Questions About Renting My 1st Commercial Property

[Matt Morel]

Hey guys! 

I want to start by saying that I hope I posted this in the right area. Well here's what I have for ya:

A buddy and I are looking to open the doors of our small business in spring/early summer of next year. Both of us are 25, and this is the first business either of us have ever done. With that being said, neither of us have any experience and have no idea what to expect with renting a commercial space. Are there any specific things I should look for, ask for, or expect?

I'm sure expenses such as renovations, utilities, etc.. will vary from place to place and landlord to landlord, but here are my biggest areas of concern:

- Renovations: If we will have to hire a licensed and insured contractor to do renovations/remodels for us to fit our business' needs. This will get pricey quick if so. Both of us have dads and friends who are very handy, and have been in construction related careers for a long time, but they aren't contractors. If we could use them, it could save us big time

* Are there any instances where the landlord should help with the cost of renovations? 

* Are the tenants usually expected to return the property to its original appearance upon   move-out? 

- What are the standard requirements for renting a commercial space? Do we need business credentials? A business track record? Show them our revenue projections?

Those are all of the areas of concern I can think about at the moment. I'm sure more will come, and I will update this post as they do! Any input that you commercial landlord/tenants can share with me about your experiences and what to expect/look out for would be greatly appreciated!

Thanks!

[Joel Owens]

"give us plenty of time to be picky with the place we choose. Best case scenario, we find a nice place with a landlord who is extremely motivated to fill the space!"

These statements counteract each other. A highly desirable retail space will usually attract the national tenants and they will pay a premium per sq ft.

If I am landlord with a retail strip center and I have 90% occupancy I will be picky who fills the last spot.

Mom and pop tenants I generally look at liquidity and net worth. If you were weak on both fronts then I would try to get your parents or other family members with more assets to sign a personal guarantee in addition to yourself . I would also require monthly reporting of sales in the lease as well as yearly to assess how you are doing month to month with total sales versus your annual lease amount you pay. I like destination tenants ( barber shop, nail salon, restaurant, doctors office, environmentally green dry cleaners, gyms, karate schools, etc.) These are where customers have to go in the store and drop money. Your tenant then gets paid so they can give the landlord the rent each month.

90% of closures last year were clothing and furniture related in the retail space. I have no interest in those tenants as well as hobby stores,sports stores, etc. People can go in the store and test and touch the product then go online and buy it cheaper. Same with office supply stores.

If the building is really,really old and retail lease rates are say 10 a foot then a tenant doesn't have to generate much annual sales to make it work. If rents are higher for a desirable location then a struggling concept or mom and pop tenant will either shut down the location or try to renegotiate the lease rate.

As a mom and pop tenant I might give a few months free rent instead of any TI ( tenant improvements ) to the tenant. That way tenant spends the money and if they fail I am not out the physical money upfront. TI's for  Starbucks of 40 a foot but they sign  a 10 year lease with increases in rent guaranteed by the parent corp of 20,000 stores is strong. Even if that location loses money I get the full primary rent term and recover my TI I spent.

Additionally for mom and pop tenants I would not allow (blocked rent). This is where the rent goes up say 2% a year but it goes up 6% in year 3 or 10% in year 5 of the lease. With a national tenant you can pretty much depend on the rent increase happening. With a franchisee or a mom and pop concept they might only last 2 or 3 years into the full lease term so I want to get that 2% increase every year to keep up with inflation.

Mom and pop tenants try to get the world for lease terms but if the location is strong they have no leverage to negotiate. We had one mom and pop tenant in a center we were filling and they were weak as a tenant. So we put them in a new development spot that was weak where no national tenant would go in to fill space. If they make it great but if not it was dead space the majority of tenants didn't want to lease.

I wish you the best of success  with your business just keeping it real from an retail center owners perspective.