Chapter 6 | Your profit and loss Forecast | 111
it may not seem so if you read all those fine print clauses. You’ll be sure that you can stay at the location long enough to build your business around it, and you’ll know what your rental costs will be. But what happens if your business fails or you discover the location is poor? You’ll be responsible for paying the rent until the space is rented to someone else, which could take a long time in some areas. Assuming someone else will pay at least as much as you do, you’ll have no further obligation once the new tenant begins paying rent. Be sure you know exactly what your rent will include. Commercial leases often require the tenant to pay for a number of things that a landlord commonly pays for in residential rentals. For example, some shopping center leases require you to pay a pro rata share of property taxes, building maintenance, and fire insurance on the building, as well as a pro rata share of the parking and common area charges. A friend of mine who rented a small building for a retail nursery business put it this way: “That blankety-blank landlord sold me the building; he just kept the title.” So, as part of making your financial projection, be sure you know exactly what charges, if any, the realtor or landlord expects you to pay in addition to the rent. By the way, no matter what you determine the rent to be, expect to put up the first and last month’s rent and often a security deposit
when you sign the lease. Don’t include those deposits here. (See Chapter 7 for treatment of preopening expenses.) Many leases that last longer than a year contain a method to protect the landlord from inflation. Some are tied to a cost-of-living index, which means your rent goes up each year at the same amount as the inflation rate. Others contain a percentage of sales clause, where you pay a set rent or a percentage of your gross sales, whichever is higher. Example: Bob Smith signed a
shopping center lease for his optometry office. His lease called for a base rent of $2,400 or 6% of monthly sales, whichever is more, plus a set charge of $400 for taxes, maintenance, and insurance. If sales exceeded $40,000 per month ($2,400 divided by .06), he would be obligated to pay the landlord more rent. Bob was pleased to sign the lease because his sales projections ($32,000 per month) indicated he would be making a healthy profit if his sales volume reached $40,000 a month, so he would not mind paying a higher rent. Of course, this sort of lease is not a good idea if the amount of sales needed to trigger a substantially higher rent is too low. In Bob’s situation, for example, if he was required to pay more rent if monthly sales reached $28,000, he probably would have looked elsewhere.