Physical Space, rental, and lease considerations

Physical space is always going to be a costly and complex consideration for your business. The following are some issues and considerations to think about before committing to a location for your business to help you make a better-informed decision.

Initially, your rent and related overhead are going to be your biggest expense. Rents and utilities are fixed expenses; it doesn’t matter how much revenue you have – you’ll have to pay your overhead every month. These expenses don’t vary with the quality of service you provide, your number of customers, or your revenue. In a nutshell, once you commit to these expenses you can’t lower them – you own them.

When considering a location, you need to look at a number of factors, such as price, lease terms, access, visibility, utilities, zoning restrictions, landlord restrictions, and neighbors. Generally, your base rent is expressed in a dollar amount per square foot per year. So a $12 per square foot location would mean $1 per month per square foot. If you’re comparing leases, and some of them are listed in dollars per month, convert them to annual dollars per square foot so you can compare costs. You will need to add costs for utilities, water, and telecommunications – which will vary between locations. Between locations, you may need to adjust costs to include common area maintenance (CAM), security or parking fees. When you compare one facility against another you can’t just look at the cost per square foot, you need to add in all of the things that make the space a usable facility. Only when you have determined the cost of creating a usable space and amortized that cost over the term of your lease, can you make a comparison based on cost. Total Ownership Cost is the only number that will matter.

Access is important. The location should have plenty of parking nearby. If you are developing an inner-city facility, look for a location with transit stops nearby.

If you rely on walk-ins, or hope people will find you easily, the facility should be visible, recognizable and easy to find. There is a temptation to make the assumption that good customers will make the extra effort to find a good business. This leads people to believe that they can choose a hard-to-find (less-expensive) location. I have found this assumption to be almost universally wrong for any business that depends on exposure for revenue. It’s also a good tactic to hunt for locations that are near symbiotic businesses, such as if you are a yoga studio -a well-known supplement retailers, health food stores and gyms.

There are three types of restrictions that may limit your location options. The first is zoning, which is fairly straightforward. It means your facility has to be located in an area that allows commercial activity and has to comply with the rules and regulations of running your type of business. The biggest challenge I’ve seen in the past in this category comes in the form of restrictions that unrealistically limit occupancy. The landlord may also have restrictions that are a part of his their standard rental agreement. Some lease restrictions may bar you from conducting your business in the way you’re planning. The final hurdle is informal restrictions put on you by your neighbor’s expectations. The darn thing is, you’ll never know what those expectations are going to be unless you ask everyone in advance, or take a chance of violating their expectations after you move in. Some of the silly things I can envision are a liquor distributor located next to a temperance league, a taxidermist located next to PETA, or an allergist located next to a florist. These are simple and obvious examples and ones I’d like to see. In all likelihood, the conflicts will be more subtle and nuanced, and you won’t know unless you do some research. You need to introduce yourself, your business model and talk with your prospective neighbors.

Some other things you need to be cognizant of when choosing a location is the development plans for streets in the area, and the status of anchor tenants at this location. If you’ve just opened up your business and the city tears up the street limiting access to your location, it is going to affect the business. Even after you open, you must keep apprised of development plans dealing with the access points to your location, and prepare dramatic sales and promotions during the times of disruption to keep the cash flowing. The second is thornier, and that is the issue of an anchor tenant. Consider that you’ve located in a shopping center that has, for example, if you are a yoga studio, a health food store; it’s a wonderful location for you – as long as the health food store remains open. If that business closes, you should have a provision in your lease that provides you the right to terminate your lease without penalty. Another example is a mall with a grocery store, which generally guarantees a lot of traffic. Make your lease contingent on the grocer remaining open. I’ve seen busy malls turn into ghost towns when an anchor tenant closes – make sure you don’t find yourself with a five-year lease in a ghost town.

Here are some other nuggets to consider when selecting a location. Consider what services you’re going to need – telephone, internet, electric, gas, cable, etc. Check with both the telephone company and cable company in your area to find which will provide the most advantageous package for you, and make sure you give them the specific address of the intended location. Some distances are too far for the telephone company to overcome and offer proper Internet services, other locations simply do not offer cable. Do not assume that you have choices. For gas and electric service, check with the utility company to find out what the bills were for the previous two years at your considered location, this will allow you to compare the total costs of different locations and help develop a more precise business plan. Also, check with service providers for any scheduled rate increases. Check with the police in the neighborhood you’re contemplating to see what type of calls for service have occurred in the area – this will help you determine whether you’re locating in a high-crime area. If you’ve only visited the property in daytime, then visit at night – and vice versa. Make sure there is adequate parking and lighting at all times. Do you feel safe at night? Is the parking lot abandoned? Is there loud music and drinking at a neighboring business? Last, but not least, again – go talk to your neighbors. Neighbors are an absolute fountain of information. They probably can tell you, and will tell you, more about the location and the neighborhood than anyone else can.

Assuming you’re leasing the space, make sure that you structure your lease for the long-term success of the business. Build in options to extend the lease for long periods of time, and make sure you have sufficient notice from the landlord if he doesn’t intend to renew – try to get a one-year notice. I know of several successful businesses that were killed by their landlords. The was one example where the landlord told the owner, after eight years of leasing, that the lease would only be renewed if they added 7,100 square feet. The business was operating in 900 square feet and had no use for the additional space. The business was forced to move when the entire 8,000 square feet was leased to a restaurant. There was little to no time for relocation plans, and the business died. At least it was a quick death.

Another stupid landlord trick is to rent to one or more businesses that compete with one another – how many stores in the mall need to sell sunglasses before no one can make any money? You need to be very clear that when you sign your lease that no competing business will be located in the same complex without your written permission. It would seem logical – but go to a mall, or a strip center and see the problem for yourself.

Some leases require a base rent payment along with a percentage of gross sales over a set cap. This blended rent can be a good way to reduce your startup overhead. It allows you to pay additional rent when you can afford it. If you find a lease like this, make sure that everybody has the same understanding of what defines a sale. You may assume that it only includes sales that take place on-site. The landlord may assume that it includes all sales, including Internet sales and revenue from off-site locations. Both of these are dangerous assumptions. Define the agreement, and make sure to burden all sales in the business plan with their contribution to the rent.

As an alternative to leasing, for a start-up, you may consider the option of co-locating. This is where you rent or co-locate, at a facility being used for another purpose. I have seen, for example, yoga studios located with health clubs, dance studios, martial arts studios and adult education centers. I have also seen yoga studios start at community centers, church basements, senior centers and – believe it or not – an airplane hangar. You get the idea. However, you choose your location, make sure to understand its strengths and weaknesses as well as its opportunities and risks. A well-thought-out choice, balancing your resources and time, will allow you to confidently move forward with your plans. While there will be many opportunities, only you will recognize the locations that will fit your plans.

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