If you’re considering leasing retail space, it’s critical to have a comprehensive understanding of the associated costs. From monthly rent and utility expenses to CAM fees and insurance, retail leasing space can quickly become a significant financial commitment.
For example, did you know that the cost of renting retail space in downtown areas tends to be higher than similar spaces in suburban areas? Furthermore, leasing agreements often include hidden fees, such as CAM fees, encompassing shared space expenses, such as cleaning, landscaping services, and utilities.
Whether you are a commercial real estate investor or tenant, staying abreast of the complexities surrounding retail space leasing costs can be challenging. This insider’s guide provides an exhaustive examination of retail leasing expenses, enabling you to make insightful decisions and avoid unexpected costs.
Main Types of Retail Leases
Searching for a commercial space for rent can be overwhelming, particularly when navigating various leasing offices, properties, and retail landlords. Even when renting from the same landlord, no two leases are identical. That’s why it’s crucial to understand the primary types of retail leases while scoping out potential commercial retail spaces for rent.
Retail lease types
- Gross Lease: An “all-inclusive” lease where the tenant pays a fixed monthly rent that includes all operating expenses such as utilities, insurance, and property taxes.
- Modified Gross Lease: A lease where the operating expenses are split between the tenant and landlord, with the exact allocation negotiated between both parties.
- Single Net Lease: The tenant is responsible for paying base rent, utilities, and their pro rata share of property taxes (the ‘single net’), while the landlord is responsible for paying all other operating expenses.
- Double Net Lease: A lease where the tenant pays rent, property taxes, and insurance premiums, while the landlord is responsible for maintenance and repairs.
- Triple Net Lease: A lease where the tenant is responsible for paying rent, property taxes, insurance premiums, and all maintenance and operating expenses associated with the property.
Percentage Retail Leases
Percentage retail leases are a lease arrangement where the tenant pays a base rent and a percentage of their sales to the landlord. This type of lease is typically used in retail spaces, where the tenant’s sales volume tends to be high.
Under a percentage lease, the tenant pays a percentage of their sales in addition to paying a fixed monthly rent. The rate varies, but it’s usually between 5-10%. On the other hand, the base rent is generally lower than what the tenant would pay under a traditional lease arrangement.
This type of lease can benefit both the landlord and the tenant. For the landlord, a percentage lease ensures that they are invested in the tenant’s success, as they will receive a percentage of the tenant’s sales. If the tenant does well, the landlord benefits as well. Additionally, if the tenant struggles, the landlord will receive a smaller percentage of sales, allowing them to mitigate some risks.
For the tenant, a percentage lease can be a cost-effective option in which the rent is directly linked to their sales volume. If the tenant’s sales are high, they will pay a higher percentage of their sales, but they will also be making more money overall. Furthermore, if the tenant is just starting out, they may be able to secure lower base rent and still have the potential to pay more if the business grows.
How a percentage retail lease works
Let’s assume a retail tenant has a base monthly rent (including net charges) of $7,500 per month and pays 3% of gross monthly sales of $50,000 or more. If the tenant’s gross sales were $125,000/month, the total rent based on a percentage lease would be $9,750:
- Base rent = $7,500
- Percentage rent = $125,000 – $50,000 = $75,000 x 3% = $2,250
- Total rent = $7,500 base + $2,250 percentage = $9,750
How to Budget for Retail Rent
When starting a business, knowing how much rent to pay each month can be challenging. To help budget for retail rent, property management company Hartman recently surveyed how much some of the most common types of retail tenants spend on rent.
Retail tenant type and the average percentage of sales spent on rent
- Apparel – 10.1%
- Department store – 6.4%
- Dollar store – 7.2%
- Drug store – 6.3%
- Fast food – 7.7%
- Fitness – 31.7%
- Restaurant – 7.7%
- Sporting goods – 6.8%
Calculating Monthly Rent for a Retail Space
In some retail markets, rent is quoted as the price per square foot per month, while in other markets, retail rents are quoted as the price per square foot per year. For example, $1.50 per square foot per month is the same as $18.00 per square foot per year ($1.50 x 12 months).
To calculate the monthly rent for a retail space, we multiply the rent per square foot by the total square feet of leased space and add any ‘net’ charges and percentage rent amounts to determine the total monthly expense:
- Base rent: 5,000 square feet x $18 per square foot = $90,000 annually / 12 months = $7,500 per month
- Net charges: $2 per square foot per year x 5,000 square feet = $10,000 annual cost / 12 months = $833 per month
- Percentage rent: 3% of gross monthly sales of $50,000 or more, estimated monthly sales of $125,000 x 3% = $2,250 ($125,000 – $50,000 = $75,000 x 3%)
- Total estimated monthly retail rent = $10,583 per month
Extra Costs to Consider When Renting Retail Space
Here’s some additional costs to consider when renting space outside of base rent expenses.
Base rent increases (rent escalation clause)
A rent escalation clause allows landlords to adjust the base rent over time, usually to keep pace with inflation and rising property values. The clause stipulates the rent increase in percentage, fixed amount, or a combination of both. For instance, a retail lease may provide for rent increases of 3% annually or $1 per square foot per year.
Repairs and HVAC
Retail leases typically require tenants to maintain the leased premises, including the space’s interior. Repairs to walls, floors, ceilings, and fixtures are the tenant’s responsibility unless the landlord’s negligence causes damage. In addition, the tenant may be responsible for some or all HVAC maintenance costs, including minor repairs, filter replacements, and regular tune-ups.
Common area maintenance
Common area maintenance (CAM) fees are the tenant’s share of expenses associated with maintaining common areas on the property, such as parking lots, elevators, and lobbies. CAM fees can cover various costs, including landscaping, snow removal, exterior lighting, security, etc.
Tenants are responsible for ensuring that their leased space complies with all local, state, and federal building codes and regulations. This requirement can cover compliance with zoning laws, fire and safety codes, health codes, and environmental regulations. In some cases, landlords may be responsible for making certain repairs, but tenants must give notice of the issue in question.
Retail tenants typically must provide liability insurance coverage to protect against any injury or damage claims made against them, the landlord, or other tenants. The lease typically sets out the required amount of insurance coverage, which varies depending on the size of the leased space, the perceived risk of the business, and other factors. For example, a tenant may be required to carry a minimum of $1,000,000 in general liability insurance coverage.
Factors Impacting Retail Lease Costs
The U.S. Real Estate Retail Market Outlook 2023 from CBRE explains why retail could be a bright spot this year:
- Lack of new supply will aid retail sector fundamentals
- Retails will turn to technology as the labor market tightens
- Mobile commerce (m-commerce) will continue expanding
- New construction will remain cost-prohibitive, with an increased focus on redesigning and redeveloping existing space to attract more shoppers
- Grocery stores will transform their footprints to better suit multi-channel retailing
Where to Find Retail Space for Lease
There are many ways to locate the perfect retail space for lease, but two of the most effective methods are hiring a local tenant’s broker and utilizing online brokerage sites. These strategies allow tenants to access a wide range of properties in any market nationwide.
Local commercial real estate brokers have in-depth knowledge about the markets and submarkets seeing the highest demand for retail space for lease. Online brokerage sites are ideal for tenants looking for available retail space, with featured listings, asking retail rents, property information, neighborhood demographics, and market trends.
Ready to rent? Find your perfect retail space for lease on Crexi.