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Guest Column: When renting space is preferred over buying

March 27/April 3, 2017: Volume 31, Issue 21

By Vinnie Virga

 

(Second of two parts)

In my previous column, “Upgrading your store’s location,” I discussed the advantages—and timing—of upgrading a retail location (FCNews, February 27/March 6). In the second installment, I will review the benefits of renting a space when buying is disadvantageous or not an option.

If you are going to rent, and it isn’t in a strip mall or with other tenants, be sure to arrange the following provisions:

  • First Right of Refusal. If the owner decides to sell and has a bonafide offer, you have 30 days to purchase at the offered price.
  • Option to buy. You have the right to buy, at a pre-agreed upon price (negotiate this sooner rather than later), and a portion of the rent paid goes toward the purchase. A good trick is to also have the purchase and sales agreement decided on in advance by your attorneys to avoid problems later.
  • HVAC service. The equipment must consistently maintain an in-store temperature of 70 degrees or the landlord must fix at their expense.
  • Repairs. Roof replacements, which can be expensive, are the landlord’s responsibility.
  • Upkeep. Determine in advance who is going paint the building, seal coat the parking lot or fix the exterior lights, etc.
  • Review renewal options. Lock in the rent; don’t agree to automatic increases, or negotiate lower hikes. Landlords must pay to retrofit every time the tenant changes and their cost for owning the building doesn’t change. All increases equal more profit from the building for the landlord.
  • Tenant improvement provisions. Most landlords will provide $2 or $3 per square foot toward renovating the space when you first move in. If this isn’t necessary, request the allocation be applied towards 60-120 days of free rent. If you do need changes, have the landlord or owner pay for them. If your changes will cost more than that, negotiate terms that stipulate the landlord or owner pay for them, and for your rent to be slightly higher to offset their higher cost.

If you’re considering renting in a strip mall here are some tips:

  • Make sure you know the zoning laws, restrictions and easements.
  • Ensure there are no open violations. Check roof, HVAC and other structural issues. Make sure the location is ADA compliant.
  • Try for “Gross Leases” if possible.
  • Good deposit, buyer can terminate for any reason during due diligence.
  • Possession date based on permit.
  • Rent starts based on days after opening.
  • Pre-approved sign, pre-approved changes.
  • Try to get near an anchor, such as the parking lot of a home center.
  • Always try for an end cap nearest the entrance.
  • Assigned parking spaces are vital. Make sure you have enough for your customers to have easy access near the front of the store.

 

Screen Shot 2017-03-06 at 10.51.13 AMVinnie Virga is managing partner and president of Big Bob’s Flooring Outlet and Floors & More buying group. His experience includes management of various CCA Global Partner retail groups, including Flooring America.

 

 

 

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Guest Column: Upgrading your store’s location

February 27/March 6, 2017: Volume 31, Issue 19

By Vinnie Virga

 

(First of two parts)

I have visited hundreds of flooring retailers, and the impression I keep leaving with is location is the difference between a thriving store and one that is flailing. Where you are situated is just as much a factor as inventory, payroll and other line items on your financial statement. With the economic outlook brighter than it has been for years, there is no better time than the present to upgrade your location or to even add new locations.

First, look at your current situation. If you don’t own or have an opportunity to buy your real estate (option to purchase, first right of refusal), you are missing out. You can keep lining your landlord’s pockets all day or you can begin to put your hard-earned profits to work for you. The rents landlords charge represent a multiple of the cost of acquiring the building and keeping it in good condition. His goal is after 15 or 20 years to own the building outright with the tenant having paid not only all the cost associated with buying the building, but also at least a 6% return on the actual cash they had to invest initially. Which begs the question: Why don’t you do it instead?

Owning their own real estate is what sets apart the most successful flooring retailers from the rest and is the primary source of their wealth. It pays to invest some time talking with multiple bankers and your accountant. For example, check out the SBA programs. Big Bob’s Flooring Outlet is preapproved by the SBA nationally and qualifies for special financing programs to acquire real estate. There are great programs the SBA offers, such as the 504 program. If you have been in business for at least two years, the 504 program allows you to purchase with 10% down; SBA will finance 40% at a great fixed rate for 20 years and the 50% balance is financed by a local bank with conventional terms which includes a five-year balloon and a 20-year amortization.

Once you have secured the financing, the next step is to find the best location. There are typically two types of locations that have been shown to perform well repeatedly. The first is a store in close proximity to a town that has a major interstate or highway. It is vital to have visibility to store signage from that highway. What a great way to ensure brand awareness. (For instance, our Auburn location is visible to 220,000 cars per day.) Stand-alone buildings are best, and area required depends on your business model. For example, a sample-only mid to upper satellite store will need around 3,000 square feet, while a satellite stocking store will need around 8,000 and a main store (stocking or warehouse and retail showroom) will require 8,000 to 12,000 depending on your volume or volume potential.

If you are in an area without a major highway, look at the center of town. Major retail centers are a great draw. Ask your realtor for demographic data to make sure you are picking an area that has significant retail traffic. Studies show most retail floor covering stores get 80% of the business from a 12-mile radius. (In rural areas it’s 18 miles and in urban areas it’s about five miles.) You want to be close to people who own their own homes with incomes of $75,000 or more—again, adjust up or down based on your part of the country.

In my next column, I will discuss rental options as an alternative to buying outright.

 

Screen Shot 2017-03-06 at 10.51.13 AMVinnie Virga is managing partner and president of Big Bob’s Flooring Outlet and Floors & More buying group. His experience includes management of various CCA Global Partner retail groups, including Flooring America.