By Michael E. Novembrino - Curry Real Estate Services

When it comes to site selection there are many questions and decisions to think about. First and foremost, what is the demographic profile of your customer?

From RTO Magazine's RTO How 2 Series

Michael Novembrino has approximately 15 years of Rent to Own industry experience holding operations positions from Zone Manager to Senior Vice President. Additionally, Michael was Vice President of New Business Development for Rent-A-Center. In this position Michael was instrumental in getting into the payday loan business, corporate leasing and other products and services. see video

Everyone has heard the adage, Location, Location, Location. The cost of your lease and its related fees will be one of the largest non-controllable expenses for your Rent to Own business. If you choose the wrong location or accept a rent that is too high, you will have to live with that situation for the length of the lease. That’s why it is so important to do everything you can up front to insure that you get the right location and the right deal for your business.

There are three important areas that can help you make the right decisions and the best deal. They are site selection, letter of intent, and lease review.

When it comes to site selection there are many questions and decisions to think about. First and foremost, what is the demographic profile of your customer? According to industry statistics, the rent-to-own customer has the following demographic characteristics:

-Average Age - between 25 and 54 years old
-Ethnicity - 69% Caucasian, 22.5%African American, 6.5% Hispanic
-Household Income - between $15K and $75K
-Education - 60.3% high school grads, 24.5% some college
-Gender - 63.7% Female, 36.3% male

Another useful source in site selection is the location of your competition. Having worked for Wendy’s in the late 70’s, I learned to try to locate near a MacDonald’s for two reasons. MacDonald’s did research on potential customers, and they were a traffic generator. This gave Wendy’s an opportunity to offer an alternative to the customer. Your ideal location is between your customer base and the competition so that you become their first choice. However, just because your competition is located in a certain area doesn’t always mean it is a good area. Market areas change and what was hot three or five years ago may be declining today.

Here are some other questions to ask yourself as you evaluate a site: How is the visibility? Is the site close to the street, does it allow for maximum signage, or a pylon sign? How is the ingress/egress? Even if it can be seen from the street, can a customer get there easily? Are there traffic generators or other reasons that your customer will be in the area? How is the public transportation? The urban customer in particular needs this to get around town. Finally, how is the parking lot? Can it accommodate all of your business and the other tenants’? Are the cars in that lot reflective of your customer demographic profile?

Another factor in site selection and, probably one of the most controversial is size. What is the ideal square footage for your RTO store and how do you divide that space among your showroom, office, and backroom? Even though it may cost less per square foot, bigger is not necessarily better. Size impacts other financial lines on your P&L such as depreciation, utilities, and even labor to name a few. On the other hand, a space that is too small will be harder to merchandise and won’t provide the increased storage space you’ll need as the store grows. Outside storage can be expensive, and I have found that when the merchandise is out of sight, it is out of mind.

There are two other things that can help you choose your location. The first is demographic maps and reports, which can be purchased from a number of sources. Curry Real Estate uses DecisionWhere, Inc at www.demographicreports.com. These maps and accompanying reports will not only give you population counts in whatever radius’ you request, but they will also give you the key demographic information in those areas. This is a tremendous tool especially when you are trying to develop a market area with multiple locations.

The other tool in site selection, although it may seem obvious, is to thoroughly drive the area. Start by determining your desirable co-tenants. These are retailers catering to the same demographic profile, such as Family Dollar, Dollar Tree, discount supermarkets, auto part stores, etc. Then, plot the area on the map and drive it. While you are driving look at where your customer lives and also look at the other retail areas. Are they thriving or are they becoming blighted? Talk to other tenants in the center about business trends and how it is to work with the landlord. When it comes to site selection, put the time in up front. Remember, once you sign the lease, it’s yours for the term.

So you’ve found a site. You called the leasing agent or landlord and found that the square footage and the cost are in your budget. What do you do next?

Your first step should be to develop a Letter of Intent (LOI). The LOI establishes the major points of the deal in writing for the landlord. Although this may seem unnecessary, it is far easier to address your needs up front than to come back with something that was never mentioned originally.

The following is a list of items that you should consider in your LOI.

•  Proposal to Lease - the Plaza name, address, Suite #, point of contact
•  Tenant Name, Address, Contact
•  d.b.a, -“doing business as,” if you are using a specific business name
•  Use – define your use with as much detail as you can. If you think that you might add other products and services in the future, include them now. You can always give something up, but it is harder to add something later.
•  Demised Premises –include the dimensions, square footage, and specific suite #.
•  Term –the initial term and any option periods
•  Commencement Dates- try to have the lease commencement date and the rent commencement date be the same and not locked to a specific date. If the Landlord is doing the build-out, the rent commencement date should be specified as “X” number of days after you receive possession. This insures that your “clock” doesn’t start until the landlord has completed their build out. This allows you to set up and maybe even be open before you have to pay rent.
•  Rent - what you are offering per square foot, monthly, and annually.
•  Option Period(s) - specify length and rent as above. Remember options aren’t necessarily advantageous to the landlord. You want them as protection against escalation in the market. If the reverse happens, you can often re-negotiate the rent prior to the renewal.
•  Percentage Rent - NONE. Why would you want the landlord to share in your success?
•  Triple Nets or Additional Rents - there are two types of leases, a gross lease and a triple net lease. A gross lease is one where the cost per square foot includes everything. These are typically found in older spaces, where the landlord has owned the property for some time, is independent, and doesn’t want to be bothered with all the financial reporting or calculations.

