Rent isn’t the only cost you need to consider when signing a lease for a retail business.
Do you know what costs are entailed when you sign up to a lease?
The lease has one headline number: the rent. It is very important to realise that there are several recurring costs, some monthly, some annually and some at start-up of any lease that can
make or break any business. The disclosure statement, which is provided before a lease can be finalised, is the best place to summarise and find all of the hidden costs.
SHOPPING CENTRE RENTS
For the purposes of simplifying the exercise, I will use a starting rent of $100,000 per annum in a shopping centre scenario. Let’s assume the site is in a large shopping centre. The actual yearly gross rent will look as follows as the further inputs will be hidden within the documents:
Rent: $100,000.00 plus GST
Outgoings: $23,000 plus GST
Storage: $4500 (you decided you need separate storage, so this is tacked on)
Total gross rent: $144,800 per annum, $44,800 or 50 per cent more of add-on costs that can quickly creep up on a business if not accounted for.
SHOPPING CENTRE RENTS
The further hidden costs in a shopping centre new store agreement that pop up as a once off when starting are:
Design review fees: $3500
Consultancy review: $3500
Category 1 costs: $80,000 (average across food and general use for 100sqm. These costs are for work such as modifying air conditioning ducts, fire systems modifications, under-floor plumbing modifications.)
These further costs above are rubbery and usually well hidden in documents referred to as a Fitout guidelines manual. By referring to ‘the manual’ in the disclosure statement and lease, centre owners don’t actually disclose these costs, and this has the potential to ambush the uninitiated retailer. Often, the prospective tenant is so deeply committed to the store by this stage, they have little bargaining power.
In summary, in the first year we have a rent of $100,000 which has quickly become a cost of $231,800, all prior to Fitout and equipment.
STRIP SHOPPING RENTS
Strip site locations are far simpler, however this does not mean hidden costs do not exist. The hidden costs encountered in strip shop (independent owner) locations generally arise because the owner or agent is not across the details and obligations.
In this scenario a summary might look like this:
Outgoings: $3500 (usually rates and building insurance)
The difference with such properties is that if you modify building services (fire services, drainage and the like), you will pay real-world contractors for such costs, perhaps $20,000 in total on a like-for-like comparison to the example above. The problem with strip sites is that when they are not configured to accommodate particular services the landlord will wipe their hands, as it becomes a case of buyer beware.
It is not unusual for costs like installing a grease trap, upgrading power and bringing gas to a site to quickly total $20,000 to $30,000. The other problem with these sites that adds to costs is that councils are cumbersome and slow and can cause massive delays, which ultimately is a hidden cost to the retail business.
In summary, specific expert advice and representation from industry experts is the key to minimising these costs and ensuring a retail business does not become burdened by any hidden costs.
Ange Kondos is managing director at Leasewise, with clients such as Mrs Fields, Schnitz and Breadtop.
SEPT/OCT 2018 | 106 | WWW.FRANCHISEBUSINESS.COM.AU