What Are Common Area Maintenance Charges In A Commercial Lease?
Most commercial retail leases are triple net leases. The “triple” stands for (i) taxes (ii) insurance and (iii) maintenance.
Taxes: This is pretty straightforward, as the landlord will simply pass on to the tenant the real estate taxes proportionately based on the size of the overall property and the size of the tenant’s location.
Insurance: This is calculated in a similar manner based on the landlord’s insurance cost for the overall property, not the tenant’s specific insurance.
Maintenance: This is the big variable and is also called CAM or “common area maintenance.”
Basically, under a triple net lease, the landlord will pass through all of the expenses to maintain the property including landscaping, cleanup, snow removal and minor repairs to each tenant on a pro-rata basis. The CAM charges in a commercial lease are typically added on to base rent as additional rent (in addition to the taxes and insurance cost). This is an area fraught with danger for the unwary tenant. A landlord typically will try to pass through as much of their expenses as possible through CAM charges, and if not negotiated upfront, these expenses can grow and grow over the life of the lease.
Gather data on the type of people living in the area. For example, if you’re planning to open a hip hamburger joint, you want a younger demographic, which might be present near a college campus. Do the people in the area like the type of cuisine you’re going to serve?
How many times have you seen new restaurants open their doors only to close them six months later? Ever wondered why? Among the top 3 reasons is improper location selection. The most successful restaurants are not only those with a great concept, outstanding food, legendary service but also the perfect location.
Here are some critical points to evaluate when selecting a restaurant location.
Conduct a Thorough Location Analysis To be a successful food service establishment, the restaurant must fit the demographics; the restaurant needs to be accessible to the type of guests that live and work in the market it serves. Location analysis is an in-depth look at the general area you’re considering for your establishment. Gather data on the type of people living in the area. For example, if you’re planning to open a hip hamburger joint, you want a younger demographic, which might be present near a college campus. Do the people in the area like the type of cuisine you’re going to serve? Going back to the same example, an upscale seafood restaurant is probably not going to be a popular choice for most broke college students. Examine what types of businesses have been in the location you’re seeking in the past. It’s essential to understand why those previous restaurants failed to ensure you don’t repeat their mistakes.
David Simmonds, recommends “Know who your customer is- what he/she looks like from a demographic and psychographic perspective. One can accomplish this from the analysis of customer data from existing locations, or one can make as educated of a guess as possible. We recommend hiring a qualified professional who has access to different platforms of data that identifies the many characteristics and behaviors of people in defined areas.”
Also, the size of the local population is essential. You need to assess the number of customers you’ll need for your restaurant to remain profitable. Can the area sustain those numbers? The individual restaurateur can find many of these demographic data points, but Simmonds states: “While there are databases of comps available to people within and outside of the commercial real estate industry, nothing beats a CRE professional who is very active in the subject market and has relationships to obtain comps that are recent and pertinent.
Don’t Forget The Basics In addition to the location analysis, there are some critical fundamental factors also to consider. Unless you’re going to open your restaurant in an extremely high foot-traffic friendly part of town, you’ll need an easy access parking lot as close to your restaurant as possible. Additionally, the side of the street you’re on relative to the traffic flow matters as well. If people need to make a left turn ten feet from a busy intersection to get into your parking lot, they may go elsewhere. Customers love convenience, so you must build that into your restaurant footprint.
Other things that matter include the overall safety of the area, as well as whether the entrance to your restaurant is openly handicap accessible. Your patrons need to feel safe and secure, and they need to be able to easily access your building, even if they require the use of a walker or wheelchair. You need to diligently go over each one of these factors when examining possible restaurant locations in your area.
Everything is Negotiable To lease or to buy? This can be a tough but crucial question. You need to seriously weigh the pros and cons of leasing space or buying one outright. It may come down to your budget and how much you plan to spend on the remodeling and to set up your new space, as well as how much you have available to pay as rent or a mortgage. There are pros and cons to both leasing and buying. Leasing is a much more flexible option as far as the future of your business is concerned since it enables you to change locations (depending on your lease, of course) without having to worry about resale values or investing large sums of cash as a down payment. However, leasing requires knowledge in a lease negotiation. When asked about what can be negotiated, David Simmonds points out, “Absolutely, everything is negotiable, in theory. Of course, the extent to which landlords are negotiable depends on the type of business being talked about for the space, the credit and financial history of the person or entity that would be signing onto the lease, local market conditions, and each landlord’s current position in the property and goals for it.”
Another negotiable point is how much free rent time you can secure from the landlord so you can build out your space without paying rent. Simmonds answers it bluntly, “As much as you think you can get away with, without aggravating the landlord enough not to respond at all. Again, this is where a qualified professional with a thumb on the pulse of the market earn their money.”
Exclusivity For Shopping Center Locations If you’re considering opening your restaurant in a shopping center, you’ll want to negotiate some measure of exclusivity with the landlord. This will prevent another restaurant featuring the same cuisine from opening in the same shopping center. I asked David if this is a realistic expectation from a restaurant tenant. He explains it explains this way: “Typically- yes, but again, this will depend on a myriad of factors: type of restaurant, credit/financials on the lease, local market conditions; meaning how much of a landlord’s market it is, how big the center is and what tenant mix the landlord would like to see in the center.
On the other hand, if you can afford to buy a piece of property or an existing building, you won’t have to deal with any potential landlord issues or rent increases. It’s important to weigh all factors specific to your situation and location before signing a lease or buying space.
Take Your Time to Secure the Perfect Spot Using a professional commercial broker can accelerate the process, but patience is a necessary component. Though it may be difficult, don’t rush through the process. It’s completely normal to feel pressured into finding a space and jumping right in, but settling for a location that seems to be just “good enough” simply won’t cut it. The perfect space for your restaurant is out there, so if it’s a success you’re seeking, wait to find the right location, then snap it up!
ABOUT: David Simmonds
David Simmonds founded RESOLUT RE in January of 2009 and has since built a massive, international, 3rd-party, brokerage platform. RESOLUT has 6 offices across Texas (Dallas/Fort Worth, Houston, Austin/San Antonio, McAllen, Midland & El Paso), and services the great states of Louisiana out our Lafayette office, and New Mexico out of our offices in Albuquerque and Sante Fe.
RESOLUT RE represents over 40 tenants nationally, in Mexico and in Canada. We have the ability to service our clients’ expansion needs anywhere in the United States and up to 77 countries around the globe.
RESOLUT RE markets over 800 projects and exclusively represents over 250 tenants regionally across Texas, New Mexico and Louisiana.
David is a member of the International Franchise Association (IFA) and the International Council of Shopping Centers (ICSC) and received a Bachelor of Arts degree in Economics from Columbia College/Columbia University in New York City.