SESSION SEVEN

Business Location and Leasing

Location, Location, Location Zoning categories Criteria for home-based businesses Criteria for a manufacturing, warehousing or industrial business Criteria for a retail business Leasing Checklist Points to consider before signing a lease or purchasing property Basic lease provisions To rent or to buy considerations Do Your Homework Site Location Criteria Evaluation table Top Ten Do's and Don'ts Sound Byte Transcriptions Session 7 Business Plan Session Feedback

Location, Location, Location

Read Transcript Whether you are a moonlight or full-time entrepreneur, at some time real estate issues will become important to you. The success or failure of most retail businesses will hinge on the owner's selectivity and judgment in selecting the right location.

An initial step in business is selecting where you will live and where your business will be located. You may have the opportunity to relocate to an area where you would really enjoy living and working.

Zoning Categories

Every city has a planning department at City Hall. You will be dealing with this and other municipal departments and agencies that have discretionary authority to approve or disapprove your intended plans.

You can no longer rely on zoning codes to determine what the rules are in your desired location. Your intended location will often be subject to "precise plan" approval, an environmental impact assessment, and other regulatory issues.

You may find yourself appearing before a review board that can often seem unreasonable in its decisions. Many cities have redevelopment agencies authorized to impose conditions even more stringent than those established by local codes.

One shopping center developer was so frustrated with the demands of city agencies that he finally threw up his hands and sold off his rights to the property. The new owner succeeded in developing the property. His secret, "I went into City Hall and told them that I would do anything they wanted me to do-----and did it."

Now, obviously there will be times when unreasonable conditions will make a location for your business unattractive. In such cases, you should unemotionally look for another location.

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Criteria for Home-Based Businesses

Be sure your home business is permitted and you have the license required by the city. Many homes have an association with regulations for the owners. Check to ensure you are in compliance. See our home based business session for those considering operating a business from their home.

Criteria for a Manufacturing, Warehousing, or Industrial Business

• Room for future expansion

• Convenient for employees

• Good Accessibility

• Available labor force

• Appropriate utilities

• Convenient to freight and express delivery systems

Criteria for a Retail Business

Read Transcript

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Each retail and commercial business has its own criteria. For example, a donut shop should be located on the "going-to-work" side of the street. On the other hand, a liquor store should be on the side of the street with traffic going home from work.

The selection of your first location will have an overwhelming impact on your chances for success.

In Session 1, you analyzed businesses that are similar to the one you chose. Did you analyze where they were located and why?

• Select the appropriate type of center (mall, strip, mini). Some business do best in a large center but some, like Mini-Marts, video stores and laundromats, do better in much smaller centers. Others such as florist, nursery or antique stores, do well located on the street front.

• Demographic data will provide you information about the neighborhood. It will inform you about the population, the number of households, estimated population by race, age and income level within a one, two or five-mile radius. You can find firms that supply this information on the Internet. A good place to start is the International Council of Shopping Centers at www.icsc.org/srch/rsrch/demographics/.

• Walk and talk the area. You will be surprised how much you can learn by talking to customers, employees and owners.

• Traffic count is very important because it will give you the number of cars at the intersection. You can also get the pedestrian count, which is great for drop-in or walk-in business. This report can be obtained from the local traffic department.

• Visibility and signage: Customers must know you are there. They should be able to see your store. Usually the end or corner location is better, which is why the rent for those spaces is higher. Get the biggest sign you can. Tell the public clearly what you are selling. Examples: Travel, Gifts, Pets, tell the products. Both your lease and the city ordinances will have limitations regarding your signs.

• Access and parking: Be sure you have adequate and convenient parking. Avoid streets with dividers or one-way traffic. Customers prefer stores where the parking is in the front.

• Proximity to competition: Know where your competitors are located. You can get the names and address from the Yellow Pages. Find out what your competition is doing and how they are doing it.

Generators (anchors): These are the big national stores in a mall or shopping center. For example, Albertson's, Nordstrom, Wal-Mart and/or McDonald's will help to bring customers into the center. The closer your business can be to generators, the better it usually is for your business.

