Selecting Space Variables

Once you have narrowed down the search to a few prime location candidates, there are specific variables that should be considered.  This section of Premier Retail Support's website was included to share a list of variables that most national tenants consider when selecting a specific space. No single shopping center or free-standing location has all the qualities of a “perfect location”. 

By using the list provided below, you should be able to prioritize the available locations you’re considering.

The bullet points should be self-explanatory but in the event you have a question, please contact us.
1.       Visibility of Space:  Being able to see your storefront from the road is very important. Why? Because it’s free advertising. How often have you thought it’s time for lunch and where should I eat? And you saw a restaurant sign and thought I’ve never there before and a new customer was born. It’s a basic question but one that is overlooked so often. Is the sign band hidden behind a row of trees? If so, just pass on the location and keep looking.

2.       Accessibility of Space: Right in, right out?  Which is self-explanatory. Or full access? Full access, which means you can enter and exit from either direction doubles the convenience for your customers. Don’t overlook or under value this very important site selection variable.

3.       Store Size:  Don’t pay for a space that’s too big. What size do you really need. Prepare a test fit layout.  Your occupancy costs will be your biggest annual expense. Having a proposed layout prior to looking at sites will not only save you money in the long run, but it will help you identify the ideal location when you are out on that site tour. Plus, with a test fit layout in hand you’ll be able to compare the proposed sites you are looking at to the required components you need. For example, in a restaurant: Do you need a grease trap, vent hood, increased HVAC needs, gas line, 400 amps vs 200 amps? If so, knowing these requirements in advance will save you money from having to add them later.

4.       Store Frontage:  Example 20’ x 90’ and 30’ x 60’ are both 1800 feet but 30’ x 60 has 50% more frontage.  And aside from having a “bowling alley” shaped store, (which is always less attractive than a more rectangular shape) did you know that the square footage of your storefront signage is normally determined by the linear distance of your store frontage.

5.       Column Placement:   Look inside the space. Does it have a column you’ll have to contend with when you prepare a test fit layout? Depending on the overall width and depth of the shopping center you are considering leasing, columns may be 20’, 30’ or maybe 40’ “on center”. Ideally these columns are hidden in the demising walls between adjacent tenants. But, when one tenant is successful in leasing a space (for example) 25’ of width that throws the demising walls off for other tenants and all of a sudden they have columns to contend with which interferes with the ideal plan-o-gram or layout. 

6.       Base Rent:   Have you also checked nearby shopping centers to compare asking rents? You should. A tenant (and their broker) should always inquire to learn what nearby comparable shopping centers are asking for rent. The best analogy I can use is when an individual goes looking for a home to purchase. You would normally ask your realtor what other homes are for sale in the neighborhood. And which ones were recently sold and for what amount. Knowing 

7.       Pro Rata Charges:   Ask for a cap on controllable expenses to try and limit your NNN charge annual increases. Every tenant pays their proportionate share of CAM, Taxes and Insurance which are your NNN charges. For example, if you are leasing 2,000 in a 10,000 square foot strip center your proportionate share is 20%. Asking for a cap will limit the amount your NNN charges can increase year to year. The strength of your brand, and your financials will normally determine your success in securing a cap. Since the landlord has minimal control over the annual increases in Taxes and Insurance you normally will NOT secure a cap on these two charges. But requesting a cap on Common Area Maintenance (CAM) is invaluable to controlling your future occupancy costs. 

8.       Percentage Rent:   Ask for an artificial breakpoint vs. a natural breakpoint. Or ask to just report sales quarterly and request no percentage rent provision. Your broker can help you in setting a breakpoint. Percentage rent is a negotiated figure whereby you share your sales with the landlord after a certain sales level is reached. It is best illustrated by an example. Let’s say you are leasing a 2,000 sq. ft. restaurant at $50. psf base rent and you negotiated an 8% percentage rent clause. 2,000 x $50 = $100,000 divided by 8% = $1,250,000 as your natural breakpoint. If your annual sales in year one are $1,300,000 you exceeded your breakpoint by $50,000 so you owe the landlord 8% of $50,000 or $4,000. Given the 2,000 sq ft space and $50 in base rent if any other figure other than $1,250,000 is used as breakpoint it is an artificial breakpoint. Normally tenants will try and negotiate an artificial breakpoint higher than a natural breakpoint. In the above example having an artificial breakpoint of $1,500,000 would eliminate 

9.       Term length:   3 years, 5 years, 10 years? How long of a term do you want or need? Since you are locked in for the length of term you commit to, the tenant will typically want the shortage term possible and numerous options and the landlord will want the longest term possible and minimal options. Your broker can guide you on what is “norm” in your area. PRS also has a section dedicated to “norm” in the industry within our website.

