Commercial Lease Basics


We’ve spent all summer coming up with our vision, business plan, name (more on that later!), learning coffee, and getting our ducks in a row to open up a coffee shop. We want to be diligent in these things as much as we can, but some things are harder to control than others– such as finding a location! We’ve been on this step back and forth for months, and for a while were close on signing a lease, but it fell through. Currently we’re interested in a location and have just put in an LOI, so say your prayers!

All the details regarding commercial leasing easily go over our heads, but we have learned a good amount so far. So from one square-one entrepreneur to another, here is some basic commercial lease information to get your head in the game, to at least seem like you know what you’re doing…

Commercial Lease Basics

Leasing Basics

Familiarizing yourself before you talk to a broker will better prepare you for understanding what you’re getting into. Let’s start with some leasing terms that will come up a lot in the beginning of this process, and are the basics of what is most important to you: square footage, rent, and term.

Square Footage

This is the width x length of the space. For instance, 30ft x 50ft gives you 1500sq/ft.
Make sure you know if this is calculated in rentable vs. useable space. Can you use each square foot you’re paying for, or are you also paying for exterior/interior walls in sq ft measurements?

Rent

Annual due rent is the rate x square foot. But this depends on what type of lease it is. Here are some basic leases that will affect your overall rent amount:

  • Base Rent- the dollar amount paid per square foot (commonly per year- see this earlier post on calculating base rent per month/year)
  • Gross/Full Service Lease- all inclusive, one sum rent amount that includes specified nets
  • Modified Gross Lease- includes net costs with base rent, but not utilities
  • Triple Net- currently the most common type of lease. Includes base rent + nets. Nets are landlord costs that are to be shared between the tenants:
    1. Insurance
    2. Maintenance- such as Common Area Maintenance (CAM) to maintain the building site (window washing, trash, security, etc.)
    3. Real Estate Taxes- from the landlords real estate bill based on the percentage of space your shop occupies

Thus together, these three nets are called Triple Net (NNN) and are added onto the base rent. The average rate can be from $3-15/sq ft. Nets come from a percentage of the whole building, and you can [should] ask for a breakdown of these expenses.

Term

The term is the length of your lease. Common terms can be from 1-3 years, to 10-15 years. Often the longer the term, the more negotiating power you have in the lease.

Pre-Lease Preparation

Before you start looking for locations or talking to a broker, start preparing for what the landlord will need to see. This includes:

  • Registered business entity with proof of good standing
  • Business operating agreement, especially if you have multiple owners
  • Licenses/Commercial insurance that you will need
  • Business Plan

Business Plan

I’m going to go into the business plan a little because a well-written business plan will prove that you know what you’re doing, minimize risk, and help you answer other location questions for yourself, your broker and your landlord. If you’d like to know what to include in your business plan, check out my Coffee Shop Business Plan series. By the end of it, you should know and be able to communicate with your landlord:

  • What your business is and how it works.
  • Finances with a 3-5 year plan- including sales projections, markup, profit margin, biggest expense, break even point, and employee plan. How much rent can you afford?
  • Marketing- including your customers and target market.

You’re asking the landlord to invest in your business, so be an expert in your business. Be able to sell yourself and what you’re doing. A business plan shows the landlord how much rent you can afford and if you’ll be successful, which gives you more leverage when you negotiate space. It also forces you to be an advocate for your business- if you can’t convince people to believe in your idea, you won’t get a good deal.

Tenant Requirements

Therefore, based on your business plan, start thinking about your requirements for a space. Here are some things you should be able to communicate to your broker/landlord:

  • Type of business and description of use, and what type of space you’ll need
  • Square footage needed- average for a coffee shop is 600-2000, and this is based on your vision and customer market
  • Rent- how much can you afford? What is your limit?
  • Build out budget- to make an empty space coffee shop ready. Know how much everything costs from floor drains to an ADA bathroom. Many people say to budget your build out and double it.
  • Physical location boundaries- N/S/E/W radius or demographic requirement
  • Amenities preferred/required and building rating (A,B,C)
  • Lease term required/preferred
  • Type of center- multi tenant, stand alone, attached yard, private parking, etc
  • Street frontage & traffic counts
  • Demographics- age, gender, income, population, average spending

Know the factors that will definitely influence your location decision, what is important to you, and what you can afford. A broker will also help bring to light factors you may have not considered as well, but having a good business plan will allow you to already have thought through these location necessities.

What’s next? As we’re continuing this journey, I’ll be sharing what the process looks like, what criteria to consider when looking for a place, and what to start thinking about before you go into a lease. Stay tuned!

Commercial Leasing Location Picture

Sources:

Note: As a fellow aspiring entrepreneur that simply wants to share my journey with you, know this is information I’ve gathered from various books on starting a coffee shop, business websites, and courses that are helping me to start a coffee shop. I only hope to share some of these resources to help you get started and inspired, however this is by no means extensive. All resources are for informational and educational purposes only, and not to be business consulting or legal advice– so do contact a licensed consultant, accountant, or attorney with respect to any particular issue or advice.

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