You've probably heard more than once that franchise...
Does leasing a larger commercial space lead to increase business? Not necessarily! In fact, tenants often find that a larger commercial space results in a bigger problem that they are not profiting. When they come to The Lease Coach stating that they are not making any money because their rent is too high we have often discovered that, more often than not, the franchisee has simply leased too many square feet.
We remember consulting to a client leasing 8,000 square feet of space who couldn’t afford to pay the rent. When we checked with neighbouring tenants it turned out our client was actually paying less per square foot than anyone else. We regularly see this scenario … leasing representatives and real estate agents, typically, receive a commission from the landlord for signed lease deals (the incentive increases with a tenant signing for a longer term, agreeing to pay a higher rent or leasing more space); however, the unknowing tenant often signs the lease agreement and becomes legally bound to the terms. Additionally, in most cases, you will also be paying operating costs or CAM (common area maintenance) fees based on a square footage basis.
Occasionally, we deal with the reverse of this scenario. A tenant told us his space was too small. If we could expand the business he could generate more revenue. We negotiated for this tenant to lease the adjacent space and he achieved his goal. Landlords, generally, prefer to work with a tenant who wants to expand versus one who needs to downsize.
It has been our experience that the main reason franchise tenants end up leasing the wrong amount of square footage is due to availability … or lack thereof. If you need about 2,000 square feet for your business but the only two spaces remaining available for lease are smaller and larger you will have a dilemma. A smaller space often has less frontage as well. This gives you less storefront exposure can be critical for your type of business – reduced frontage results in reduced visibility for customers.
When choosing between locations that are modestly too big or too small, franchise tenants should almost always decide which space is better located. With adjacent and very comparable units, we would normally advise the franchise tenant to be more conservative and lease the smaller location. Franchise tenants who tell us their location is too small are usually profiting but want to expand to increase their sales. Whereas franchise tenants who tell us their location is too big often want to downsize to reduce rent payments as a means of improving their bottom line.
On a related note, consider also the functional shape of the premises for your business. In one situation, the landlord was expanding his commercial property claiming that only one CRU (commercial retail unit) was left. Unfortunately, this unit had one corner carved out for the building’s large utility room – thus making the remaining tenant space awkward and more difficult to use. Since the expansion portion of the project was only in the construction phase, we suspected the landlord still had time to move other newly-interested tenants around and suggested to the tenant we walk away from the deal as a negotiating strategy. As expected, within a few days the landlord reconsidered his position and predictably came up with a much better location for the tenant.
When it comes to leasing commercial space, choose wisely and recognize that bigger is not always better.
For a copy of our free CD, Leasing Dos & Don’ts for Franchise Tenants, please e-mail your request to JeffGrandfield@TheLeaseCoach.com.
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.