Real estate is one of the most viable investment options for most investors. It is straightforward to understand and invest in those assets. However, they come with their own set of rules and benefits. When choosing them, investors must know the returns related to real estate. Consequently, they must study the income and expenses for these investments.
If you’re considering leasing retail space, it is critical to have a comprehensive understanding of the associated costs. From monthly rent and utility expenses to CAM fees and insurance, retail leasing space can quickly become a significant financial commitment.
Whether you are a commercial real estate investor or tenant, staying abreast of the complexities surrounding retail space leasing costs can be challenging.
Below, we examine retail leasing expenses, enabling you to make insightful decisions and avoid unexpected costs.
Types of Commercial Leases
There are several types of commercial leases available, each with its own benefits and drawbacks. Below are some of the most common types:
- Gross Lease: An “all-inclusive” lease where the tenant pays a fixed monthly rent that includes all operating expenses such as utilities, insurance, and property taxes.
- Modified Gross Lease: A lease where the operating expenses are split between the tenant and landlord, with the exact allocation negotiated between both parties.
- Single Net Lease: The tenant is responsible for paying base rent, utilities, and their pro rata share of property taxes (the ‘single net’), while the landlord is responsible for paying all other operating expenses.
- Double Net Lease: A lease where the tenant pays rent, property taxes, and insurance premiums, while the landlord is responsible for maintenance and repairs.
- Triple Net Lease: A lease where the tenant is responsible for paying rent, property taxes, insurance premiums, and all maintenance and operating expenses associated with the property.
Expenses to Consider When Leasing Retail Real Estate
Commercial leases are vastly different from their residential counterparts. While residential leases are typically shorter in duration and cover fewer variables, commercial leases are longer and involve more complex negotiations. Additionally, commercial leases often require a more significant financial commitment from the tenant, including higher security deposits and additional fees.
The Cost of Rent
When considering the cost of rent for retail space, there are a few things to keep in mind. First, base rent is not your only rental cost. In addition to base rent, you will also be required to pay your share of operating expenses (aka NNN)
Second, the size and location of the space will affect the price. Nicer, more visible locations will have higher base rental rates. Lastly, the length of the lease can impact the monthly rent payments. As you can see, there are a lot of factors to consider when it comes to the cost of rent for retail space. Be sure to do your research and work with a reputable retail leasing company to ensure you get the best deal on your next retail space lease!
The Cost of Utilities
Another cost that will not be included within your base rental rate is your utility expenses.
These costs cover:
- Lighting
- Electrical
- Heating, air, and ventilation
- Water
- And any trade specific utilities that you may require
These “other” costs can vary from additional display lighting for a boutique retail store to power intensive kitchen needs for a bustling restaurant. While utilities can be estimated, it is important to take into account what your specific needs are rather than rely on general information.
Even if a previous tenant is able to share the cost of their utility bill, their uses may not align with your concept and thus provide you with a skewed estimate of your utility expense.
Operating Expenses (NNN)
Most retail buildings are Triple net (NNN) leases. Meaning in addition to base rent tenants will also be responsible for their share of the operating expenses which are the property taxes, building insurance, and common area maintenance (CAM). These costs are passed along to tenants. While it is not likely you will ever avoid having to pay NNN you can sometimes negotiate to have a cap on the landlord’s controllable expenses.
Property Taxes
As with all properties, your new or prospective landlord is required to pay taxes on the retail space you are considering leasing. If you have agreed to a NNN lease structure, that means this expense will be passed onto you as the tenant.
Typically, since the tax rate is not controlled by your landlord, taxes will be a non-negotiable expense.
Building Insurance
This is different to the general liability and property insurance that you will have to have. Building insurance offers financial protection against property damage for landlords who rent buildings to commercial tenants. It can help cover costs from a fire, storm, or other incidents that damage or destroy your building.
If a fire damages your building, building insurance can cover the cost of renovations to the walls, floors, ceilings, and any permanently installed fixtures or equipment. The same is true for water damage from a burst pipe, or windows broken by a storm.
However, building insurance does not cover office equipment or other moveable property, which is why you might also want the protection for your business personal property afforded by standard property insurance.
Common Area Maintenance
Common area maintenance is one of the three main components that make up operating expenses, the other two being insurance and property taxes. This, in turn, makes CAM part of what is called a Triple Net (NNN) Lease.
