Can a Retail Tenant Afford Their Rent?
A question I get constantly in the field, whether it be from a Landlord or Tenant, is how can this Tenant afford the rent they are signing up for. The last thing all parties want to discuss in the lease is the likelihood of a Tenant default.
A good rule of thumb that a Tenant should use is the occupancy cost (Rent plus all CAM) should be between 6-8% of your total sales. To make for easy math if your leasing a 3,000SF space and your annual sales are $1,000,000 then your total occupancy cost should be $60,000 - $80,000 or $20 - $26.67PSF.
Again, that is the total "real estate cost" for your business so in the event the NNN expense in $4.00 annually you need factor that number into the equation. So the base rent the Tenant is able to pay is $16 - $22.67 PSF.
Make sense?
For the Landlords ask for the sales of the Tenant's other locations and that should give you a good idea of whether they can afford the rent or not.
Again, this is a RULE OF THUMB these number vary on market, type of business and demand. For instance a Barber may be able to go higher on their ratio because they don't have the overhead and additional expense of say a full service restaurant.
If you have any questions, feel free to call me or email me and we can discuss.
Clayton King
505-263-8531
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