I am seeking to rent a commerical property

16 Replies

Hi all!

          I am now exploring the idea of opening a bakery snack retail store. Currently in the process of looking for the perfect location.  I have no experience in commercial terminology and seeking help from my fellow BPs family. I found a good spot in a shopping strip. The strip is newly built and 80 % finished on the inside. From their website, the stats are listed as this:

Stats:
Min Available:900 sq. ft.
Max Available:1800 sq. ft.
Rent Rate:$20.00
NNN:$3.50

My interest is the 900 sq. ft. unit.

Can someone explain to me what these terms are? Rent rate , NNN and how I am suppose to calculate them.

Also, when I sit down to talk to agent/owner, what question should I be asking and keywords I should be looking for from them? Hidden charges?  My plan is a 3 year lease with a  Bakery snack retail store that will serve slice cakes, frozen smoothies and snacks.

I don't want to go in sounding like a newbie (eventho I am) and be taking advantage of.

Thank you all for your time and support,

CL

@Joel Owens   may be able to provide additional insights. 

NNN means "triple net" which means the tenant is responsible for taxes, insurance, and all maintenance. The $20 means $20 per square foot per year. The $3.50 is an additional amount for the NNN charges. If you rent the full 1800 sq.ft. That's available your rent would be $3525 per month. You would need to do all your finishing out of the space.

Read the lease very carefully.  There may be additional charges. Commercial leases have much less protection for the tenant.  A late rent payment may result in a chain on your door. 

Jon Holdman

    Two things that aren't listed that are negotiable depending on the local market are the build out costs and free rent. The build out costs are the costs to finish the space. Most likely they will provide you with walls and concrete floors and you will have to finish the rest (bathrooms, interior unit walls, flooring, lighting, etc). However this is negotiable. Ask about it. It doesn't hurt. The last tenant we signed, I paid for 50% of the build out because the tenant signed a 10 year lesser and was a national brand. Also ask if the landlord would give a couple months free rent. I will give anywhere from 0-6 months free rent also depending on the tenant, and other terms of the lease. Hope this helps.

    @Jon Holdman @Greg V.

    Thank you gentleman! This really helps. Keep the advice coming please!

    @Carol Lee  

    Negotiate to not start paying until at least the first month of opening day.  If you don't have customer, you can't pay the rent.  This is the time you can set up your shop.

    Also check Loopnet.com to see if $20/sqft is competitive.  You may be able to find something else to your liking at cheaper price.

    "I am now exploring the idea of opening a bakery snack retail store."

    Hi Carol,

    Do you have any food experience in an employee or management position??

    If not I would STRONGLY encourage you to find another local bakery in the area and work for them or do an internship where you help out the owner for a few weeks in return for learning the trade.

    I have decades of restaurant and food experience before getting into commercial real estate. Unlike real estate which can be a somewhat passive investment if you have scale a small business is not. It takes a lot of your life and constantly being there to get it off the ground.

    If you have family this is something to consider as your kids or significant other will not get to see you much working those 60 hr weeks. A food business you do not hang a sign outside and all these people start popping in. Even in a great location this isn't the case. You will get a few stragglers now and then but cannot make a profit off the foot traffic alone.

    For advertising what usually works best is a FREE FOOD tasting. Owners worry about the food cost but they have it wrong. They spend thousands on fancy pretty ads that people never react to generally. They want to put a coupon in because they figure it covers the food cost. The better way is with the free food. A customer can then say to themselves instead of using a coupon and still not liking something they can try it for free. Nothing lost and everything possible to gain so you take the risk out of it for them. You give away free samples with the event and some will order on the spot giving you immediate sales to possibly break even. This kind of buzz will get you huge attention versus the ME TOO advertising everyone does. 

    The strip center you are talking about is triple net and you have the base rent and then CAM re-imbursement to the landlord. You might want to put a cap on CAM percentage you are obligated to pay regardless of the occupancy level of the center. The expenses get heavier as vacancies rise.