Common Area Maintenance (CAM) expenses are fees paid by tenants to landlords to help cover costs associated with overhead and operating expenses for common areas. Common areas are spaces used for or benefited from by all tenants and include, but are not limited to, hallways, elevators, parking lots, lobbies, public bathrooms, and building security.
CAM expenses are usually defined in the lease to clear up any ambiguity as to what they entail. It is important to have a clear understanding of these expenses before signing a new lease.
Tenant Improvements
Tenant improvement, leasehold improvement, and build-out are different ways of saying the same thing in the commercial real estate business. While the words may be different, the meaning is not. All three terms mean work is being done to an office or a building to prepare it for a new tenant.
Leasehold improvements, otherwise known as tenant improvements or build-outs, are structural changes made to a leased space to make it suitable for a new tenant.
Examples of these improvements include:
- Repainting
- New carpet
- Lighting configurations
- HVAC updates
- Plumbing upgrades
- Electrical work
- Full renovation
These improvements sometimes are done by a contractor that the tenant hires, or the landlord might agree to oversee the work on a turnkey basis. In other cases, both the tenant and landlord might share responsibility for a build-out.
General Liability and Property Insurance
General liability and property Insurance is important for any business, and it is also a landlord requirement if you want to lease retail space. The lease contracts will typically outline the insurance requirements required by the landlord. The cost of insurance will depend on factors such as the type of business you have, the value of your property, the coverage you choose and the location of your business.
Furniture, Fixtures, and Equipment (FF&E)
In commercial real estate, FF&E stands for furniture, fixtures, and equipment. You might also see the word “accessories” in the place of “equipment,” and the acronym instead becomes FF&A. These types of assets include movable furniture and electronic equipment.
As tangible assets, FF&E items cannot have a permanent connection to the building in any way. For example, faucets and lighting fixtures are not FF&E since they are part of the structure of a building itself. In contrast, office furniture like couches, desks, sofas, shelving, and bookcases are examples of FF&E.
Including the total costs of these FF&E items on your business’s balance sheet can lead to tax breaks and deductions. They also are key factors in determining a company’s accurate valuation—the sale price of an entire business.
Marketing and Advertising
Running a property also requires marketing and advertising costs. These costs occur when owners promote their property for rent or sale. Usually, these costs are crucial in generating income. If landlords do not market their property, they may not find suitable buyers or tenants. Marketing and advertising expenses are deductible items from revenues under operating expenses.
In order to attract customers to your new business, you will need to invest in some marketing and advertising. This can include online ads, print ads, flyers, and more. The cost of marketing and advertising will vary depending on the methods you choose to use.
How to Negotiate the Best Lease Terms
When it comes to leasing retail space, keep in mind that you are entering into a long-term contract. As such, it is important to make sure that you are getting the best possible terms for your lease.
Here are a few tips on how to negotiate the best lease terms:
- Know what you want: Before entering into negotiations, it is important to know exactly what you want out of your lease. This will include such things as the type of space you need, how long you need the lease for, as well as your budget. Once you have a clear idea of your needs, you can begin negotiating with landlords from a position of strength.
- Do your research: It is also important to consider different retail spaces before settling on one. This way, you will have a good idea of what is available and at what price point. This information will be crucial during negotiations.
- Be prepared to walk away: If the landlord is not willing to meet your needs, do not be afraid to walk away from the deal. There are always other retail spaces available, and signing a bad lease because you are desperate for space will not be in your best interest.
- Get everything in writing: Once you have reached an agreement with the landlord, make sure that all of the terms and conditions are clearly written out in the lease agreement.
Why Choose IPA Commercial Real Estate?
Choosing the right commercial property management company can make real estate ownership a breeze. For people who own commercial and industrial properties, working with a respected property management company can be a great resource. With 30+ years of experience in the Inland Empire, the experience of the IPA Commercial Real Estate team provides a depth of knowledge regarding maintenance and project costs.
Just like management in any other business, a respected management company can monitor the care and financial requirements of any property. We can also help evaluate your rent structure. IPA Commercial Real Estate very focused on client properties and tenants and we have the skills and knowledge to make your ownership experience easy and pain-free.
We offer 24/7 Service from our team day or night! Call IPA COMMERCIAL REAL ESTATE at (951) 686-1462 to discuss how we can help you. Let us show you how to add value to your property.