As a Baltimore Maker and Entrepreneur, you may have made your rounds selling your goods in pop-up shops, trunk shows, wholesale, online, and everywhere in between. And as you continue to grow your business, you’re looking into new options to further establish yourself and make your imprint in your industry. If a brick & mortar space is in the cards for you (as many of our members have told us!), you know there are many options and considerations to explore when it comes to commercial real estate. So we’ve tapped a reputable source to share 4 things you need to know to go from basement to storefront.
Check out the things you need to know from Brad Shapiro of Jabber Five Real Estate Group:
Intro to Commercial Real Estate
Commercial Real Estate is a dynamic industry offering tenants and landlords a platform to express their entrepreneurship. In this blog post, we are specifically going to discuss just one of the property types of income-producing commercial real estate, retail. The other property types include office, industrial, multi-family and hospitality.
Historically, retailers in the United States commonly operated under what we call today “owner-occupants” or “users” – meaning they often owned the property where they both lived and worked. As a merchant, it was very common to raise your family above or behind your storefront or “shop.” Today, while real estate developers tout the economic and social benefits of a live, work, play environment, this actually is not a new phenomenon but history repeating itself in a way.
However, retailers nowadays do not usually own their property, but rather lease their space after careful consideration of the rent structure, site selection and feasibility analyses highlighted below:
Rent Structure
Based on our experience owning and operating retail properties throughout Baltimore City, the best rent structure is an equitable threshold that allows both the Landlord and Tenant to operate profitably.
A commercial lease agreement governing the transaction includes, but is not limited to:
- Base Rent – Usually indicated in both per square foot (i.e $15.00 PSF) and whole dollars ($1,250 per month, $15,000 per year). This example assumes a 1,000 SF space.
- Additional Rent – Landlords’ of retail space commonly ask the tenant to reimburse them for the tenant’s pro-rata share of the property’s operating expenses. These operating expenses are often called the triple-net, or NNN, expenses and are categorized as the property’s real estate taxes, insurance and CAM (short for Common Area Maintenance).
As an example, a 1,000 SF tenant in a 10,000 SF strip shopping center represents 10% of the total GLA (Gross Leaseable Area). Therefore, if the tax bill is $5,000, the tenant would pay for 10% of the bill, its pro-rata share.
- Percentage Rent – Sometimes, in lieu of charging a market rent that may be cost prohibitive, a Landlord may ask the Tenant to share a percentage of their sales.
- Term – How long is the lease for? 3 years, 5 years, 50 months?
- Options – Does the Tenant have any options to extend their lease after the initial term or any options to terminate early or expand or contract based on certain conditions?
- Tenant Improvements – Is the Landlord offering any money to help the Tenant build-out or customize their space, often one of the Tenant’s biggest expenses. Known as “T.I”, this is something every Tenant should ask for depending on the terms of the lease.
- Guarantee – Who is guaranteeing the performance of the Lease in the event there is a default? If the Tenant stops paying rent, who can the Landlord rely on for payment? Often it’s an individual or sometimes a corporation.
Site Selection
Even with the advent of technology which has admittedly made site selection more scientific, site selection is an intuitive rite of passage that the entrepreneur must carefully consider when picking a location. This element of due diligence may be aided by a respected real estate broker with superior market intelligence, however, the tenant should play a major role in picking their location.
Things to consider include:
- Co-tenancy. Who are the retailers next to you, if any? How important is it for you to be next to other uses that complement your business?
- Parking. How important is parking for your business taking into account both employee and customer parking?
- Signage. Does a big LED sign help promote your business? How is your corporate branding reflected in not just your marketing material, but the signage on your physical property?
- Access. Do you need to be located on a major highway? Or on the side of the road where the traffic is headed home? Or at a traffic light? Or hidden in a warehouse district? How will you get in and out of the property?
Feasibility
At the foundation of progressing from basement to storefront, you must consider not just why, but how?
- How will you afford the rent? Known as “Occupancy Cost,” what is your rent going to be compared to your projected sales and does this work for your proforma? Can you get some free rent from the Landlord in exchange for a longer term? Or can you start at a lower rent and then graduate to higher rents in the final years of your lease? Do you have a capital reserve to pay rent and other expenses while you start up?
- Budget. Have you identified the Sources and Uses of your business? Specifically, what are your “Sources” of capital or where are you getting the money to open your business? From friends and family? Savings? Bank loans or other debt instruments? And then, what are your “Uses” of capital? Do you need to buy materials? Hire staff? Market to your targeted customers?
Of course, the strategies and critical thinking above do not contemplate an omni-channel approach or a business plan that involves an online presence. Certainly, in today’s business environment, you must also consider how much time and money to allocate to the various social media marketing and awareness outlets.
We look forward to helping you grow at Made in Baltimore so that the next blog may be about your second location!
For more information on Commercial Real Estate, contact Brad Shapiro
bshapiro@jabberfive.com
Office: (410) 560-3970