larger than necessary commercial retail unit (CRU). A franchise tenant’s rent is often based on the total number of square feet leased (e.g. $25.00/square foot) so a larger area will mean a higher monthly rent.
As The Lease Coach, we frequently encounter this problem. It’s not always the tenant’s fault – he/she may have been persuaded into leasing the commercial space by a leasing representative / real estate agent. Leasing reps and real estate agents, typically, receive a commission from the landlord for signed lease deals (the incentive increases with a tenant signing for a longer term, agreeing to pay a higher rent or leasing more space); however, the unknowing tenant often signs the lease agreement and becomes legally relegated to the terms.
We remember one case where we negotiated for our client to surrender 2,000 square feet of space back to the landlord thereby reducing his annual rent by $45,000 per year and the business returned to being profitable. This is an expensive lesson to learn. Available commercial spaces are often at a premium (there are only so many spots available). Franchise tenants may feel this pinch and feel rushed into making the wrong decision. We call this compromising on the location and urge franchise tenants to not jump into the first spot they find.
A franchise tenant’s commercial space could be too small as well. We worked with one tenant who wanted to expand. We approached the landlord and negotiated for this tenant to lease the neighboring space – there was another tenant leasing here but landlords will often prefer to accommodate other tenants wishing to grow when possible.
Note that your monthly rent is not the only rent based on your leased commercial square footage. Franchise tenants are required to pay a second rent to the landlord in the form of their percentage of the building’s Common Area Maintenance charges (including property maintenance, garbage removal, landscaping, snow removal, and so on).
Your priority when doing site selection should be choosing the best location for your business. Ask yourself questions including “Am I close to my target customers?”, “Is there sufficient parking?”, “Is this property and my business signage conspicuous to walk-by or drive-by traffic?”, “Is this property easily accessible?”, “What other tenants are leasing space in the property and do they complement or conflict with my business?”, and “Does the landlord have plans to sell the property at some time?”.
The shape of the CRU will also be a factor with your decision. If the space has a long hallway or pillars inside, this becomes wasted space. Customers will also shy away from visiting rectangular-shaped space (feeling it is too confined). We remember one situation where the landlord was expanding his strip mall and claimed he only had one CRU left to lease. We learned that this specific unit housed a large utility room in the back – meaning a tenant could not use that space. Since the expansion portion of the project was only in the construction phase, we suspected the landlord still had time to move other newly-interested tenants around and suggested to the tenant we walk away from the deal as a negotiating strategy. As expected, within a few days the landlord reconsidered his position and predictably came up with a much better location for the tenant.
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