Five Expenses You Need to Be Aware of Before Leasing Retail Space

Canada’s retail sector is an economic juggernaut with an annual market size of over $500 billion, providing jobs for almost three million people. And while e-commerce sales have benefitted from changes in consumer behaviour due to the COVID-19 pandemic, brick-and-mortar retail sales still reign supreme and account for almost all consumer spending in virtually every retail category. From corner grocery stores and car dealerships to building and garden supply centres, furniture stores and restaurants, Canadians prefer the more engaging and personalized shopping experience that in-store shopping offers.

When you’re ready to set up shop and explore commercial real estate retail space leasing options, stocking your store with products, hiring staff and paying rent aren’t the only costs you’ll need to consider in your budgeting process.

Other important expenses include:

• Leasing Costs
• Utilities
• Renovation Or Build-out Costs
• Furniture, Fixtures and Equipment (FF&E) Costs
• Marketing Costs

1. Leasing Costs

Depending on the type of lease you negotiate, you could be looking at additional expenses for property taxes, insurance and building maintenance in addition to your base rent.

There are three types of net leases: single net leases (N), double net leases (NN) and triple net leases (NNN). In each case, the tenant pays base rent plus one or more costs associated with the commercial property they want to lease.

• Single Net (aka Net, N) Leases
  A single net lease requires tenants to pay base rent plus some (or all) of the annual property tax on the building or space, while the remainder of the operating costs remain the landlord’s responsibility.
• Double Net (aka Net-Net, NN) Leases
  With a double net lease, tenants pay base rent plus property taxes and insurance for the space or building they occupy.
• Triple Net (aka Net-Net-Net, NNN) Leases
  Triple net leases start with base rent, then add property taxes, insurance and most of the costs of operating the building – including all building repairs and common area maintenance – to tenants’ monthly bills.

Since municipal governments set property taxes, you usually won’t find much negotiation room on these costs. But, if your retail space is just one unit within a multi-tenant building, you should only be required to pay a pro-rata portion of the total property tax based on the percentage of the total rentable building space you occupy. Understanding how property taxes could affect your business’s bottom line over time is especially important if you’re in an up-and-coming area, as you could be facing double- or even triple-digit increases from one year to the next.

When it comes to insurance, you’ll need to purchase a policy customized for your business and its inherent risks, so the only negotiating you’ll be doing is with your broker.

Common area maintenance (CAM) refers to costs related to cleaning, maintaining and repairing common areas of a leased property, including:

• Lobbies
  
• Hallways
  
• Elevators
  
• Restrooms
  
• Terraces
  
• Parking Lots
  
• Landscaped areas

Paying CAM fees has both benefits and drawbacks. CAM fees can benefit tenants by obligating landlords to maintain a higher standard of repair and upkeep than they normally might if they had to bear all costs themselves. By passing costs onto tenants, landlords are protected from fluctuating maintenance costs, while the drawback for tenants is that they can take a hit when costs increase.

While it’s unlikely you’ll be able to remove CAM fees from your lease altogether, your landlord may agree to cap yearly costs.

2. Utilities

Depending on your retail business type, your utilities may include monthly or annual payments for water, hydro, gas, telecommunications and even wastewater treatment.

In order to estimate annual totals for your business, you can get information on rates from your local municipality and telecom providers or work with consultants who can estimate costs for your business and present you with pricing options from multiple energy providers or alert you to specialized commercial energy plans in your area.

3. Leasehold Improvements

Most landlords know quality tenants add to a commercial real estate property’s value. As a result, it’s not uncommon for them to help tenants offset renovation costs with tenant improvement allowances (cash per square foot paid once renovations are complete), inducements (free or reduced rent for several months to a year), or even pay for the upgrades themselves in turnkey build-outs.

You’ll want to discuss and present plans for renovating your space to your landlord during lease negotiations to ensure they consent to them before you sign and that your lease allows for both currently-planned and future renovations if necessary. You’ll also want to ensure your plans don’t violate zoning laws for the building and area and include your renovation plans in an addendum to your lease.

If your landlord’s not interested in providing a turnkey build-out, you’ll need to pay for your improvements upfront, so you’ll want to arrange bank financing before any work.

Once you present proper materials, labour, receipts, etc., your landlord will reimburse you for costs according to the per-square-foot tenant improvement rate or rent abatement agreement included in your lease.

4. Furniture, Fixtures and Equipment (FF&E)

FF&E is defined as equipment used to operate a business that’s not permanently affixed or connected to a building. Accountants define FF&E as long-term tangible assets that they value on a company’s balance sheet and use for tax deductions.

FF&E items include:

• Furniture: Desks, chairs, filing cabinets, merchandising tables, shelves and display cases, reception sofas, etc.
• Electronic equipment: Computers, point-of-sale (POS) terminals, security cameras, etc.
• Decorative items: Wall hangings, art, photographs, etc.
• Lighting: Lamps and lighting fixtures

It’s crucial to both budget for and keep a detailed record of these assets, as not only will accountants want them, but you will as well. While all leasehold improvements belong to the landlord when your lease ends or you move out of the space, all FF&E items belong to you and can be packed off to another location or sold to a purchaser of your business.

5. Marketing Costs

Getting the word out about your business can make the difference between a bustling first day where products fly off the shelves, seatings sell out, and registrations crash your computer servers (all good problems to have) to one where you can hear a pin drop (a bad problem no one wants).

Depending on your business, tactics can include:

• Teaser campaigns at temporary pop-up locations
• Social media/influencer/word-of-mouth marketing
• Transit vehicle image takeovers
• Guerrilla marketing with graffiti, stencils, stickers, flashmobs or publicity stunts
• Email marketing
• Radio marketing
• Poster or flyer distribution
• Pre-order campaigns with early bird discounts
• Contests and giveaways

No matter what tactic you decide on, make marketing part of your retail space leasing budget from the start so you don’t end up short of funds when you need them.

Don’t Let Hidden Costs Derail Your Retail Space Leasing Plans

Make sure to budget for property taxes, insurance, maintenance, utilities and tenant improvements, plus furniture, fixtures and equipment costs. Then, add a marketing budget to the mix for an opening day that leads to long-lasting business success.