Take a Fact Based Approach to Negotiating Your Lease
I’ve been hearing from some friends lately that commercial landlords and property managers have been applying pressure and asking for higher rent, while at the same time reducing services that they provide. This made me think that it might be a good time to have a discussion about how much rent you should be paying for your business. It’s easy to get caught up in the annual rent increases and the lure of a fancy main street location, but business owners need to take a good, hard look at the numbers before committing to a lease.
It varies by industry, but in general businesses should be paying between 5% and 10% of their gross revenue toward rent. Most retailers and restaurants should be in the 5%-7% range, while some professional offices may skew a little higher. I have seen recommended numbers all over the board. One good way to get information on what your percentage should be is to utilize either the Small Business Administration or industry organizations relevant to your business. Another factor to consider in determining your ideal percentage is location. When I had a retail store with large windows on a busy, popular main street, I considered part of my rent to be advertising, so I was ok if my percentage of gross revenue nudged up a bit.
To determine your ideal rent, simply multiply your annual gross revenue by the appropriate percentage for your business. If you are an apparel retailer with annual gross revenue of $480,000, your rent should range from $2,000/month (480,000 x .05 = 24,000, 24,000/12 = 2,000) to $3,200/month (480,000 x .08 = 38,400, 38,400/12 = 3200.)
If you prefer to work in the other direction and start with the rent number, simply multiply the monthly rent by 12 to get your annual rent, then divide that number by your ideal percentage. For example, if a landlord is asking $4,000 a month for rent and you want to keep your rent within 6% of your gross revenue, you would need to make $800,000 a year, or $66,666 per month, for that rent to pencil out. 4000 x 12 = 48,000, 48,000/.06 = 800,000.
ANNUAL GROSS REVENUE X TARGET PERCENTAGE = TARGET RENT
or
ANNUAL RENT / TARGET PERCENTAGE = TARGET ANNUAL GROSS REVENUE
When calculating the percentage for your business, don’t forget to add in any triple net fees -they might be a separate line item but still count toward your total rent paid.
If you are renegotiating an existing lease, don’t underestimate the value you bring to the table as a stable, long-term tenant. It is expensive and risky for landlords to turn over properties and their best bet is usually to keep existing tenants whenever possible. At the same time, don’t overplay your hand. Landing on a lease that everyone can live with is a delicate balance that needs to be negotiated carefully. Here’s an interesting article to help you look at the process from the landlord’s point of view.
You need to make the final decision on what percentage of your revenue your business should be paying in rent, but I highly recommend you stay within industry guidelines, at the lower end whenever possible. With the current threat of a global pandemic and a disruptive presidential election ahead of us, business owners need to keep costs under control to weather the unpredictable swings of the economy.