You have a dream! You want to open up a coffee and cupcake shop. You developed a business plan, you’ve talked with a lender, you saved up your capital and you have your menu, you’ve hired a real estate broker, and you’ve narrowed down locations and size….now what?!
The hard part, so you think, is done right? It’s taken two years to get to this point, but you have found the perfect little spot for your dream business, have your list of equipment and inventory needed, met with an architect, and have quotes from contractors, now what?!
Your future location is perfect! It’s a great little warehouse that is 3,000 square feet. It’s a stand-alone building with a great outdoor space for your customers. The asking price is within your budget, and the warehouse has a grease trap too. Sounds like it’s perfect! You’re ready to move forward with signing a 5-year lease….now what?!
Your broker informs you of the next steps. They mention build-out costs, which you have discussed when you hired them, but now it’s real. Your broker points out that the space was set up as a bottle shop, so there is not enough plumbing needed for your concept. Plus with it being a coffee shop, you will need floor drains, two bathrooms for the size of the space, access to the grease trap, change of use, and time for the build-out. Will the Landlord help with these costs and time???
This is where your Broker will come in to help guide you in negotiating a good deal on your behalf. Truth is, you will be improving the current state of the old Warehouse, so that will add value to their investment. First things first, let’s get some quotes on how much it will cost to convert this exact space to what you envision. You will need to get with your architect and a G.C. to try and give you some of this. They will need to do some work, drawings, test fit, come into the space and see what is currently there, and ask the Landlord for any mechanical drawings of the space or current floor plans….now what?!
OH BOY! The pricing that came back is a shock! You knew it would cost money for the equipment, inventory, and even furniture, but you had no idea how much it would cost to retrofit the space into what you need. I mean, it has HVAC, walls, plumbing, and electricity….how much more could it cost?!
These days build-out costs can range anywhere from $60/PSF to $200psf depending on a variety of factors, including location, the scope of your project, your timeline, and what kind of business you’re running. So, will the Landlord help you with this build-out??
A ‘build out’ represents the construction activities executed on a commercial building space, to make it functional for a tenant. In this case, you! In this respect, build-out costs can also be considered ‘tenant improvements’ or TIs. It is improving the space. This allowance, or simply TIA (Tenant Improvement Allowance), is a sum of money that is agreed upon between the tenant and the landlord to be paid by the landlord for covering the construction costs and alterations to the rented premises. This is usually expressed as a dollar amount per square foot. Great, how much do we get??!!
The TIA usually depends on a few factors, like the present status of the real estate market; the credit history of the tenant; the condition of the building/space; and the term the tenant is requesting. Super, you have a great set of financials! Now what?!
After receiving your GC and architect quotes, you conclude that your build-out will cost about $75/PSF. How much will your Landlord give you in TIA? This is where all the factors come into play. Sometimes you can do a combination of free rental periods and/or delayed rent commencement as well as the TIA. Generally, the tenant can negotiate a higher TIA if they commit to a longer lease term. Awesome, you tell your broker you can do a 7-year term, now what?!
While getting your quote from your GC and architect is great, you also need to know how long it will take to do the build-out. Oh, you need permits?! How long does that take?! Oh, you need to have the drawings done per the new space you found, how long does that take?! Many factors, including changing the use of the business for the space, will come into play here.
Ok, your Broker and you have figured out that you would need 6 months to do the build-out. Will the Landlord just give you the money the day you sign the lease?! NO. In retail, typically the Landlord will reimburse the negotiated TIA after the tenant has had professional and certified contractors perform the work, and receive their C.O. (certificate of occupancy) and there are no liens on the property, as well as the first month’s rent is paid. SOOOOO, in about 8 months, you will get your reimbursement. Sure, you’re still ready for your dream business, let’s do this!
Your broker has negotiated a great deal for you:
- 7-year term
- $17/PSF with 2.5% annual increases; $4.00 TICAM
- 6 months of delayed rent
- 1 option to renew your term for another 5 years with 2.5% annual increases
You sign the lease and get going. Your build-out takes 8 months, your build-out costs come in higher at about $85/PSF and you end up opening in the Winter months…but you are prepared because your Broker has given you some feedback and insight on starting a new business, costs involved, a timeline of finding a space, building it out, TIA costs and growing your customer base. Because of this, you have time to do pre-marketing with social media and pop-ups at various events and by the time you open your shop, you have a line out the door to try your homemade cupcakes and locally brewed coffee and tea.
Reality sets in when Brokers discuss the start to finish with a client when they come to them with their idea of a brick and mortar business.
From site selection to opening the business, there are many steps and costs along the way. With quality representation, it doesn’t have to be a scary idea.