Location and Leasing
OBJECTIVE: A poor location or a poorly negotiated lease can cripple a wonderful business. Every business has its own location criteria. In this session you will define your criteria, learn how to select the right location, create a site model, and recognize the important aspects of a lease agreement.
Location, Location, Location
Whether you are a moonlight entrepreneur or full-time, at some time real estate issues will become important to you. The success or failure of most retail businesses will hinge on the owner's selectivity and judgment in picking the right location.
An initial step in business is to decide where you will live and where your business will be located. You may have the opportunity to relocate to an area where you would really enjoy living and working.
Every city has a Planning Department at City Hall. You will be dealing with this and other municipal departments and agencies that have discretionary authority to approve or disapprove your intended plans.
You can no longer rely on zoning codes to determine what the rules are in your desired location. Your intended location will often be subject to "precise plan" approval, environmental impact assessment and other regulatory issues.
You may find yourself appearing before a review board that can often seem unreasonable in their decisions. Many cities have redevelopment agencies authorized to impose conditions even more stringent than those established by local codes.
One shopping center developer was so frustrated with the demands of city agencies that he finally threw up his hands and sold off his rights to the property. The new owner succeeded in developing the property. His secret, "I went into City Hall and told them that I would do anything they wanted me to do-----and did it."
Now, obviously there will be times when unreasonable conditions will make a location for your business unattractive. In such cases you should unemotionally look for another location.
Criteria for Home Based Business
Be sure your home business is permitted and you have the license required by the city. Many homes have an association with regulations for the owners. Check to ensure you are in compliance.
Criteria for a Manufacturing, Warehousing, Industrial Business
Criteria for a Retail Business
Each retail and commercial business has its own criteria. For example, a donut shop should be located on the "going-to-work" side of the street. On the other hand, a convenience store may be best positioned on the side of the street with traffic going home from work.
The selection of your first location will have an overwhelming impact on your chances for success.
In Session One you analyzed businesses that are similar to the one you chose. Did you analyze where they were located and why?
Generators (anchors): These are the big national stores in a mall or shopping center. For example, Albertson's, Nordstrom, Wal-Mart and/or McDonald's will help to bring customers into the center. The closer your business can be to generators, the better it usually is for your business.
Leasing Do's and Don'ts
Retain a real estate lawyer to assist you in negotiating your lease or purchase. A five-year lease on a $1,000 per month space is $60,000 (probably a personal obligation) and may well be your largest obligation for your beginning business.
Most retail stores leases are Net, Net, Net (NNN) leases (a.k.a., Triple Net Lease) meaning that you as tenant will pay for the taxes, insurance, gardening, utilities, security, trash and sewer, litter, graffiti removal and repairs. This charge is based on the square footage of your space. CAM (Common Area Maintenance) charges can be costly so find out the estimated cost per month before signing the lease. CAM charges can vary but will normally include parking lot sweeping and repair and all aspect of common area upkeep.
Ask for options. At the end of your base term you can then renew the lease or move. Try to keep your initial term short. There are some compelling reasons to have a short term lease with options:
Consider the possibility that you need to expand your business and will need more space. To provide for this, your lease could provide that if you need more room, your space can be expanded, you can move to another location in the center or you can cancel your lease.
Don't hurry your decision. There is no such thing as the last good location.
Don't judge entirely on rent. Pay fair rent for an outstanding location. Don't let the lessor dictate all the lease terms.
Points to Consider Before Signing a Lease or Purchasing Property
Lease Check-Off List (See Attached Exhibit: "Commercial Lease")
Rent: is the rent comparable to other rents in the same location?
Term: is your lease for a short-term (a year or less) or long-term?
Floor area: how much square footage of the space? Rent and CAM charges are base on the square footage of your space.
Common area maintenance charges (CAM): what are the estimated charges for a year?
Options: do you have options to renew the lease after the first term expires?
Rent increase: is it a fixed rent increase or is it based on the CPI (Consumer Price Index). If so, negotiate a percentage cap.
Percentage rent: some landlords will ask for fixed rent plus a percentage (of your sales) rent. An issue to negotiate.
Tenant improvements: put the agreement in writing as to the responsibilities of the landlord and your responsibilities to do the necessary improvements to get the space open for business. Landlord's Construction Exhibit "C" should be made a part of the lease. Please refer to the sample exhibit furnished in this session.
Right to assign or sublet: Landlord's consent "not to be unreasonably withheld"
Signs: be specific with exhibit and description
Provision for expansion requirements: if you think your business will be expanding
Parking rights: be sure that adequate parking spaces are provided. In most retail centers tenants share "common area parking" rights. Nearby restaurants or theatres can monopolize the parking spaces you require.
Personal guarantee: avoid, if possible. If it is required, ask your lawyer to review this clause carefully.
Exclusive: ask that no other business similar to yours be allowed in the center if it's appropriate.
All leases have Exhibits
To Rent or to Buy Considerations
Do Your Homework
You can create your own "Site Model" in order to maintain objectivity when evaluating locations for your business. This can be done by assigning different values to the factors that are most important for your particular business. Then each location can be evaluated against these measurements.
Some things to keep in mind in site selection:
The following form will give you a methodical approach for evaluating the strengths and weaknesses of each potential location.
First, evaluate your site location for each factor on a scale of 1 to 10. Number 10 being the highest.
Second, decide the importance of each factor to your particular business on a scale of 1 to 5. Number 5 being the most important.
Multiply the grade by the weight to determine the points for each factor. Add up the points to get a total score. Repeat this process for each site to gain an objective comparative analysis.
Top Ten Do's and Don'ts
We heartily recommend that you download the individual business plan template for this session Business Plan Template Document 6 and complete it now.
Instructions on filling in the business plan template:
We suggest that you fill in each section of the business plan
The template for all sessions 1-15 can also be downloaded into your computer as a single document:
Include sufficient research findings and background materials. Make it interesting up by the use of background data, your biography, charts, demographics and research data. When your business plan is completed, print off and assemble the 15 sections.
Many other business plan formats are available in libraries, bookstores and software.