As a Commercial Broker, Business Broker I am asked to find space with the “best” rate. Well, rental rates are an integral part of operating your business. Businesses usually look at the total monthly figure, but have you taken into account the total costs over the rental period?
For every dollar earned by your business, you are spending it in three categories: Cost of Sales (any/all expenses to purchase and/or produce your business goods and services); Operational Expenses (any/all expenses to run your business that sells the goods or services); Miscellaneous Expenses (i.e. Tax/interest or not classified by cost of sales or operational costs). Keeping expenses in check keeps your business revenues growing and the business paying you and your shareholders.
So is there a rule of thumb when figuring how much rent is too much? Retailers use rent-to-sales ratio, and can vary depending on the type of store, and vary from 1.25%-just under 9% while restaurants look at the 8% ratios. Professional and technical firms, on average, spend about 2.5% while small manufacturing firms can be in the 2.75% ratio.
When I work with tenants I explain how they have to look at the entire cost of occupancy. When designing a lease the entire cost of the space also includes property insurance, maintenance and real estate taxes, and advertising costs (large power centers and malls have a category split among tenants for this) any costs the landlord is willing to offer as tenant improvement dollars and free rent time. So even though these are business expenses, they are not built into your rent to sales ratios! However, you need to include them in your look at the cost for space. When figuring total rent, all amounts paid to the landlord over the given lease period should be brought back and figured into an overall price per square foot. This is never the advertised price, but one negotiated as a package. That way you know what your total cost for space is and how that impacts your bottom line.
Next time, lets discuss types of leases…they come in different forms; Full Service; Triple Net (NNN); Modified Gross (usually industrial); Percentage Lease (usually base plus a % of revenue earned and mainly used in shopping malls).
Does this help? Lets work together on finding the right space for you, or the right business to acquire!