Every massage business tenant wants to pay the least amount of rent possible, while every landlord wants to charge higher rents. If you’re opening a practice and looking for a space to rent, keep these important tips in mind:
1. Never pay too much
Rent is an expense that can mean the difference between making a profit and barely breaking even, so never underestimate the importance of getting a property at the right rental price. If you’re struggling to pay rent, there are two possibilities: Your rent is too high or your client load is too low. Rent is a major part of your day-to-day operating costs, and is also a major factor if you sell your business. Many massage therapists find they’re unable to sell their businesses because prospective buyers think the rent is too high.
2. Understand how your rate is set
If your landlord is smart, she won’t just pull a rental figure from the air. A typical commercial developer sets rental rates based on a simple formula in which the rental revenue from the tenant covers the property’s mortgage, and also provides the landlord with a good capitalization rate, or return on investment. Mathematically, this is an easy calculation involving face rate versus net effective rental rate. Face rate is the dollar amount of rent you pay, the amount on the lease agreement. The net effective rental rate is the amount left after the landlord deducts real estate commissions, inducements and incentive packages, and work done on the space. With a $24-per-square-foot face rate, the net effective rate can easily be $17 per square foot.
3. Find out what others pay
Although knowing what other businesses in the building you lease space in pay for rent is a good idea, expecting their rent to be the same as yours isn’t always realistic. There are legitimate reasons tenants might pay differing rates within the same property, including:
- Size: The size of space the tenant requires or size of the commercial retail unit can make a difference.
- Term: The length of the term, or number of years the tenant has agreed to lease, can be a factor. A longer-lease term doesn’t necessarily mean a lower rental rate, but depending on the current economy and building occupancy, a landlord might offer a lower rate to entice businesses to move in and stay.
- Strength: The covenant and history of the tenant is relevant to the landlord from a rental perspective. Whether the tenant is a mom-and-pop startup or a national chain store, signing the lease corporately matters to the landlord and the building’s mortgage holder.
- Inducements: The dollar value of the inducement package, meaning, the financial incentives some landlords offer to attract tenants, also impacts rental rate.
- Timing: In a newly developed property, the first and last tenant may pay different rates because of supply and demand.
- Industry: The tenant’s industry is a factor. For example, hair salons are plentiful, but pet shops aren’t. Pet shop owners have more locations not leased by competitors to choose from, so properties that want to attract a wider mix of tenants may charge a pet shop a lesser rent than a hair salon.
- Location: The location of the unit relevant to other units in the property can make a difference. Also, second-floor space should be cheaper than main-floor space.
4. Be ready to pay a deposit
Many commercial landlords ask tenants for a security deposit. Although such deposits are often requested, they are not legally required. Landlords collect deposits for various reasons:
- Quick cash flow: The space may have sat vacant for some time, bringing in no income.
- Offsetting inducements: The landlord may have to offer monetary inducements, such as a tenant allowance or free rent, to lease their space.
- Landlord’s work may be required to make the space suitable for showing and leasing.
- Real estate commissions: The landlord has to pay real estate commissions in most cases. These fees add up fast; they are typically 5 to 6 percent of the total base rent.
5. Always negotiate
Everything is negotiable when it comes to rents and deposits. During negotiations, a landlord will probably consider many factors, including your financial strength, the existence of a personal guaranty, the size of landlord inducements, competing offers from other landlords, and the strength of the landlord’s position. Don’t assume you have to accept the landlord’s terms without trying to turn them to your advantage.
Dale Willerton and Jeff Grandfield—The Lease Coach (www.theleasecoach.com)—are commercial lease consultants who work exclusively for tenants. They are also professional speakers and co-authors of Negotiating Commercial Leases & Renewals for Dummies (Wiley, 2013). For a complimentary copy of their CD, Leasing Do’s & Don’ts for Commercial Tenants, email firstname.lastname@example.org.