Retail Leasing: How to Lease Space for Your Business

Opening a physical retail store can be daunting. While stores can be a vital tool to grow your business, the leasing process can be arduous and overwhelming. 

This retail leasing guide will provide an overview of the leasing process, strategies for choosing a retail location, and tips for negotiating a lease that supports your business goals.

Why retail space is a hot topic in 2022

Physical retail spaces are seeing a resurgence. During the first quarter of 2022, in-store retail and food sales increased by 11.5%. In March, shopping center traffic was just below 2019 levels. According to CBRE, vacancy rates are now the lowest in a decade. While major metropolitan areas have been slower to recover, rents are increasing, especially in the Southeast of the United States.

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Still, it’s never been a better time to open a retail store. Brick-and-mortar stores have emerged as essential channels to meet new consumer habits.

As online customer-acquisition costs continue to grow, physical stores can create brand awareness, drive customer engagement, and build brand loyalty. 

Working with a commercial real estate broker

Tenants may choose to work with a broker to navigate the leasing process. 

There are advantages to working with a broker. “Not only will [brokers] be able to identify available spaces based on your search criteria, but commercial lease structures are far more complex than residential home or apartment leases,” says Hargis. “[Leases] require a strong understanding of what’s ‘market’ for all the important elements.”

Choosing the right broker is essential. Brokers often specialize in specific markets and uses (i.e., office, retail, fitness, restaurants). A broker should take the time to understand your business and goals.

Keep in mind that brokers will require a fee (average 6% to 10% of the total lease cost). Sometimes, tenants can negotiate that landlords pay the broker fee. It’s important to discuss the terms of the fee before engaging in the leasing process. 

Buying vs. retail leasing 

While less common, there are opportunities to purchase a commercial building. It’s crucial to think about your business goals, timing, and access to capital. 

Leases lower your risk, require less capital, and are better for business owners looking to open a location right away. 

Owning a building gives you complete control of a property and you have the opportunity to rent out the property in the future. However, this requires access to capital, takes time, and involves significant due diligence.

Now, let's take a close look at the retail leasing process.

How does retail leasing work?

Here, we’ll break down the steps to leasing a retail space. 

1. Prepare a business plan and budget

Preparation is vital. Developing a business plan will help you determine your goals and understand your expenses. It can also identify areas where you may need additional expertise. 

You may also need a business plan when contacting landlords. Experienced leasing managers will do their homework to ensure new tenants can pay the rent. 

“Be prepared by knowing your numbers and telling your [brand’s] story to this point. Be ready and confident in [your] pitch,” says Erin Drapkowski, Vice President at Ukropina Sabaugh, a commercial real estate advisory firm.

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When drafting your business plan, ask the following questions:

• What are your goals for a retail store?
• Who is your target customer?
• What are your business expenses (number of employees, point-of-sale (POS) systems, merchandise, etc.)? 
• How will you market your store? 
• What are your projected sales? 
• How do you want your store to look? 
• What are your build-out costs? (Keep in mind that construction may require a permit from the city and the help of an architect.)
• What is your timing? 

2. Develop a location strategy

Once you understand your goals and costs, choosing the right location is crucial for success. We’ll include a physical location checklist below. 

Here are a few questions to help identify your location criteria. 

Where are your customers located? 

Choosing the right location starts with your target customer. Where do they shop? If you’ve been operating online, use data to understand your customers’ habits. 

Tim Hargis, partner at West Equity and former Vice President of Business Development and Real Estate Strategy at Tuft & Needle, advises thinking about customer acquisition when choosing a location. He says, “Consider how you’re going to drive potential customers into your store. Are you going to depend on high volume foot traffic … or rely on your internal marketing efforts to create awareness?”

What kind of environment will be most conducive to your business?

Do you want to be in a traditional mall, an open-air center, or a street location? Identifying the type of center will help narrow your search.

There are advantages and downsides to each type of location. Traditional shopping centers can draw more traffic. The landlord will often curate the merchandising mix, offer security, and care for the common areas. 

