Negotiating a Lease

Every coffee business at one point or another, unless you are fortunate enough to own your own building, will need to negotiate a lease with a landlord. While I tend to handle all of the negotiations myself, I always have any lease reviewed by my lawyer. The most important thing to remember about a lease is that it represents a debt that you must pay to your landlord for as long as your lease is valid. When you review your financial statements at the end of the year, rent is usually one of the most significant costs in our Income Statement under General and Administration. Rent is a fixed cost which doesn't increase or decrease depending on how busy your shop is, it is the same each month and only escalates under terms permitted in the signed lease document.

A typical lease cost is broken into three parts,
Net cost + Common Area Maintenance/Operating Costs (CAM), and realty taxes. These costs are given Per Square Foot or Per Metre and monthly rent is determined by:

Net Cost psf + CAM psf + Realty Taxes psf x square footage / 12

If our rent is $15, CAM $4, and Realty taxes $3 pst on a 1500 square foot space, our rent would be:
$15+$4+$3= $22 x 1500 sqft = $33,000/12= $2750 per month

While most landlords won't negotiate reductions in CAM or taxes, the Net Rent is usually negotiable. This is an area where business owners must squeeze every dollar out of the landlord to reduce the break even point. In our example, each $1 reduction in the psf rent represents $1500 savings per year, and $7500 over the course of a 5 year lease. An excellent goal for rent cost is 10-12% of gross revenue. When negotiating your lease, keep this goal in mind, and use it to quickly determine whether you can achieve the target. *You can also use the 10-12% guideline to determine whether you are generating enough income from your existing lease. It is easier to save a dollar than to make one.

Once the per square foot costs are agreed upon, fixturing or rent free periods are typically granted as a landlord inducement for a business to sign a lease. It is critical to take advantage of this since paying rent while you are under construction and not earning any income is an odious burden for a new enterprise. Make sure you have enough time between the date you sign your lease, and when the fixturing period starts in order to adequately plan your build and obtain proper permits.

Another inducement typically offered by landlords is a cash allowance for leasehold improvements. The allowance can represent as much as 10-20% of the lease value over 5 years. Your lawyer will make suggestions which are specific to your location, such as parking space allowance, garbage disposal, signage, plate glass window repair, business interruption, but please remember that it is better to pass up on a location than overpay and jeopardize your profitability. Don't forget that when looking for a location for your new coffee shop don't be afraid to take over a space from a failed coffee shop. The plumbing, electrical, and many other leasehold improvements are in place, and if you can secure some inducements from the landlord your path to profitability is made significantly clearer.