Volume 26/Number 22; March 18/25, 2013
Over the years, having visited several hundred flooring stores, one thing that always struck me is the difference a good or bad location can make. Don’t be fooled—it shows up on your financial statement year after year.
One of the wonderful blessings of the economic headwind we have been in is, now is finally an excellent time to upgrade your location or to add new locations. If you don’t own or have an opportunity to buy, your real estate (option to purchase, first right of refusal), you are missing out.
There are many landlords, and most are quite wealthy. Their secrets are renting to people like us, and the rent they charge is a multiple of the cost of acquiring the building and keeping it in good condition. Their goal is to eventually own the building outright with the tenant having paid not only all of the costs associated with buying it, but also with at least a 6% return on their initial investment.
Why don’t you do it instead?
The most successful retailers I know own their real estate, and it is a major source of their wealth.
Talk with bankers and your accountant. Check the SBA programs. For example, Big Bob’s Flooring Outlet is preapproved by SBA nationally and qualifies for its special financing programs to acquire real estate. I like the 504 program, which if you have been in business for two years allows you to purchase with 10% down, 40% of the note is financed by SBA at a very low 20-year fixed rate, and the 50% balance is bank— financed with conventional terms including a 5-year balloon and 20-year amortization.
There are two types of locations that consistently perform well. If there is a major interstate or highway, I always like to have visibility to my store signage on that road. It is a great way to ensure brand awareness. For example, our Auburn, Mass., location is visible to 220,000 cars per day. I recommend stand-alone buildings, and square footage will depend on your business model. A sample-only, mid-to-upper satellite store needs around 3,000 square feet; a satellite stocking store needs around 8,000, and a main store (stocking or warehouse and retail showroom) needs up to 12,000 depending on your volume or volume potential.
If you are in an area without a major highway, find a location near the center of town that has a major draw (a home center or major grocery store). Demo-graphic studies can be provided by your realtor and are a great way to ensure you are picking a good location. Most floor covering stores pull 80% of business from a 5- to 18-mile radius depending on population density. Look at owner-occupied households with incomes of $75,000 or more (adjust this number based on your part of the country). Pick a location that is going to be easy for the majority of these people to visit.
If you are going to rent, and it isn’t in a strip mall or with other tenants, be sure to try for the following provisions:
• First right of refusal. If the owner decides to sell, you have 30 days to purchase at the offered price.
• Option to buy. You have the right to buy, at a pre-confirmed price (agree now while prices are low), and a portion of the rent goes toward purchase (we usually get 25%). A good trick is to also have the purchase and sales agreement pre-determined by your attorneys to avoid problems later.
• HVAC. The equipment must, all year round, be able to achieve an in-store temperature of 70 degrees or the landlord must fix at his expense.
• Repairs. Roof repairs and replacement are the landlord’s responsibility.
• Maintenance. Who is going to paint the building, sealcoat the parking lot, fix the exterior lights?
• Renewal options. Lock in the rent, and don’t agree to automatic increases or negotiate them to be substantially lower. Landlords have to pay to retrofit every time the tenant changes, and their costs for owning the building doesn’t change. All increases equal more profit from the building for them.
• Tenant improvement. Most landlords will provide $2 or $3 a square foot toward renovating the space when you first move in. If this isn’t necessary, try negotiating for it to be applied toward 60 to 120 days of free rent. If you do need changes, have the landlord pay for them; if they will cost more than that, negotiate for the building owner to pay renovation costs, and for your rent to be slightly higher to offset their higher fee.
If you have no ability or desire to own a location, and you’re considering renting in a strip mall, here are some tips:
• Try to get near an anchor; in the parking area of a home center is always a great first choice.
• Always try for an end cap, nearest to the entrance.
• Be sure to have some assigned parking spaces for your customers to have easy access, especially if you are near an anchor or a restaurant.
• If you are in the mall, get a ‘go dark’ provision so if more than 33% of the space isn’t used, you may, at your discretion, terminate the lease with 30 days notice.
•Get the right to audit CAM (common area maintenance) expenses and be sure to check the allocation based on the square footage rented.
In closing, the next time you pull up to your store, try to look at it with fresh eyes. Is this some place a woman (35 to 65 years old) would want to go? Is it in the right part of town? Is it where people go to shop regularly? Does it look inviting? Is it safe? If not, change.
Change the location, change the outside, make a move and upgrade. You won’t regret it because in retail, it has always been about location.