Leasing Checklist


Read Transcript

• Retain a real estate lawyer to assist you in negotiating your lease or purchase. A five-year lease on a $1,000 per month space is $60,000 (probably a personal obligation) and may well be your largest obligation for your beginning business.

• Most retail stores leases are Net, Net, Net (NNN) leases (a.k.a., Triple Net Lease) meaning that you as tenant will pay for the taxes, insurance, gardening, utilities, security, trash and sewer, litter, graffiti removal and repairs. This charge is based on the square footage of your space. CAM (Common Area Maintenance) charges can be costly so find out the estimated cost per month before signing the lease. CAM charges can vary but will normally include parking lot sweeping and repair and all aspects of common area upkeep.

• Ask for options. At the end of your base term, you can then renew the lease or move. Try to keep your initial term short. There are some compelling reasons to have a short-term lease with options:

  Your business may not be successful at your initial location. A short-term lease will minimize your overall rent obligation.

  You need flexibility in lease terms to accommodate growth. Start-up businesses frequently find that their growth rate is more rapid than expected.

• Consider the possibility that you need to expand your business and will need more space. To provide for this, your lease could provide that if you need more room, your space can be expanded, you can move to another location in the center or you can cancel your lease.

• Don't hurry your decision. There is no such thing as the last good location.

• Don't judge entirely on rent. Pay fair rent for an outstanding location. Don't let the leaser dictate all the lease terms.

• An Internet marketing tool is now available to enable you to locate potential competitors: the “local” link on search engines. To demonstrate the power of this tool, go to a search engine such as Google or Yahoo and enter the type of business you plan to start. Then, click on the “local” link at the top of the page and enter you zip code. Presto: your local competition will be displayed on a map along with links to their Web sites.

• Is the location the best available in the area where you want to be?

• Does it meet your own specific criteria?

• Are utilities and tenant improvements adequate?

Basic Lease Provisions:

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Rent: Is the rent comparable to other rents in the same location?

Term: Is your lease for a short-term (a year or less) or long-term?

Floor area: How much square footage of the space? Rent and CAM charges are based on the square footage of your space.

Common area maintenance charges (CAM): What are the estimated charges for a year?

Options: Do you have options to renew the lease after the first term expires?

Rent increase: Is it a fixed rent increase or is it based on the CPI (Consumer Price Index). If CPI, negotiate a percentage cap.

Percentage rent: Some landlords will ask for fixed rent plus a percentage (of your sales) rent. This is an issue to negotiate.

Tenant improvements: Put the agreement in writing as to the responsibilities of the landlord and your responsibilities to do the necessary improvements to get the space open for business. Landlord's Construction Exhibit "C" should be made a part of the lease. Please refer to the sample exhibit furnished in this session.

Right to assign or sublet: Landlord's consent "not to be unreasonably withheld."

Signs: Be specific with exhibit and description.

Provision for expansion requirements: If you think your business will be expanding, make provisions in your lease to provide for anticipated future needs.

Parking rights: Be sure that adequate parking space is provided. In most retail centers, tenants share "common area parking" rights. Nearby restaurants or theaters can monopolize the parking spaces you require.

Personal guarantee: You should avoid this, if possible. If it is required, ask your lawyer to review this clause carefully.

Exclusive: Ask that no other business similar to yours be allowed in the center if it's appropriate.

All leases have Exhibits

1. Site plan, which is a drawing of the inside of the store, restrooms, windows, doors, A/C vents and utilities.

2. Sign criteria, put in a drawing of the type of sign you want, be sure to state color and size.

3. Construction obligations: state exactly what the landlord will do and what you will do.

4. Special requirements of tenant

To Rent or to Buy Considerations

• For start-ups, the primary consideration is that capital is needed for the business.

• Are requirements going to change? If so, renting is probably preferable.

• Are there tax or borrowing incentives available if you buy?

• Some make more on the real estate than on the business. Talk to the Community Development Department.

• Ownership fixes future cost and availability of the location.

Do Your Homework

• Completely fill out a standard lease form with contingencies necessary for your particular business.