With the Triple Net lease the landlord is passing the costs of operating the real estate on to the tenants. There are 3 components to Triple Nets, CAM, (common are maintenance), taxes, and insurance. All are calculated as a pro-rata share based on the amount of space you are leasing vs. the total rentable space. For example, if you are leasing 5,000 sq. ft and the rentable space is 50,000 sq. ft., you will pay 10% of these expenses as additional rent on a monthly basis. It is hard for the landlord to estimate the triple nets on a new or newly constructed development. To be safe, you should plan that in the first year the original number may be less than the actual. In this case, you will pay a lump sum to make up the difference at the end of that year. You will also pay the higher amount in the subsequent years.

•  Security Deposit - try to avoid this as it ties up your capital, but for the most part, you will probably have to pay one month’s rent.
•  Condition of Premises - this is your opportunity to specify how you want the premises when you accept them. You can address build out items such as walls, lighting, offices, flooring, HVAC, etc. Because of the Americans with Disability Act (ADA), it is important to make sure that the landlord is in compliance outside. However, compliance inside is your responsibility. The major areas of concern are the entrance ways and the restrooms, both of which will have to be handicapped accessible.
•  Sprinkler System - there are two areas to address. The first is that the current system, if there is one, is working. The second is that if zoning changes require sprinklers, the landlord assumes the expense for them, not you. Depending on your location and space, this item could cost you 10K to 50K!
•  Utilities - arrange separate meters that are your responsibility. If you share a common meter with another tenant who is a high utility user, you will be paying more than you should.
•  Signage - include everything and let the landlord tell you what they will allow. Of course, you must include the maximums allowable by local codes. Make sure you check this when you get the LOI back. Many landlords have signage requirements; you want to make sure that your standard package is approved before you sign the lease.
•  Restrictions, otherwise considered exclusives - these tie directly to your use. You may be able to get everything in your use accepted or you may have to give up the exclusive provision on particular items. Needless to say, you don’t want to give up you core business use.
•  Anchor Goes Dark - this provision protects you in the event that the major anchor goes dark thus reducing the traffic that you were counting on for your business. You may want the right to terminate the lease or get a rent reduction
•  Occupancy Clause - this addresses the fact you are expecting a minimum occupancy in the center, typically 50%. If it gets lower than 50%, you want the right to terminate the lease or a rent reduction.
•  Cap on CAM - ask for a cap of 5-10% maximum per year because this is a controllable expense for the landlord.
•  HVAC - in your conditions of premises, you should ask the landlord to provide you with a written, certified inspection of the HVAC. If the landlord doesn’t want to do this, then you should. Repairs or replacements are an unnecessary expense for you. You should get at least a one year warranty on the HVAC. If it’s an older unit; ask for an annual cap on repairs. You don’t want to incur a $10,000 capital expense to replace the HVAC in year four of a five year deal, when you are going to relocate. This only benefits the landlord. This is a major expense that you can only amortize for 12 months or the remaining term of your lease.

Once you have negotiated the LOI, you are ready to go to the lease. All of the items covered in the LOI will be part of the lease, and you want to make sure that the lease agrees with the LOI. Most landlords have their own lease that they will want to use. For an independent operator, it is less costly to do this.

The following are some basic hot spots in the lease that weren’t covered in the LOI:

•  Landlord Maintenance - the landlord should be responsible for the structure, roof, sidewalks, parking lots, and all of the utilities up until they enter the leased premises.
•  General Liability Insurance - you want the landlord to carry insurance for the shopping center, and the landlord will require you the carry insurance also. You need to review this section with respect to the required limits and the notification that you must provide to the landlord regarding coverage.
•  Default - the landlord will have a list of situations that if violated, will put you in default of your lease agreement. If you are in monetary default, for whatever reason, you should request that the landlord notify you in writing and give you 10 days from the receipt of the notice to cure. Should the default be non-monetary, for example, you need to repair something that you damaged, then you should request the right to cure within 30 days after receipt of written notice.
•  The Right to Relocate - often the landlord will include a provision that they can relocate you if they so choose. You’ve invested time selecting your location, and your business is doing well. You wouldn’t want to be in a position where this could happen. You should negotiate so that the landlord must at least have your written consent to relocate you.
•  Right to Go Dark - this can be in a continuous use clause and can be tied to default. You must be open for business as prescribed. This is difficult because the landlord doesn’t want dead space even if you are paying rent. If you can’t get this clause deleted from the lease, try to have it removed from the default category.

Because you are entering into a legal document, you should seek legal advice before you sign the lease.

As you can see, there are lots of things that go into this process. A good real estate decision serves as the foundation for your business. If you find a great site and make it right with the build out and lease, this will be one major expense that you will feel good about for years to come.

Need help making your real estate decisions? Contact Curry Real Estate Services. CRES offers tenant representation, site selection, consulting and lease negotiations. Our team, Joseph Curry, Michael Novembrino, and Tom Archer, have over 80 years experience in Real Estate and Operations. If you would like more information on how we can assist you, please call Michael Novembrino at 214-450-5305 or email at blueskyinc@msn.com

Michael Novembrino has approximately 15 years of RTO experience holding operations positions from Zone Manager to Senior Vice President. Additionally, Michael was Vice President of New Business Development for Rent-A-Center. In this position Michael was instrumental in getting into the payday loan business, corporate leasing and other products and services.