    The cheapest per sq ft also means nothing. VALUE is finding the best location for your business at a good per sq ft price. If market sq ft is 20 and you find a place in a horrible location for 14 sq ft is that good ?? No it's not and a bad location can make or break certain types of businesses.

    As far as (TI) which is tenant improvements in the business getting build out costs from a landlord is doubtful.

    You are not a corporate national brand, you are not a subsidiary of a corporate national brand, not a large franchisee, or a small franchisee. You are a startup business with the first location going from scratch with not even a franchisee model to follow. That is the MOST RISKIEST type of tenant a strip center landlord can have. I agree about getting rent to start upon opening because there will be delays that happen. At best I see the landlord giving a possible rent credit for a month etc. because it doesn't cost them anything. I do not see them paying anything for your TI unless they are really desperate. The reason is you could immediately fall out of business and they have wasted those dollars versus a national tenant they can count on for the full primary lease term.

    Have you looked within a 2 mile ring radius to see how many other bakeries there are?? Your area could really have a need or be saturated beyond belief where no money can be made. The landlord will want to look at your liquidity and net worth to determine if you have funds to keep throwing money at a start up business or are you giving everything just to open the doors etc. ??

    I just want you to have eyes wide open. Another option if you decide to do this is to look for an existing business on www.bizbuysell.com

    This is Loopnets sister site for selling businesses. You can find them at great pricing with 50% down that are already making a profit. Even if not there are some spaces that went out and left the strip center owner all the equipment. The landlord strikes a deal with you to go in and everything is ready. Pay special attention to what the lease rate starts at and how it rises over the years.

    People have this fantasy sometimes about the food business but it rarely matches up to reality.

    Hope it helps. No legal advice.    

       

    I'd find a commercial broker to represent you in the leasing transaction. Like in a purchase transaction, the lessor will pay your agent a percent of the lease. You will almost always end up with a better lease this way. 

    Maybe @Joel Owens has some advice on finding a good retail leasing agent? 

    @joe owens  @lee g.

    Great great tips! Loving it! please keep them coming.

    CL

    @Carol Lee  I highly encourage you to seek the advise of a local real estate attorney and a local commercial broker. There is no problem being a newbie. We've all been newbies at some point. Use the expertise of local professionals in your area to protect your interests. Do your research on both the attorney and real estate broker to make sure they have a good reputation for dealing fairly. If you use a commercial broker, make sure they represent you alone in the transaction and not both parties (dual agency). 

    Get experience first before opening a food place.

    It's a waste of time to talk to a landlord to rent a space, use an attorney, commercial real estate broker BEFORE even knowing if your fantasy matches reality. That's putting the cart before the horse. You do not want to put a bunch of time and money into something and obligate yourself to an expensive lease without doing due diligence and being realistic on expectations.

    Guerilla marketing is the best. Hitting the streets and getting your product in front of people. If you have great food and connect with people and maintain that standard the business usually follows. Too many food places conduct very little due diligence, are in love with an idea that's not reality, and want to just open the doors and a little couponing and all this business pours in. It's all pure fantasy. If you want your food business to thrive and not just survive week to week then it takes much, much more for success.

    I have been all capacities from worker, to assistant manager, to manager, to an owner in the food industry.  

    I have worked for one of the largest franchisees in the country for one of the top three national pizza chains.  

     @Joel Owens  @Rob Boese  

    Thank you both for your advise and input! Back to the drawer board!

    @sam zdrum

    Thank you Sam for letting me use your computer!

    CL

    @Joel Owens @Jon Holdman @Greg V. @Udayabagya Halim

    We are looking into buying a cafe. It opened just couple months ago, but the owners have to sell due to personal reason. After we submitted the contract to the landlord, they came back and want 75% of the sale price minus equipments and furnitures. The owner got 4 months free rent to renovate but no TIC.

    We are still looking into the original lease, but we definitely don't want take over the existing lease and be in the same shoe when we have to sell it the future!

    Sale Price:  $100K

    Equipments & Furnitures: 30K

    Net Proceed: $70K

    Landlord 75% cut: 52.5K.

