Retail Economics: 3 Things You Shouldn't Forget
There comes a point in business when you become "too big" for the downtown shopping strip. As a smart entrepreneur, you choose to respond to the growing needs of your business by moving to a shopping centre where you have a higher earning potential.
Budgeting for this move is not easy. The figures can easily confuse you, and you can easily overlook certain expenses that will have a significant impact on your budget. Here are a few things to remember as you budget for the big move.
Guaranteed Rent And Percentage Rent
Unlike many other commercial centres, the rent in a shopping centre might not always be a fixed amount payable at the end of the month. The rent might be calculated in two ways. It might be calculated as a fixed amount for every square foot of the retail space. This is referred to as guaranteed rent. It might also be calculated as a percentage of your sales during a particular lease period (e.g. every month). The two methods of calculation give different dollar amounts to be paid as rent, and you'll be required to pay the amount that's higher between the two.
The concept of "percentage rent" might have a significant impact on the amount of time it takes you to recover the expenses you will incur when moving your business to a shopping centre location.
Merchant Association Levies
As a tenant in a shopping centre, you'll be required to pay levies imposed by the merchant association that runs/owns the shopping centre. Examples of these levies include garbage collection fees and the cost of maintenance of shared facilities and common areas within the centre.
The mentioned levies are often lowest in neighbourhood shopping centres, moderate in community shopping centres and highest in regional shopping centres.
When doing your calculations, don't forget to include the merchant association levies.
The Cost Of Finishing Out
Before you're ready for the first day of business, you will need to make various adjustments to the empty retail space (e.g. installation of lighting fixtures, modification of the store front and the installation of AC units) in a bid to make it more suitable for your retail business. These expenses are referred to as finishing out expenses.
When doing your calculations, have it in mind that it will be ideal for you to have recovered the finishing out expenses by the time you'll be required to renew the retail lease agreement.
Contact someone who works in real estate for more advice.