LLOYDMINSTER, Saskatchewan — When drycleaning plant owner/operators rent their store-plant space, the haunting questions focus on the considerations that should be taken into account prior to entering into a longer-term rental agreement or perhaps renewing an existing lease.
Selecting an appropriate space from which to profitably conduct business should be a meticulous procedure, far more than just finding an empty spot where the rent is cheap, signing a lease agreement, making a few improvements and then moving in. Overlooking seemingly insignificant considerations could spell disaster.
THE LEASE—ASSET OR LIABILITY?
The well-negotiated space lease is a valuable asset while one that contains negative clauses could be a liability.
Many entrepreneurs have signed rental agreements for terms longer than they thought they had. The watchword is: “Look before you lease.” Look at the location, the amenities, the neighbors, the covenants and, most importantly, the rental in relation to the business and profit you can generate from this location. Do they work for you, or only the landlord?
Not every for-rent commercial space, no matter how attractive or economical, is suitable for a drycleaning plant. Determining whether you are location-dependent or -independent is important.
If location-dependent, you rely on the immediate neighborhood for patronage. If location-independent, as say for a plant that draws its customers from pickup and carryout depots, you rely on a larger market base, not a specific neighborhood. In the first instance, location, visibility and accessibility are ultra-important. With the location-independent, although accessibility is important, location for itself means little.
Before signing, examine your potential market, its source and whether the location of your plant is better here rather than there. Consider your neighbors and if they generate patronage for you. Compare various locations, their estimated drawing power, and your total occupancy cost for each as a percentage of the projected gross income.
KNOW YOUR ECONOMIC RENT
A common opinion is that rental agreements are presented with most terms and conditions spelled out and offers one of two choices: take it or leave it. Not true!
Everything is subject to negotiation. The most important rental factor is not the asking price, but the potential patronage you can generate from the location, which denotes what you can afford to pay and be profitable.
Always, the first price is what the property owner would like to have. This leaves you to determine what he/she will settle for. There are two considerations to be taken into account: “market rent” and “economic rent.”
Market rent is based on what similar rental spaces were recently leased for, or their asking price, your rental rate adjusted for its superiorities or inferiorities, such as location, amenities, condition, utility, lease terms, etc. To determine market rent, you need to find similar “For Rent” spaces and make comparisons.
Economic rent, the more important criterion, is a fair and reasonable rental amount that is based on your projected income and profit margin. Unfortunately, industry statistics that will provide guidelines and benchmarks are skinny and unreliable.
The best procedure is to estimate your income for each location being considered, individually, then deduct all expenses except rent but including a fair wage for yourself. From the remainder, deduct what you believe would be a fair rental amount and compare it with your net profit hurdle rate (this is the minimum acceptable percentage) and the landlord’s asking price. How do they stack up?
MAKE COMPARISONS
Determine how much space you really need. Although you do not wish to be crowded, there is no point in paying for excess space. The object is to attract the largest patronage at the lowest cost.
It may only be a choice of this or that, but best as possible project your income and expenses—including rent and profitability—for alternative locations. Include the cost of any improvements you must make. Then compare.
Low-rent spaces may not be that cheap when you look at the bottom line. Alternatively, a high rent may not be exorbitant if your net profit can be increased pro rata. Perform a sensitivity analysis, that is, project both income and expenses at varying levels—optimistic, most probable and pessimistic—for different locations with differing lease rates. Determine your break-even point for each potential location. The “optimistic” is hoped for, “most probable” should support the rental rate, and “pessimistic” is the worst-case scenario.
Information in this article is provided for educational and reference purposes only. It is not intended to provide specific advice or individual recommendations. Consult an attorney or real estate professional for advice regarding your particular situation.
Check back Thursday for the conclusion!
Have a question or comment? E-mail our editor Dave Davis at [email protected].