Thursday, May 6, 2010

Expansion - Site selection / Lease negotiation

When you're looking for space for your salon there are so many things to consider!

1. How do you choose a location? - I'm no expert on this but here are some things to think about. Who are your clients? The landlord or leasing agent should be able to provide you with demographic information about the area you're considering. It will show you things like the population within a 1, 3 or 5 mile radius of the location. You'll get male/female breakdowns, along with household income etc. For a salon, I think you need to concentrate on the 1 and 3 mile radius. You're probably not going to pick up many clients from 5 miles away. Get similar demographic information for locations of existing, successful salons that are similar to you. See if your demographics are similar to theirs. For instance, if a salon you'd like to emulate, has 30,000 households within 3 miles, and your potential location has 15,000 households within 3 miles, you might want to rethink this location. Perhaps it's an up-and-coming area and the population density just isn't there yet.

Pay attention to the surrounding businesses, how much traffic drives by daily, how visible your signage will be from the road. Are there zoning restrictions that will prevent you from putting up the signage you want? Is there ample parking for clients and staff?

2. Should you use a commercial real estate broker? - If you find a space you think you like, you can call the number in the window and work with the landlord or leasing agent directly. If you do this, however, remember that the agent is not working for you! They work for the building owner. If you choose to obtain your own broker, they will be paid by the landlord, much like a residential realtor gets a commission from the seller when you buy a house.
So the big question is, can you get a better deal for yourself if the owner doesn't have the added cost of paying your commercial broker? Well, I guess that depends on how good you are at negotiating! When we were scouting locations for our new salon, we used a broker. He provided demographic data for us on our existing location and on several areas we were considering so we could decide if the locations made sense. When we chose a location, he handled all the negotiations and kept the process moving. If we hadn't had him, I think the process would have dragged on a lot longer, and we probably would have paid too much. I also liked having someone who works with commercial real estate for a living involved. He knew which lease provisions were pretty much standard, and which ones we had some negotiation room on.

3. Renovations - unless you're moving into a space previously occupied by a salon, you're probably going to need to do some renovations. Often the renovations are entirely your cost. Sometimes the landlord will give you an "allowance" to pay for part of your finish work. The allowance may be a fixed amount, or it may be an amount per square foot of space. So if you're going to rent 1,000 sf of space, the owner may offer you a $10 per sf allowance, or $10,000 toward your renovations. Generally you will need to pay out that amount, then submit a request for reimbursement. Your landlord may agree to pay directly to your contractor upon submission of proper documentation. Sometimes the space you want comes as a "vanilla box" with drywall, drop ceiling, some ceiling fixtures and concrete floor and you are responsible for the full cost. A commercial real estate broker can tell you what is typical in your area. Instead of an allowance, the landlord may give you free or reduced rent for a certain amount of time.

Keep in mind that renovations can be very expensive. If you want to do some of the work yourself, make sure your lease allows that (they may require all work be done by licensed contractors). Talk to a few contractors BEFORE you sign the lease and get budget numbers for what you want to have done. Plumbing and electrical will break you if you're not careful. Don't sign a lease without knowing what you're in for on the reno.

4. Building Codes - We ran into some unexpected costs on our renovation and hopefully I can save someone else that problem. We moved into a small strip-mall type building with four separate units. Local building codes had changed since the last renovation of the space was done and we found out after the ceiling was torn out that additional fire barriers needed to be installed from the tops of the walls up to the roof. Until the building inspector came in we had no idea this needed to be done and it actually had nothing to do with our specific renovations. But because renovations were going on, the building had to be brought up to current code. Make sure your lease covers this in some way. You want it to state that any work required to bring the building up to code will be paid for by the owner.

5. Additional costs - Also before you sign your lease, make sure you have in writing all the known repairs that the owner is going to do at his cost. In our case, the owner agreed to put in 2 new HVAC units. I wish I also had them take care of some items I noticed but didn't bother to speak up about because I thought it was petty. The back door to our space didn't close easily and it ended up that it had to be replaced. There were also a couple of windows with the thermal seal broken (so they were foggy), and some other windows where the tinting material was damaged or peeled. Since I didn't have any of those items in my lease, it was my responsibility to fix them. That added up to a couple thousand dollars of stupid tax.

6. When rent starts - Your rent doesn't necessarily have to start as soon as you sign the lease. In our case, our lease said that we would start paying rent 120 days from the date we signed the lease, or the date we opened for business, whichever was sooner. That gave us 4 months to get our renovations done before we had to start paying rent (and we needed every bit of it).

Don't assume that you can get your renovations done quickly. I strongly recommend that you choose your contractor before the lease is even signed and try to be ready to go because it ALWAYS takes longer than you think it will.

7. Type of Lease - there are two primary types of commercial lease. One is called a Triple net lease (NNN) and the other is a simple lease. With a simple lease, you pay rent and personal utilities (probably) and that's it. The landlord pays for property taxes, insurance on the building, utilities for common areas, property manager fees, maintenance costs (like snow removal, landscaping, roof repairs). It is truly simple and you know what to expect.

The other type of lease is probably what you'll run into if you're in a shopping center. With a NNN lease, all those "other" costs I mentioned above are shared by the tenants according to how much space they have. For instance, at one of our locations we have 2.4% of the leaseable space of the whole shopping center, so we pay 2.4% of those costs. Our monthly rent payment is made up of "rent" and an estimate for those other costs. At the end of the year, the property accountants compare the estimated costs to the actual costs and we either get a bill for our share of the deficit or a check for the overage. One year we got a bill that was as big as a full month's rent - they had screwed up the estimates and everyone underpaid. Believe me, there were some unhappy tenants in that center, but we had no choice but to pay. They seem to be better at estimating now.

There's nothing wrong with either of these lease types - just know what you are getting. You don't want to plan on paying one amount for rent, then find out that you have to pay common charges on top of it. If it is NNN, ask the owner for documentation of what their prior adjustments were, so you'll know if their estimate is likely to be reasonable.

8. Personal guarantees - As a small business owner, you pretty much have to personally guarantee everything. Your lease will probably be no different. If you can negotiate out of a personal guarantee, go for it. If you are investing a fair amount in renovations, you have a better chance of getting out of the guarantee because if you default on the lease, the owner is getting the benefit of all your renovations. Make sure you point that out to them. If you can't get out of the guarantee entirely, ask them to have the guarantee expire after a couple of years. So if you have a 5 year lease with a 5 year renewal option, maybe they'll drop the guarantee after 2 or 3 years.

9. Lease Term - Your financial advisor may suggest differently, but I suggest you stick with an initial lease term of no more than 5 years. Make sure it includes an option to renew, especially if you're going to be investing in renovations.


  1. One small piece of advice I would add is that you can now trust Craigslist to be a decent marketplace for expiring leases.

    In New York City, where rents are in the $10k+ range, it's essential to ditch the 20% broker's fee, and a number of my fellow salon owners have found great spaces by going direct to the landlord. We found our salon there, so I'm happy to personally recommend it :)

    p.s. is there an e-mail or twitter account to contact you (ms. salon owner) at?

  2. I was looking for related topic regarding building price negotiation which would help me acquire some ideas to aid my knowledge in dealing with different types of negotiation particularly buildings. Thanks for the blast information you've just shared.