Indoor Playgrounds - The Right Location
By Dave Wilson
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Some Hints in Searching for Your Space:
Drive around your area thoroughly and drive through every business and retail location in your town. Don’t just drive along the front of a space - drive along the sides and in back also. You will get a feel for the condition. Further, you can assess the surrounding or neighboring units at a facility, which will give you a feel for the other business types located there, the clientele and the condition of the premises. You may also be able to find out if there are any ‘like’ or child-based businesses in the complex. This may give you an indication on whether a Use Variance may be an issue or not?
Don’t only look for ‘space for lease’ signs, especially in ‘old retail’ locations. Try and determine whether a space looks empty or not leased. In some cases, a landlord may want to get the complex fixed up before he puts signs up – If you can get to him first, you may be first on the list!
Go to the town’s tax clerk. They will be able to give you the owner’s name and how to contact them. They may also be a valuable source of information on what is happening with that property. However, approach them nicely and with courtesy – Remember, they are often underpaid and overworked public servants.
You will find that a couple of dedicated ‘drive days’, checking all the ins and outs of your town, might just yield that that one special site location or possible ‘Ugly Duckling’ retail situation that will be the absolute best fit for your concept, budget and space requirements.
You can also use Newspaper Ads or a Real Estate Firm in your serch, but I would caution that you qualify your needs, as noted above, before you agree to visit a site or work with one specific broker. Get a feel from telephone discussions as to whether the real estate agent is a commercial ‘pro’ or just a residential agent handling a commercial space request.
The Landlord Meeting and Presentation - Be Proactive and Be Prepared:
You must remember at the outset that a landlord’s sole objective is to rent all his available space at the best rate he can with the least amount of risk. Remember that your FEC concept will most likely be considered a ‘start-up’ business by the landlord and, therefore, a perceived risk to him. It is your task to convince him otherwise. The supply and demand issues cited above will also be a big factor in determining the risk the landlord will be willing to take when looking at your project.
Walk In Strong!
Have a well-defined idea of the amount of square footage you are looking for and what rate you are looking to pay. Specifics like ceiling height desired, number of parking spaces you’ll need and what major attractions and services you are looking to include, as well as build out requirements should be first-hand knowledge to you. This will define and economize your search and give the landlord a positive initial impression of both you and your project.
You Should Have a Business Plan and Facility Design In Hand to Show a Landlord.
We advise every client to get a Business Plan prepared and a Conceptual Design drawn as a methodology for formalizing and quantifying their concept. When presented to a landlord, he will see that you are serious, have invested significant personal time and dollars and will be more apt to listen to what you propose. A landlord needs to know immediately that you are not wasting his time and that you believe in your own dream more than anyone else and that you possess the drive and determination to make it happen!
Negotiate!
Always negotiate….but do it at the right time and place! Remember, you are selling a landlord on your concept and on your capability to be a great operator first. Get him interested in your ability to succeed and how you will accomplish this. Then, as you work through this process, you can begin to start to negotiate with him. As a landlord spends more and more time with you and begins to take you, your concept and your ability to make it happen more seriously, work to get him to seriously negotiate rates and terms.. I have seen many final leases signed that were vastly different and more favorable to the client than the first draft that was presented. These were all cases of continued and focused negotiation.
Look at all parts of a lease and read the fine print. Make sure you understand all the clauses, multipliers and potential for rate increases. If you do not understand certain parts, ask your attorney to clarify. That is why you hire them.
If you do not presently have a strong relationship with an attorney, it is always a good idea to try find one that has practiced in the town or city you are looking to locate in. Further, a seasoned real estate attorney is strongly favored over a general practitioner and you will quickly find that it will be worth any additional fees their expertise might cost.
Now for the Dollars and ‘Sense’ – Your Space Represents a Profit Center:
What you agree to at the beginning of your lease period is going to follow you all through
your business life at that location. The bad news is that it is usually set in stone for the lease period and you cannot go back and rectify a bad decision you made. Thus, you can see the importance of the subjects discussed above: finding the best fair market lease rate, strong negotiation and diligent searching to find a possible hidden ‘gem’ for your space. Further, each additional lease period past your initial tenure will usually be based upon those terms and rates originally agreed to by you when you first started your lease.
Small Percentages Loom Large – Especially Over Time:
At a facility that that grosses $ 800,000 in annual sales, a cost reduction in the negotiated lease rate representing just a 2 % savings can have a substantial effect on your bottom line, especially over time.
For example, a 10,000 SF facility having a total lease rate with CAM of $ 13.50 per SF would have an annual cost for the space of $ 135,000. Therefore, at sales of $ 800,000, this will represent 16.8 % of the total budget. A reduction in the lease rate negotiated of $ 2.00 per SF would result in an annual savings of $ 20,000 per year, or 2.5 % at $ 800,000 in sales. $ 20,000 per year savings represents $ 100,000 over a 5 year lease period. $ 20,000
per year savings might represent almost ½ of the annual cost of your Manager for the year.
As another example, having a landlord agree to pay for the build out of the partitioning, the rest rooms, the kitchen, the flooring and the HVAC system as part of your leasehold improvement package might represent as much as $ 150,000 that you do not have to invest in the project. At 7.25 % interest and a 10 year loan term, the $ 150,000 loan would have cost $ 21,132 per year to repay. Not having to incur this annual cost then is a significant savings, and, again, a boost to your bottom line profit of more than 2.6 %
Of course, you must be comfortable that you have been able to keep your lease rate around, or close to, your targeted, initial level and still get the landlord to include these improvements. A further positive aspect of this landlord ‘give back’ strategy is that you will have to commit less capital to the project – This can be instrumental to your moving forward!
Lease increases can be another area of savings and additional profit. If you can get your landlord to delay a $ 1 per SF increase in your lease rate from year # 2 until year # 3, on that same 10,000 SF example above, this represents a savings of $ 10,000 in year # 2, or 1.25 % in additional profit that year on $ 800,000 in sales.
Final Thoughts
The Space you decide on, and the terms under which you contract for it, will have an impact on your total bottom line and the profit you will make in your business for the life of your lease. Be diligent, be thorough and think ‘out of the box’ to try and find your perfect space.
Look for that ‘ugly duckling’ and use your imagination and drive to see if you can negotiate a strong and beneficial lease agreement with a landlord who, himself, is trying to rebuild his mall location into a successful site, as well. If you can do this, you will be in a win-win situation and take strong advantage of one of the ‘other’ profit centers available to you.
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