So, you’ve decided to open your first or a new location. Pretty exciting, right?
There are few things as exhilarating in this world (in my opinion) as bringing a new project to fruition.
The long days. The sleepless nights.
Entrepreneurs are the only people that would work 80 hours for themselves just to avoid working 40 hours for someone else.
And we wouldn’t have it any other way.
After you’ve secured your online presence, it’s time to think about your company’s physical presence.
Of course, location is important. So are a myriad of other factors.
But if you don’t properly budget for your new space, it won’t matter how outstanding your product, service, or location is: you could lose your ass and drown in expenses.
Corporations have real estate teams and data analysts crunching the numbers to determine what they can afford to spend so that they (almost) never fail.
Small businesses can’t afford – or justify, for that matter – having such staff members on the payroll, so here’s your quick reference guide to your commercial real estate budget:
Determine your needs
First, figure out what you actually need in a location.
No, not what you think you should have; what you absolutely need.
When I work with a new client, we always figure out their “must haves” and “would be nice to haves” first.
Your priority is to find a property with all of your “must haves.” Anything with a “would be nice to have” is just icing on the cake.
These criteria will also vary depending on your industry, so here are a few questions to ask yourself.
Is visibility important to you?
If so, be prepared to pay for it.
Visibility is important for retail businesses who need to attract passing traffic to their stores. Offices, which are more of a “destination” type of business, don’t necessarily need the visibility.
If visibility is not a necessity, don’t even worry about it.
Do you need quick interstate access?
For retailers and office users, interstate access isn’t vital – it’s just nice to have.
For service companies and distributors, it’s a must have. These businesses are paying for every minute their drivers are on the road, and they need to keep that time to a minimum.
Are neighbors important to you?
You’ll notice that there is almost always a nail salon and a video game store in Target anchored shopping centers.
Because Target attracts moms with their kids – both of whom are the target demographics of nail salons and video game stores.
Target (and other retail behemoths) spend millions and millions of dollars to get customers through their doors and many smaller businesses take advantage of that.
Don’t reinvent the wheel.
If there is a business that attracts your clientele, locate near them – your customers are already there!
We could spend all day on these questions, alone.
And I still couldn’t possibly cover every question in determining your needs because those are very specific to you and your business.
Have specific questions on your business? I’m always available by email Tyler@TheCaubleGroup.com or you can call me at 615.854.7188.
Let’s get down to the numbers
Since I’m located in Middle Tennessee, we’re going to use Nashville numbers.
It’s a strong, mid-sized market experiencing quite a bit of growth, so unless you’re in New York or LA, these numbers won’t be too far off from your local market.
(If you’d like to discuss numbers specific to your market, contact me and we’ll have that conversation.)
We’re going to walk through an example, which may not fit your situation perfectly, but at least you’ll be able to take this formula and apply it to your numbers.
Let’s say you’re looking for 3,000sf of office space downtown.
Office in Nashville is about $30.00/sf at the moment, so we’ll use that to keep round numbers.
To find your annual base rent expense, multiply the square footage by the $/sf amount.
3,000sf x $30.00/sf = $90,000.00 per year or $7,500.00 per month
Since office space is traditionally leased on a Full-Service Gross basis, you can expect almost all of your expenses to be covered by the base rent (common area maintenance, utilities, etc.).
But that’s not necessarily all.
While your CAM and utilities are likely included in this expense, you may have to pay extra for your parking, which can be anywhere from $150 to $250+ per spot per month.
Chances are good, too, that your rent will increase 3% annually, so add that to your budget over the next few years.
Be sure to ask the landlord for all expenses associated with renting that space so that you can plan ahead.
Having a good broker on your side will make all the difference during your search / negotiation, as they know what should be an expense paid by you vs. the landlord and how to negotiate these expenses.
For more information on finding a good broker, check out my Facebook Live video on the topic here.
Ground floor spaces in mixed-use buildings and shopping centers are structured differently than office spaces.
Totally not confusing for those outside the industry, I know.
Let’s assume the same numbers as above:
3,000 square feet of retail space in West End / Centennial
To make this simple, we’ll keep the base rent at the same $30.00/sf.
However, retail space is typically set up in a NNN lease, meaning tenant is also responsible for paying common area maintenance, tax, and insurance on the building.
So, while your base rent is $30.00/sf, you could also have another $5.00/sf in NNN expenses (which usually isn’t quoted in the base rent).
3,000sf x $35.00/sf = $105,000.00 per year or $8,750.00 per month
Your space will also be separately metered, so you’ll be paying your own utilities. These, of course, vary from business to business.
“How do we budget for this then?” You’re thinking.
Well…really the best way is to call the utility district and ask what the bill has run historically. If it’s a new shopping center, you could be out of luck here.
In that case, an additional 10% of your base rent should be a good estimate. But again, that depends on your business and habits.
There are always additional expenses when you’re involved in real estate.
If you’ve ever owned a home, you know this all too well.
What other expenses could be involved in leasing space?
Is the space perfectly suited to you?
Consider yourself lucky.
No space is perfect for everyone, so you’ll likely have to tear down walls, construct bathrooms, or at a minimum get new paint and carpet.
Depending on the situation, your landlord may cover all or part of these expenses.
And if they don’t, you have to decide whether that’s an expense worth incurring on your business.
We’ve had build-outs as low as paint and carpet, which usually comes in under $10,000 depending on the size of the space, all the way up to entire premises renovations in the $100,000 range.
Don’t forget that you need to insure your business and the building.
Landlords typically have a clause in the lease requiring you to carry commercial insurance on the premises.
I recommend you call your local commercial insurance carrier (no, not that GEICO representative that you really love talking to on a 1-800 number…) and get a quote.
If you don’t have a commercial insurance agent that you trust, feel free to reach out to me and I will gladly connect you with agents that I know conduct their businesses the right way.
Yep, you need to keep your space clean.
Big surprise here.
If you’re in an office building, chances are good that this expense is covered in your rent.
Retail spaces have to keep up with this on their own.
Of course, this is within your premises. Common area is typically a responsibility of the landlord.
The toilet could clog.
The HVAC could go out.
And it always seems to happen at the most convenient times for a business.
Unless you’ve negotiated with the landlord to have them cover all of these costs, you’re on the hook.
And trust me, you don’t want the HVAC to die and leave you giving a $10,000 gift to the landlord.
Be sure that you’re only responsible for very minor maintenance costs within the space, such as changing lightbulbs.
It’s tough to account for literally every possible expense when leasing space.
Something unexpected always occurs, so it pays to have an emergency fund for exactly those situations.
While each leasing situation is unique, there are common expenses that you can always expect.
The better prepared you are before you start your site selection, the easier your search will be.
Not to mention the likelihood of your business succeeding.
So put together that commercial real estate budget!