• Attend local Chamber of Commerce meetings to find out about community opportunities and concerns. You can find your closest Chamber of Commerce by going to: www.uschamber.com/chambers/directory/default.htm

• Fully evaluate a specific location, including the completion of a "Site Criteria" table.

• Maintain contact with the community development department.

• Find and get to know a good real estate lawyer.

• Negotiate an actual lease as a dry-run practice.

Site Location Criteria

You can create your own "Site Model" in order to maintain objectivity when evaluating locations for your business. This can be done by assigning different values to the factors that are most important for your particular business. Then each location can be evaluated against these measurements.

Some things to keep in mind in site selection:

• There's no such thing as the "last good location."

• Copycatting your most successful competitor's site criteria can help you avoid making mistakes.

• If you are building a chain of stores, never sign a lease on your second location until your first location is profitable and proven.

• It is better to pay fair rent on a great location than pay great rent on a fair location.

• Don't rely on leasing agents to make your site decisions.

• Driving streets and walking neighborhoods is a good way to scout for locations.

The following form will give you a methodical approach for evaluating the strengths and weaknesses of each potential location.

First, evaluate your site location for each factor on a scale of 1 to 10, Number 10 being the highest.

Second, decide the importance of each factor to your particular business on a scale of 1 to 5, Number 5 being the most important.

Multiply the grade by the weight to determine the points for each factor. Add up the points to get a total score. Repeat this process for each site to gain an objective, comparative analysis.

Site Criteria Table
Factors	Grade 1-10	Weight 1-5	Points
Traffic count: Cars or pedestrians
Visibility access
Proximity to competition
Zoning
Parking (include off-street parking)
Condition of premises
Proximity to customer generators
Income level of neighborhood
Population density
Ethnic make up of neighborhood
Age factor
Directional growth of area
Area improving or deteriorating
Crime/shoplifting rates
Availability of qualified employees
Labor rates of pay
Supplier proximity
Terms and rental rates
Adequacy of utilities, gas, & water
Transportation accessibility
Total Points

Top Ten Do's and Don'ts                         Print this Top Ten List

TOP TEN DO'S

1. Talk to your city hall planning and zoning department to be sure your intended location conforms to all code requirements.
2. Create a Site Model Criteria for your particular business.
3. Look at many locations to establish comparable values for rent and location potential.
4. Order demographic data to provide information about your customers.
5. Retain a real estate lawyer to assist in negotiating your lease or purchase.
6. To minimize your risk, negotiate for a short-term lease with options.
7. Provide terms in your lease for potential expansion requirements.
8. Have every agreement put into writing.
9. Ask that no other similar business be allowed in your shopping center.
10. Use signs that are the largest allowed and clearly state what you are selling.

1. Be hasty in making a real estate decision. (There is no such thing as the last good location.)
2. Don't judge a location entirely on rent.
3. Permit a potential landlord to dictate all the lease terms.
4. Personally guarantee your lease if possible.
5. Sign a purchase or lease document without the approval of your lawyer.
6. Depend on the advice of a landlord's leasing agent.
7. Submit to unreasonable conditions; unemotionally look for another location.
8. Depend on any verbal agreements with landlords or sellers - get it in writing.
9. Open the second store until the first one is proven and profitable.
10. Sign a lease without the condition that it is subject to securing all permits and licenses.

Sound Byte Transcriptions
Jack Edwards      |Listen|

	Jack Edwards Commercial Real Estate Broker

My name is Jack Edwards. I have been a commercial real estate broker for 40 years. I have observed that individuals hoping to open a new business sometimes overlook certain things or make judgmental errors which big chains do not make, and that's the difference between the chain's success and the individual's failure.

You need to determine whether the market around your intended location will adequately serve your customers. For example, if you're going to open a liquor store, your store should be on the "going home" side of the street.

It is very difficult to find a McDonald's that is unsuccessful. They occupy the "primest" of the prime real estate locations. If you think you have a better mousetrap and the world will beat a pathway to your door, you're fooling yourself. Most retail businesses require good accessibility and visibility. The public needs to be able to find you easily, even if they're not looking for you. Be as imposing as possible.

