Commercial Space Leasing – Know Your Neighbors
Are nearby shops complementary?
Next, check to see if the commercial space you’re considering is complementary to nearby retail establishments. For example, it would not be appropriate to put a liquor store next to a school for troubled children. However, a dry cleaner, nail salon, office supply store, and dollar store might fit well in your neighborhood mall anchored by a major supermarket chain.
Complementary Stores
Grocery stores, drug stores, and gas stations tend to be complementary. In some cases, they are all provided by a retailer. For example, many of the Sam’s Clubs or Wal-Mart superstores have grocery stores, a pharmacy, and sell gasoline. Additionally, there has been a growing trend for grocery stores to sell gasoline as a loss leader. Your goal is not to make money selling gasoline. Your goal is to increase the number of trips customers make to the store for groceries.
Category Assassins
In some cases, “category killers” are grouped in a center of power. (A category killer is a retailer that stocks every conceivable item relative to a category. Office Depot is a category killer for office supplies. Petco is a category killer for pet supplies.) Having four to six Class Killers in a group is known as a center of power.
More about category killers
The stores are not linked in a physical sense, apart from being part of the same planned development. In other words, they were probably developed at the same time on a large expanse of land, but there is no closed road between the stores. Other examples of category killers are Home Depot, Circuit City, Best Buy, Linens N Things, and Bed Bath and Beyond.
Example of complementary uses
Another example of ancillary use retail uses would be to place an adjoining beauty supply store, hair salon, tanning salon, nail salon, and spa in the same retail center. Clients interested in one of these businesses may well be interested in at least one of the others.
Avoid a Deal Killer
Ancillary uses can be a significant improvement to a location. However, uses that are clearly inconsistent with the proposed location may be a deciding factor.
Building
When the retail space meets the minimum acceptable standard for the criteria discussed above, it’s time to review costs to prepare the retail space for your business. Generally speaking, costs include signage and the cost of renovating or redoing improvements within your space.
Tenant Improvements
At this point, you should be aware of the landlord’s policy regarding tenant improvements. (Tenant improvements are done to make the space suitable for a business. It can include adding bathrooms, demolishing and adding walls, floor coverings, window coverings, signage, and just about anything else related to the physical preparation of the commercial space for your business.
Will the landlord pay?
The landlord is generally willing to finance the tenant’s improvement costs as long as he is confident that the tenant has the financial ability to pay the rent over the term of the lease. If you’re representing a national retailer with a strong balance sheet, landlords will spend virtually as much money as you request on tenant improvements. Of course, the cost of tenant improvements will be included in the rental rate.
Up to you
If you are a new business with no history and little capital, landlords will be cautious about spending for tenant improvements. They likely want you to finance tenant improvements for their space. The benefit is that your rental rate will be lower. However, you will need to include the cost of preparing your space for occupancy in your initial capitalization.
IT details
Other topics related to tenant improvements include defining the work to be done and who is financially responsible for doing the work. If you are a national retailer, you can provide the owner with a detailed set of plans for their space. Then it’s up to him to profitably provide the construction he needs. If you are a smaller retailer, the landlord may provide a tenant improvement allowance and require you to work with contractors to do the work.
How much IT?
The cost of tenant improvements occasionally exceeds $100 per square foot for second generation retail. It is generally much lower. Even if the landlord is willing to provide substantial funds for tenant improvements, be careful about the scope of work for tenant improvements. The landlord’s expenses for tenant improvements are essentially a loan to be repaid with rent over the term of the lease.
Who country for ADA?
If the space requires tenant improvements that require obtaining a city building permit, check to see if you will need to replace the bathroom due to the ADA. (ADA is the Americans with Disabilities Act). In most cases, changes to comply with the ADA are not necessary if you do not need a building permit. However, a typical consequence of obtaining a building permit is that the space must be reviewed for full ADA compliance. Replacing the bathroom to make it ADA compliant can be expensive.