by Shannon O’Donnell
So you’ve outgrown your garage and want to start selling your wares from a brick and mortar location. Although the decisions surrounding such a move may seem daunting at first, break down your essential needs to narrow your list. The following are a few points to consider as you search for the perfect spot to house your growing business.
Rent or Purchase
The first fundamental question a business owner needs to answer is whether to purchase a building, or rent space within one. While you will have more flexibility to use a building you own however you like, buying a building requires greater initial cash flow than renting. Purchasing is also a greater financial risk. If your business doesn’t go as planned and you close, your liability to a landlord is capped based on the term left on your lease. If you own the building, you will be liable for carry costs, such as insurance and real estate taxes regardless of whether or not you are operating a business in that building, until you can sell that remaining asset.
The old adage is still true – location, location, location. But the best locations are also the most expensive. Does your business need foot traffic generated from national or regional chains? Or does your business sell itself such that customers will find you on the internet and drive to your location as opposed to happening upon your front door? Smaller shopping centers, or even buildings off the beaten path can be a great opportunity with reduced rental obligations if you do not need to be in the hip part of town.
Along those same lines, if you decide a shopping center is best for you, where your space will be located within that shopping center, as well as what your immediate neighboring businesses are, may affect your decision. If you plan to sell a tranquil service, for instance, you do not want to be adjacent to a child’s hair cutter or sports bar. People screaming (at any age) don’t make a massage very pleasurable. On the other hand, being close to a tutoring establishment could be beneficial to draw customers into your space, as there could be parents with an hour to kill each week looking for someplace to shop.
Hire a Broker
A commercial real estate broker knowledgeable in your market will be a great asset during this process. Typically the landlord pays all of the broker’s fees, so his or her expertise will cost you nothing. A broker should know the various options available in your area, the market clientele each option caters to, and the details of the leasing process. Most brokers will not only help you select the best location for your business, but also help you negotiate basic lease terms and facilitate connections to get you through the construction process.
Review and Plan for the Lease Obligations
When you pencil in the business proforma, ensure you understand the initial construction costs and what is included in the additional rent charges you will owe each month. If your potential new space does not meet your needs in its present condition, ensure you understand precisely the costs and time frame associated with completing the upfit changes needed, including the lengthy permitting and approval process. The landlord can give you the center’s recent annual per square foot charge amount, as well as the annual increases so you know what to expect. You may also have to pay additional utility costs, association fees, or marketing fees.
Be certain to understand your lease obligations beyond the obvious payment of rent as well. What can you do in your space? What can you not do? Will those rights and restrictions sufficiently permit you to operate a profitable business? Understand the “hidden” responsibilities you will have and plan for the inevitable and unexpected expense to fulfill those responsibilities. For instance, it is typical that a commercial shopping center tenant is responsible for maintaining the HVAC unit. If that is the case with your potential lease, ensure you inspect the unit, or obtain the landlord’s most recent inspection report. A commercial rooftop unit can set you back $15,000. Depending on the time of year and your climate, you may need to replace a broken unit immediately with little to no notice. If the unit serving your space is not new, consider asking the landlord to cap your repair expense exposure, or agree to replace the unit when necessary.
What is Important for Your Specific Business
Despite having the expertise of both a broker and real estate attorney, only you know what will make your business the most profitable. Would the ability to have merchandise on the sidewalk in front of your store attract customers? Might you serve beverages or snacks such that outdoor seating would be beneficial during certain seasons? Is outdoor seating year round essential such that you need a heated, covered patio area? Do you need marked, short-term or pick-up parking?
Moving your business out of your garage is an exciting endeavor. Knowledge of that process will help you succeed. Hire experts to help you along the way. Question and clarify any ambiguity. And enjoy flipping on the “OPEN” sign!
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