Is Bigger Really Better?: Leasing the Right Square Footage and Shape Of Space For Multi-Unit Franchisees
So often, franchise tenants come to me stating that they are not profiting because their rent is too high. While this can be true, frequently the tenant has simply leased too many square feet.
I remember consulting a pharmacy owner with 8,000 square feet of space who couldn't afford to pay the rent. When I checked with other tenants in the building it turned out the pharmacist was actually paying less per square foot than anyone else. It wasn't the rent per square foot that was killing his business but the amount of square feet he had been talked into leasing by the landlord's leasing representative. By surrendering 3,000 square feet of space back to the landlord, the rent was reduced by $45,000 annually and the business became viable. Don't learn your lesson this way; it's too expensive.
Occasionally, I deal with the reverse of this scenario. Another tenant told me his space was too small. If we could expand the area, he could do a higher volume of business. By negotiating to lease the space directly adjacent, the tenant achieved his goal. Generally, a landlord would rather work with a tenant who wants to expand than one who needs to downsize.
Since most landlords charge rent on a square footage basis, it makes good sense to analyze your area/size requirements carefully. Additionally, in most cases, you will be paying operating costs or CAM (common area maintenance) fees based on a square footage basis. It has been my experience that the main reason tenants end up leasing the wrong amount of square footage is due to availability ... or lack thereof. With a smaller space, you may have less frontage as well. This gives you storefront exposure, which is critical for both retail operations and other types of businesses.
With comparably-sized units, choose the space in the better location. Tenants who tell me their location is too small are usually making a profit - they simply want to make more money by expanding to increase their sales. Whereas tenants who tell me their location is too big often want to downsize to reduce rent payments as a means of improving their bottom line.
In one particular case my client, a national retailer, wanted 1,000 square feet more than was available in a prime corner location. With some persuading, the landlord agreed to relocate one tenant and reconfigure another tenant to make room for my client who otherwise would have simply walked away from the deal. Creative suggestions and good communication are all part of negotiating so make sure the leasing representative knows the deal is on the line if a solution cannot be found. Walking away from a location because the size or shape of the space doesn't suit you is an alternative that needs to be exercised by more franchisees.
Prior to becoming a lease consultant in 1993, and exclusively representing tenants, I was a typical leasing agent and shopping centre manager. Back then, as it is today, leasing agents were motivated by commission. The greater the area the tenant leases the larger the commission received.
Not only the area/size but also the shape of the premises must be considered from a functional perspective. In one situation, the landlord was expanding his strip mall and claiming that only one CRU (commercial retail unit) was left. Unfortunately, this unit housed a large utility room in the rear - making the back of the space unusable for almost any tenant. Since the expansion project was still under construction, I suspected the landlord still had time to move other newly-interested tenants around and suggested to the tenant we walk away from the deal as a negotiating strategy. As expected, the landlord reconsidered his position and predictably came up with a better location with no utility room. My client leased a much better location in the right shape and configuration for her needs.
For retail tenants, a square box is most often the optimum shape of space. Rectangle-shaped CRU's are the most common and perfectly acceptable provided they are sufficiently wide and not too deep. Most retail tenants should not consider leasing space that is less than 18 feet in width. I prefer a minimum 20-foot storefront width or more to increase visibility and versatility of use. It is also possible to lease a wider storefront that narrows at the back. This type of creative thinking can make questionable space much more attractive and viable.
Phantom Space is one of my favorite topics. Here, the lease agreement says the tenant has 2,000 square feet, for example, but when the area is measured the real square footage is much less. Since tenants are paying rent by the square foot, landlords can benefit greatly (even if unintentionally) by leasing out more than 100 percent of the building. An unscrupulous landlord could be taking advantage of his/her tenants or could be mistaken, but either way it costs the tenant money. Don't just take the landlord's word for it; have your space professionally measured.
In one case we measured a client's premise and discovered that, instead of the reported 4,400 square feet, the tenant's space only contained 3,600 square feet. The landlord (a lawyer) had purchased the building a few years ago and never questioned the previous landlord's measurements. We not only got the tenant a refund for previous months she had overpaid but also a $1,000 per month rent reduction for the remainder of the term.
Much commercial space is measured incorrectly. In most instances a substantial incorrect measurement can be defined as a discrepancy of 5 percent or more. In actuality, we've discovered that nine out of ten incorrect measurements will favor the landlord. Having your commercial space professionally measured by an independent expert will provide peace-of-mind and is highly recommended.
Dale Willerton is The Lease Coach - a certified commercial and retail lease consultant who works with franchise chains and individual franchisees across North America. Willerton is author of Negotiate Your Franchise Lease or Renewal; he speaks frequently at franchise shows and provides real estate training to franchisors and chains. Visit www.TheLeaseCoach..com, www.DaleWillerton.com/www.HelpULeaseFranchise.com or call 1-800- 738-9202.
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