A golden rule for cutting rental costs
Retail expert Brian Walker shares his thoughts on rental costs. Walker revealed his first Golden Rule of reducing your occupancy costs in a shopping centre – do your research – including every question you should ask the property manager and the demographic details you really need to know when considering a store location, and now follows this up with his second Golden Rule.
Cutting occupancy costs: know your lease
The second golden rule is to gain a comprehensive understanding of your lease proposal. Knowing the key terms and conditions of your proposed lease thoroughly is the next stage of research.
Seeking independent assessment of the lease construction, relevant clauses and costs is a necessary step in this process to understand your exposure both currently and in the future.
In my mind, the critical points to note, when considering occupancy costs are:
- Is the site rental comparable on a similar rate per square meter to all other existing competing merchants within the shopping centre in the same category of business? This ensures all competitors have same rental cost base.
- Is the percentage rental lowered to a level so as to not initiate overage rental due to excessive performance from the new store?
- Can you secure a shorter lease term other than a five year lease? Mobility is increasingly key.
- Can you secure an option period?
- Can you secure a lesser guarantees position other than a three-month bank guarantee coupled with a director’s guarantee, which seems to be the expected norm?
- Will the lessor group assist with any site establishment works, e.g. plumbing.
- Are you completely familiar with the renewal of lease terms and the financial impact of the lease over its fixed term?
- Do you know your break-evens and the level of sales required to cover your rental and other costs? Be conservative with your sales forecasts.
Now you should have all the information you require to confidently understand the centre in which you are about to commence trading. You are almost ready to begin negotiations for your lease with a goal of driving down occupancy costs.
Come back later for the third Golden Rule, all about understanding your business and how it will fit in the centre.
This article first appeared on Inside Retail, a sibling website to Inside Franchise Business.