Question on Commercial Lease

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Question on Commercial Lease

Frank Painter
Member since 2018 · 5 posts · 0 votes

Hope this is the right place for this.

I'm venturing into a retail business and after some negotiation have been given the following numbers for space 

3,500 SQFT of commercial retail space in a small strip mall that include a supermarket and walgreens, and salvation army donation store.

$18 per sqft with $6 CAMS per sqft

3 year lease with 3% yearly increase

Is this reasonable?

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  • Wayne Brooks
    Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes
    7y

    We have no idea what the local market for retail rents is.....I assume you would have a better idea.

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  • Jenna Zebrowski
    Member since 2018 · 28 posts · 3 votes
    7y

    You would have to decide if the numbers make sense for you, in your market and your financial situation, but based on what you have provided, the annual increase isn't that unusual, and I would want to see what CAM includes and if there is a cap on increases for uncontrolled amounts.

    Jenna

    The Law Office of Jenna Zebrowski, PLLC

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    Strip malls are generally 5 to 10 year leases. 3 year is more uncommon.

    Without knowing what business you are buying it is hard to comment on rent rates. Rent rates can vary by age of the building, location, tenant mix, cross traffic of larger anchors, site lines of property, access in and out, traffic of cars per day, etc.

    Some business models that average XX sales and XX profit might be fine at 18 a foot and 6 cam to start. Others they might need lower rent per sq ft for that box size of 3,500 sq ft to make it work.

    The strip mall can't be small if you have those tenants inline. A pharmacy is generally 10,000 sq ft and up and supermarket those can go to 60k sq ft, salvation army is bigger size also. Do you mean there are free standing large  single tenant buildings and then the small strip center with a few tenants in it?

    There is so much to a lease both for the landlord and the tenant. Mom and pop tenants simply do not have the leverage that national tenants due for negotiating. I know a national tenant I can sell the center for a lower cap rate. Mom and pop tenants the increases need to be 3% annually with personal guarantees with decent net worth. If I take a chance on a mom and pop tenant and they want out of the lease early then I want termination fee to be equal or close to covering lost rent for a so many months, new leasing commissions, attorney legal fees, tenant improvements, and covering the few months of free rent for the new tenant. Basically I do not want to be out any money as a landlord switching out the tenants.

    There is cumulative versus non-cumulative and then controllable versus non-controllable expenses when it comes to CAM costs.

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  • Frank Painter
    OP
    Member since 2018 · 5 posts · 0 votes
    7y

    The business is a dollar plus store. (everything $1-3)

    There is a dollar tree about 1.5 miles away and a Dollar General .5 miles away.

    I don't consider the Dollar General any type of competition, as it's not really a dollar store.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    Dollar Tree and Dollar General generally have a 8,000 to 12,000 foot space and pay about 10 to 12 a foot NNN to NN.

    There are 3 main components.

    1. Your level of guarantee on the lease.

    2. What you paid for the business itself and how that is structured.

    3. The lease to rent the place.

    I would want to know how many years left remaining on the 3 anchor tenants as they tend to provide a good amount of daily cross traffic to the smaller tenants. I would also want to know the landlords age of the roof, type of exterior and street lighting, any website promoting the center, what type of sign at the road and if you get a slot for visibility, what type of sign you can put on the building itself above your space, age of the parking lot, etc. You want to know when the landlord plans to update the space as it can impact your business. Place gets old and run down sales can drop off. If it is made to look new and fresh then additional shoppers might be drawn to the center. Check road improvements plans for the main travel artery. Sometimes a road widening is planned that can take up to one year of construction. 2 things can happen.

    1. With eminent domain the road widening can take some of the parking lot spaces for the center thereby changing the parking ratio for the businesses there and daily patrons.

    2. With construction on the road businesses can see a big dip in sales until the project is finished. Example you have a 2 lane road but it is being widened to 4. Eventually when finished it might be a benefit to relieve congestion and stacking of cars but until that time it deters shoppers from the center. National tenants can usually hold on but regional to mom and pop tenants tend to be more heavily impacted. If  a median is put in versus an open turn lane that can be a HUGE negative for a center. There is a big difference between turning in an open turn way into a center and having to go down and turn around to get back into a center. Consumers do not like having to work to get somewhere. They visually and physically want it quick and easy. 

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  • Damon DiPlacido
    Real Estate Agent · Bala Cynwyd, PA · Member since 2016 · 67 posts · 29 votes
    7y

    Frank,

    $24 psf gross sounds rich for an independent dollar store, but will depend in part on the population density plus other factors previously mentioned.  Retail rule of thumb for gross occupancy cost would be 10%, so you'd need to be doing $840k in sales to support this rent. For an independent dollar store, I'd probably want to keep the GOC lower, if possible - 8.5% would give you more breathing room. Did you negotiate a 3 yr option following the initial term? 

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  • Frank Painter
    OP
    Member since 2018 · 5 posts · 0 votes
    7y

    5 year options after initial 3 year term.

    Honestly, I've seen many properties in the area both near and far, but this one is much newer, landlord willing to do some work, and provide free rent for some months. 

    Other properties much older, lower ceilings, and more than $24 psf.

    I understand for a dollar store this may be too much, but in comparison, there is nothing cheaper in the area. 

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  • Frank Painter
    OP
    Member since 2018 · 5 posts · 0 votes
    7y

    Anyone operating such a property, can you share your utility cost ? That is the one unknown factor for me.

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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    7y
    Originally posted by @Frank Painter:

    Anyone operating such a property, can you share your utility cost ? That is the one unknown factor for me.

    Few hundred a month??? Likely less than $1,500. You should ask your local attorney or CRE broker. They will have all this information and more, but no one on BP can answer this question reliably.

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    BIGGEST thing for me above all of this is CAN the business make great profit being an absentee owner with management in place?

    In other words most small business are owner/operator types unless they can scale with multi-unit operations and build in layers of management into the profitability and cost structure. Then it can start being a little more passive. If the owner of the business is having to BE the manager then they are working a job for the cash flow stream taking their time night and day. In that way someone might have a job with better than average income working a business but hard to do other investments to scale passive cash flow over time. The goal for many investors is to NOT be the business but have multiple investment streams for more passive cash flow.

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  • Frank Painter
    OP
    Member since 2018 · 5 posts · 0 votes
    7y

    Thank you everyone for the great feedback. I understand it's not going to be easy and but I am willing to put the time and effort required to run such a business. I have a full time job that will allow me to also be a working owner in this new venture. Yes, we will need employees and possibly another manager, but I see my employment costs being low at least in the beginning. 

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  • Jake Randolph
    Developer · Sammamish, WA · Member since 2018 · 9 posts · 3 votes
    7y

    Hello, 

    Happy to connect with you and discuss further. I've done retail leasing and expansion in SF and Seattle. As a retailer its really driven by the category you're in and your profit margins. If the occupancy costs is too high your margins won't support the ongoing increases. 

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