10.   Options:   Options are always at tenant discretion. If you do not exercise an option, your lease will come to an end. Did you ask for 1-2 options? You should. Some national retailers will successfully negotiate 4-6 five-year options. Since it is at the tenant’s discretion, you can try to renegotiate your option towards the end of your initial term. Any and all options are great options for the tenant.

11.   Rent Start Date:   Did you ask for enough build out time? If you didn’t, you’ll be paying “dead rent” vs enjoying free rent. “Dead rent” is paying rent to the landlord before you are open for business. Within the PRS website we have prepared a section, “30 Steps to Your Grand Opening” where we have laid out step by step the timeline of the entire process of site selection, leasing, construction to your grand opening. Always ensure you know how long it’s going to take to open, and that you negotiated enough time.  

12.   Tenant Improvement Allowance:   Is the landlord going to contribute “dollars” to bring the existing conditions up to a vanilla shell? There are so many variables to cover we built a Construction Variable subject area. Grey Shell, Raw Shell, Vanilla Shell, As-Is with and without tenant allowance. Is the tenant allowance cash or free rent after you open? When is the tenant allowance paid? All these variables should be in your LOI but definitely addressed in your lease prior to execution.

13.   Utilities:   Do you need 200-amp service or 400-amp service? What is there now? Who will be paying for the upgrade in electrical service? Are utilities being brought to the shopping center or your individual premises. The difference in this variable could cost you $40,000. The amount of service you need will be determined by the applications or equipment you need to operate your business or restaurant. The architect that is preparing your plans or test fit layout can advise you of your electrical needs upfront.

14.     Co-tenancy Clause:   Are you waiting for the anchor to open to generate traffic? Did you ask for an anchor opening co-tenancy clause? Delays happen. Once a tenants lease is fully executed, you will normally have a certain number of days to construct your business (or store/restaurant) prior to your rent starting. Lets’ say 180 days. You may be right of schedule but if that anchor tenant you were planning on generating the traffic to drive customers to your shopping center runs into delays and doesn’t open, without a co-tenancy clause your rent will start and you will have to cover the bills without the benefit of your anchor. Plus, if the anchor isn’t open you will also normally be contending with construction vehicles and the noise and dust that comes along with it. 

15.   Exclusive:   Did you ask for an exclusive so you’d be the only “use” of your kind in the center? No one wants a competitor alongside you. We have all seen this so often. A pizza parlor or hair salon opens in a center and a few months later when sales are hopefully booming, a direct competitor opens within the same shopping center. So easily avoided with an exclusive.  

16.   Use Clause:   Is what you are going to sell well defined? Is what you are going to sell tomorrow what you will be selling in 5 to 10 years? Your use clause defines and protects your flexible in what you can and will sell. As the tenant you want this as broad as possible. As the landlord they will want this as tight as possible especially if they are granting you an exclusive. For example: If you are opening a pizza parlor you may want your use clause to grant you the right to sell chicken wings, hoagies, calzones, etc. The landlord will not want to grant you a right (and exclusive) to sell food because that would restrict him from leasing to a Greek or Italian restaurant. Our attorneys (under Industry Support) can craft a use clause you both can live with. 

17.    Relocation Clause:    Do you have one, where the landlord can relocate you after you open? How is it defined? Who pays for what? It all needs to be clearly spelled out. Once you construct and open your business or restaurant you want the security to be in that spot for the entire length of your lease. BUT, especially in large shopping center, the landlord needs the right to assemble big blocks of leasable space so if a major anchor wants to lease within the center (which would help all the tenants) a small tenant with years left on their lease, doesn’t stop it. Ideally, tenants will not have a relocation clause in their lease, but sometimes you will. Crafting a relocation clause that provides you protection covering downtime and all the costs make this clause more palatable.  

18.   Sales Kickout?   Did you know you could ask for a provision that in the event you don’t achieve a negotiated level of sales you can terminate the lease? This provision is a creative resolution to the situation when a landlord and tenant have different sales projections for the potential of the tenant’s business. If the sales kickout figure is achieved the lease remains intact. If the sales kickout figure is not achieved the tenant may terminate the lease and walk away. 

19.   Permit Contingency:   If the city holds you up and you can’t get a permit to start construction did you ask for a permit contingency, so your rent won’t start? This happened across the country during the last couple of years as Covid shut down city offices that normally would approve a tenant’s plans. Although we all hope these covid delays never happen again, wouldn’t you feel more secure with a permit contingency. 

20.   Personal Guarantee Language:   : For how long are you liable to keep paying rent, if you close your store? No two personal guarantee language provisions are the same. It will be tied to the amount of tenant allowance the landlord provided you and any other out of pocket expenses the landlord incurred to help you get open. It will also be influenced by the strength of your corporate and personal financials.

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