In this article, we are going to discuss the operation of retail leases. How to best budget monthly rent for a new retail business and the additional costs to be taken into consideration to help understand the true cost of renting retail space.
The most important forms of retail transactions. Finding commercial rental space can confuse the ground. You don't have two identical leases, even with the same landlord, the same rental office, or the same landlord. It helps to understand the key types of retail leases when reviewing retail commercial accommodation for leasing purposes.
Categories of retail leases:
· A gross lease is an all-inclusive retail lease that consists of a one-time payment for everything, including utilities and net triple expenses. The modified gross lease includes base rent and certain tenant expenses such as utilities or janitorial services.
· A net lease for retail space means that the tenant pays basic rent, utilities, and property tax (which is the "net one-time rent").
· The double net lease is when the retail lessee pays basic rent, utilities, property tax, and the proportionate share of insurance on the property.
· The triple net lease is typical for basic tenants or individual properties and means that the tenant pays basic rent, utilities, property taxes, insurance, and building repairs.
The proportion of retail leases.
Individual renters whose rent is in percentage pay a lower fixed base rent each month, their share of net costs, and a percentage of gross monthly sales in the form of incremental rent.
While the payment of a percentage of income to an owner may seem unfair at first glance, the percentage of retail leases can be beneficial to both the owner and the tenant.
Landlords are encouraged to maintain rental space as a commercial retail property in perfect condition to attract pedestrian traffic.
How does a retail percentage work?
Say a retail tenant has a basic monthly rent (including net charges) of $7,500 per month and pays 3% of their gross monthly sales of $50,000 or more. If the tenant's gross sales this month were $125,000, the total rental rate would be $9,750:
· Base rent = $7,500
· Percentage rent = $125,000 – $50,000 = $75,000 x 3% = $2,250
· Total rent = $7,500 base + $2,250 percentage = $9,750
Type of retail tenant and the average percentage of sales expended on rent.
· Electronics and appliance stores — 2.09%
· Health and personal care shops — 3.37%
· General merchandise stores — 3.86%
· Food and drink establishments — 5.81%
· Furniture and home furnishing stores — 5.98%
· Clothing and accessory outlets — 7.66%
· Calculating the Monthly Rent for a Retail Space
In some retail markets, rent is indicated as a price per square foot per month, whereas in other markets, retail rents are indicated as a price per square foot per year. For example, $1.50 per square foot per month works out to $18 per square foot per year ($1.50 x 12 months).
To calculate the monthly rent of commercial space, we multiply the rent per square foot by the total number of square feet of rental space and add "net" fees and rent percentage amounts to determine the total monthly expenditure:
· Base rent: 5,000 square feet x $18 per square foot = $90,000 annually / 12 months = $7,500 per month
· Net charges: $2 per square foot per year x 5,000 square feet = $10,000 annual cost / 12 months = $833 per month
· Percentage rent: 3% of gross monthly sales of $50,000 or more, estimated monthly sales of $125,000 x 3% = $2,250 ($125,000 – $50,000 = $75,000 x 3%)
· Total estimated monthly retail rent = $10,583 per month
Additional costs must be taken into consideration when leasing a retail space.
Here is a summary of some of the additional costs to consider when renting space, in addition to the basic rent expenditure:
· Increase in the basic rental - Also called the "rent escalator clause", annual rent increases for a multi-year retail lease are generally negotiated. In advance and may be subject to a base rent increase of 3% or more each year.
· Repairs and HVAC - Under the terms of the lease, it may be the tenant retailer's responsibility to repair the items. Like heating and air conditioning (HVAC), indoor plumbing and electricity, and glass breakage.
· Common Space Maintenance (CAM) - CAM expenditures are the landlord's costs to maintain common areas shared by all tenants and clients. These include common parking areas, exterior lighting, public washrooms, and landscaping. Costs are usually transferred to each tenant according to the proportional share of the leased space in the property.
· Code Compliance - Construction of interior walls, locker room construction, re-positioning of HVAC ducts, and installation of trade lighting. As a commercial kitchen can trigger additional code requirements, and licensing charges paid by the tenant and reviewed by city inspectors.
· Liability insurance - Homeowners require tenants to take out third-party liability insurance as a condition of the lease and designate the landlord as an additional insured to protect the landlord from claims arising from injury, theft, and business interruption to the tenant's clients or employees.
Hiring a local tenant’s broker and an online brokerage site are two of the best ways to find a perfect retail space for lease in any market nationwide.
Local commercial real estate brokers have in-depth knowledge about the markets and submarkets seeing the highest demand for retail space for lease. Online brokerage sites are the ideal source for tenants looking for available retail space, with featured listings, asking retail rents, property information, neighborhood demographics, and market trends.
In previous post: "What Dictates Commercial Rent Prices?"