The landlord will usually quote you a Net Rent and then tell you there will be common area, maintenance (C.A.M.) and Reality Tax charges on top. Begin by asking the landlord to specify each of these amounts.
If the C.A.M and Realty Taxes for the current year are not known ask for last year’s and ask for a guarantee in the offer to lease that they will not increase by more than the consumer price index (CPI) for your area in future years. This puts the risk and accountability for managing these expenses on the landlord not you.
After all, in all probability you are paying them a management fee to do this anyway. Regardless, the key thing to remember is that the total rent payable per month and per year cannot exceed 8-9 % of the anticipated average yearly sales over the term of the lease. Let’s look at an example.
Let’s assume you are looking at 2500 sq. ft. in an A power center and the landlord quotes the following rents:
1. Net Rent; $20.00/sq. ft.
2. C.A.M.; $4.50/sq. ft.
3. Realty Taxes; $ 2.75/sq. ft.
You calculate the total annual rent to be $27.75/sq.ft. X 2500 sq. ft. = $69,375 per year. In order for you to even consider this location you have to believe you can average $69,375/9% or $770,833 in sales every year of the lease term.
Let’s assume you believe you can average annually only $610,000 over the term of the lease. If you take 9% of this number your arrive at $55,000 which is the total rent you can pay. Divide this number by the square footage and you arrive at a total rent /sq. ft. of $22.00. Subtract from this the landlords estimates of CAM and Taxes and you arrive at a net rent of $14.75.
This is the rent you can afford to pay in this location based on your calculation. Show this to the landlord and if he is agreeable, great; if not walk away – this is not the ideal location for you.
Time and time again we see independent salon owners sign leases based on emotion instead of intelligent analysis. The result is overpayment and lost profit. In this example overpaying by as little as $5.75/sq. ft. on 2500 sq. ft. over a ten year period results in $5.75 x 2500 sq. ft. x 10 yrs = $143,750 in lost profit.
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- By Summit Salon Business Center – www.SummitSalon.com