    Owner: 17.5K

    David you need to look at how many cafe type places or restaurants are available in a one mile ring radius if this is urban core. A saturated market for a concept leads to constant discounts and volume business to eek out a small profit to get by. If you are only one of a few in town then people will go the extra distance to give you business. Supply and demand is what it is about.

    If suburban go out 3 miles.

    What is WALKABILITY and population levels  for the area? Is their adequate parking where this cafe would sit? The equipment I care nothing about because it sells for 10 cents on the dollar.

    Is this location on the going home side or going to work side?? How long does it take for someone to reach your business walking or driving? Are their sidewalks or parking space?? Is there a median in the road where they have to turn around and get to your business?? Customers are lazy so fast and easy access along with a great product are key.

    The landlord didn't give TI upfront because of exactly what is happening now. Small mom and pop outfit that can't stay afloat. Giving free rent the landlord is not out dollars. If this was Starbucks TI would be expected but that type of national tenant you expect they will be there the full lease term to recover TI's spent with the rent paybacks.

    A small cafe you are basically buying yourself a job. They do not make much money for most of them. You have labor, rent, food costs, insurance, and on and on with expenses. Some people will do a job and make for example 50k profit a year. When I look at businesses they have to make a few hundred K profit being absentee owner. I make way,way more than 50k so everything has to be an investment not another job for the income it  throws off.

    I would look at an option where you are not legally taking over the lease. This lease could be inflated above market rent where the landlord was trying to make up for 4 free months rent with higher rent and then above market annual rent increases of say 3% versus the 2% national average.

    With the option if it doesn't work you walk away. This business is new and has no track record or sales. The equipment can be bought cheap so then all you have is the location for value.

    No legal advice given.      

    Thanks @Joel Owens for your suggestions.  My questions is more toward taking over the business and landlord wants 75% from the sale of the business.  Under the ASSIGNMENT AND SUBLETTING section, they want 75% of the of the economic consideration realized by the tenant, for god sake, the business just started less than 2 months.  The owner just want to recapture her startup cost.

    Assignment or Subletting Consideration. Any Rent or other economic consideration realized by Tenant under any sublease and assignment, in excess of the Rent payable hereunder and reasonable subletting and assignment costs, shall be divided and paid seventy-five percent (75%) to Landlord and twenty-five percent (25%) to Tenant. Tenant's obligation to pay over Landlord's portion of the consideration constitutes an obligation for  Additional Rent hereunder. The above provisions relating to Landlord's right to terminate the Lease and relating to the allocation of bonus rent are independently negotiated terms of the Lease which constitute a material inducement for the Landlord to enter into the Lease, and are agreed by the parties to be commercially

    Yeah landlord had them sign a crap lease in exchange for free rent. I would tell the landlord to go pound sand.

    I do not know why you want to spend 100,000 on a cafe business. I had been in restaurant industry in all facets for over a decade before getting into commercial r.e.

    When buying a business you do not want the assets and not the liabilities. Unless this is a rock star location you can't find anywhere else I don't see what the value is here. Restaurant equipment supply houses will only buy stuff for about 10 cents on the dollar. If you sell directly to someone starting up they might get 30 cents on the dollar. Unfortunately build out is expensive and right after you buy new equipment and it becomes used it drops like a rock in value ( like a car does ).

    If this location isn't amazing then you could simply go buy your own equipment and start up elsewhere. It's not like this company has a huge customer base or build up of sales history. That is what you pay for when buying a business. Anyone can do a little build out and buy some equipment and say it didn't work out pay over value to buy me out.

    Go on bizbuysell.com and you will see tons of businesses for sale. Usually you can get 30% down and they finance the rest. If it does not come with the building then you have to worry about re-imaging versus rising food and labor costs with increased rent annually. This is why if in a strip center I would want an option to buy the center with a ROFR at a set price. Build the business up and then use that to own the real estate so I can keep rent low for my unit.

    No legal advice given.

         

    Before you start to look, use the service of a good commercial leasing real estate broker.  They have a lot of information on the demographics you need to select an area and negotiate a lease with escape clauses if your business needs to close or expand.

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