Another important aspect of your location will be your lease document. This is a document drawn by lawyers and understood by lawyers. So, rely on your own real estate lawyer to give advice in this area. There are many subtle points in a lease that can be negotiated, so don't just be stampeded into signing the document.

It usually is wise to take a short-term lease with options to extend, because a long-term lease could turn into the anchor that sinks your boat. On the odd chance that your business doesn't work out, it would be a real burden on you to be saddled with the obligations of a long-term lease after you're out of business.

One final comment regarding leasing. Remember that really great locations are sort of like buses, because another one comes along every ten minutes. So, if you think you've got the greatest location in the world and there's nothing else like it, remain calm. If you can't make the deal you want, pass the location. You will find another one just as good or sometimes better.

Donna Strachan - Beauty Salon Owner      |Listen|

	Donna Strachan Beauty Salon Owner

My name is Donna Strachan. I own Primarily Hair in La Habra, California. I have been in business now for 21 years. I was asked to come up with some of the worst things that have ever happened to me in business.

I don't think in terms of the everyday little things that happen in business because they go on every single day and are taken in stride. The real problems for me are matters that are emotionally or financially draining over a long period of time.

When starting out in business, I wish I had taken more time to contact people who knew more about what I wanted to do than I did.

I realize now that when leasing space, you must be clear about who takes care of what. Because it was not stated whose job it was to replace my air conditioner, only to maintain my air conditioner, I found myself with some major expenses. Never underestimate the expenses of repair and renovation.

One other giant mistake I made was trying to diversify. I've learned from that: do what you do best; don't try to be all things to all people. I lost sizable chunk of money when I opened a satellite business with a partner. Sometimes you can't really guarantee the mindset of the person with whom you've gone in business. So, that was a very bad thing, which I got out of and recovered from, but it left me emotionally and financially drained.

I wish I had learned more about the laws of hiring and firing. A worker's compensation case ruled against me ended up costing me a bunch of money, and I realized two or three of those in one year could kill a person financially. Also, the costs of unemployment claims can start to limit how competitive you can be. Safety has always been a big issue with me, and I have made my employees aware of the effects of worker's comp cases on our economic well-being.

Larry Tien - A B Photo Service      |Listen|

	Larry Tien A B Photo Service

I'm Larry Tien, and I'm the owner of A-B Photo in the City of Industry. I think that the most important thing in starting a business is location. Location, location, location, that's always what people say. Don't think that if you find a place that has a cheaper rate you can save money. Put that idea aside and look for the traffic with people passing by and you will acquire more business even though the rent is a little bit more. But first, you have to study to make sure the location is right.

The second thing I would say for a business like service or retail, is that quality is very important. You want to give your customer the best product, which your competitor cannot give to them. Make sure either your product or your service is the best.

In my very first business, I made a mistake because I looked for a location where the rent was fairly cheap, but it ended up that the business did not run very well because I did not have enough customers to support my business.

Business Plan for Session 7: Opening and Marketing

We heartily recommend that you download the individual business plan template for this session Business Plan Template Document 7 and complete it now.

Section 7: Premises

MS Word Printer Friendly Web Page Adobe PDF

Instructions on filling in the business plan template:

1. Each box has a permanent title in CAPITAL LETTERS
2. Below each title is a sentence starting with an "Insert here…" sentence. This will suggest information to insert. The boxes will enlarge as you take up more room so use all the space you need.
3. After completing each box, delete the "Insert here" sentence, which will leave only the permanent title of the box and the information you have filled in.

We suggest that you fill in each section of the business plan
as you proceed through the course.

The template for all sessions 1-14 can also be downloaded into your computer as a single document:

Section 1-14: All

MS Word Printer Friendly Web Page Adobe PDF

Include sufficient research findings and background materials. Make it interesting up by the use of background data, your biography, charts, demographics and research data. When your business plan is completed, print off and assemble the 14 sections.

Many other business plan formats are available in libraries, bookstores, and software.

Session 7 Feedback

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