4 Tips on How to Reduce your Retail Occupancy Cost

A study entitled "2009 Forbes/CIT Survey" completed last fall included the following retail statistics:

- 40% of tenants had renegotiated their rent
- 38% negotiated other types of concessions
- 28% received Landlord allowances on new leases
- 22% had reduced their overall occupancy expenses.

It's no secret that rents are down (anywhere from 20-40% depending on your location) and that corporate, multi-unit tenants have real clout and are using the condition of the great recession to ratchet down their rents. 

But how does the small business operator take advantage, even in the short term? (The current consensus is that retail rents will remain depressed in most areas through 2011, due to an overabundance of vacant, retail space and the forecasted modest demand in the short term.)

Here are (4) actionable tips for good operator to reduce their retail occupancy cost.

Franchisees who have a good track record with their Landlord have an opportunity to reduce their overall occupancy costs and this can be accomplished in a number of ways. If your operations and sales performance are historically strong, a Landlord will have every motivation to work with you because right now he is limited in his ability to replace you.

First, read your existing lease for any conditions that the Landlord may be violating, such as co-tenancy provisions or vacancy levels. For example, the Landlord might have agreed to have a certain anchor tenant and that tenant is no longer operating. Or he might be in violation of a maintenance standard provision. If you find anything in your lease that is a violation or a potential default by the Landlord, this gives you additional leverage in your negotiations.

Second, annual base rent is an obvious target for modification. You need to do your research by finding out the asking rents in competing centers. Also learn what the Landlord is currently asking for vacant space in your center. If your lease commenced after 2004, chances are your rent is significantly above-market. The Landlord could agree to temporary "rent relief", which is generally a short-term reduction (a year or two) but might expect to recoup that reduction later on. If you agree to a payback, tie it to a sales threshold. This is a win-win for both you and the Landlord.

Third, occupancy cost isn't just rent. In some centers, Common Area Maintenance (CAM) charges are high. Part of your negotiations, if you don't have this already, is to "cap" the CAM charges, which is standard practice for corporate-owned businesses. Also, make sure your lease reads that your pro-rata share of the CAM (as well real estate taxes and insurance on the center that are passed through to tenants in most retail situations) is based on your total square footage divided by the total square footage of leasable space in the center (not "leased" space). The Landlord should be paying CAM on vacant spaces. If your lease doesn't read that way, change it as part of your rent renegotiations. This is a quick way to reduce your occupancy cost.

Fourth, another part of your occupancy cost is a marketing association charge for the shopping center (for example, $1 a square foot). Ask the Landlord to show you how those marketing dollars are being spent and if it's not helping you, try to get this charge omitted from your lease, or at least reduced. Another expense is the administrative fee percentage that's usually noted in the CAM section of your lease. Anything over 5% is too much.

If you hope to stay in your existing location for the foreseeable future, or there's a better space in the same shopping center that's opened up, consider negotiating an extended term or a new lease. This is valuable to you if you get what you need in that lease, and the Landlord benefits in that he'll have a more bankable lease on your space.

It's worth the time and effort to reduce your occupancy costs. Most of these costs are fixed. If you lower them now you'll be better positioned to survive the current market and you'll be more profitable as your sales increase in the future. 

Written for the IAFD.

By Elizabeth Angyal
Angyal Realty Advisors.