Free-standing buildings could be less expensive. However, you have less control over your neighbors and the environment outside of your location. 

Who are your ideal co-tenants? 

List out your ideal co-tenants. Who will complement your business and drive traffic to your store?

Are you a wellness brand? Opening a store next to like-minded tenants such as fitness concepts or juice bars may help drive cross-shopping. 

What are the requirements for your business to operate? 

Do you need a bathroom or a sink? Do you want designated parking spaces for pick-up? It’s essential to think about the size of your space, necessary utilities, and parking requirements.

Local city governments will also have different requirements based on your use. Investigating these mandates will save valuable time and resources. 

3. Source locations

Once you’ve developed a business plan, budget, and location criteria, you can start looking for spaces.

There are several ways to find your ideal location. You can use online services such as Costar and LoopNet to find storefronts in your target market. 

Networking is also effective. Reach out to other business owners and share your search on social channels to attract leads. 

It can also be as simple as driving around your target market and looking at shopping centers that fit your location strategy. Landlords will often have For Lease signs on available buildings. Shopping center landlords will have a Leasing page with contact information on their websites. 

Finally, using a commercial real estate broker can be an effective way to source locations. We’ll touch on brokers below. 

Overall, Hargis stresses the importance of flexibility. “Try to find a few different spaces that could work,” he says. “Many prospective tenants get too focused on one ‘perfect’ location.”

4. Tour locations

After you reach out to the landlord, schedule a tour. It’s best to bring any stakeholders to the meeting. For example, touring with your contractor can save time and costs during the construction process. 

Take some time to sit outside the prospective space and observe the traffic. It’s ideal if you can monitor the area on different days and times of the week. Do you see your target customer? 

5. Negotiate a letter of intent

Once you decide on a location, the landlord will send you a letter of intent (LOI) that outlines the basic terms of the lease, e.g., rent, length of term, etc. We’ll provide an in-depth lease checklist below. 

6. Sign the lease

Once you agree to terms, the landlord will draft the lease. It’s essential to review the lease with an attorney. 

Don’t be afraid to walk away from a lease negotiation if the agreement will not set your business up for success. 

Retail lease agreement checklist

In the United States, the lease can be a lengthy document. Here are the most common terms you will find in a retail lease.

Length of term

Length of term refers to the length of the retail lease.

Fixed minimum rent (FMR) 

Fixed minimum rent refers to the base rent for the space. 

Common area maintenance (CAM)

Landlords charge a fee to maintain the common area. Review the language to understand how the landlord calculates this number.

Real estate taxes (RET)

The landlord will provide you with an estimate of annual taxes based on your store size. Review the language to understand how the landlord calculates this number.

Increases

The landlord will include an annual increase. There may be separate increases for base rent and CAM. Make sure you understand how your occupancy costs will increase and when they occur.

Other costs

The landlord will list “other costs,” including percentage rent, a security deposit, marketing fee, and utilities:

• Utilities: It’s essential to understand if you will contract utilities through a utility provider or the landlord. If the landlord provides utilities, they may charge an administrative fee. The tenant can negotiate any fees
• Additional percentage rent: Sometimes landlords will include a percentage rent clause on top of your occupancy costs. A tenant would pay a percentage of sales over a specific sales threshold. For example, you would pay the landlord 10% of any sales over $500,000 made that year

There are a couple of helpful ways to reduce retail leasing costs:

• Rent abatement: Rent abatement allows tenants to receive free rent during a specific period. Often, landlords will provide rent abatement during the first few months of the lease
• Pure percentage rent: Paying a pure percentage rent can reduce your risk. If a landlord insists on a base rent, you can negotiate a lower rent with a higher percentage rent clause

Delivery date

The delivery date is the date the landlord will deliver the space to you. 

Sometimes the landlord will need to do construction before delivering the space. Delays could mean additional costs for you. Ensure there are penalties if they miss the delivery date. 

Rent commencement date

The rent commencement date is the date you will start paying rent. Negotiate ample time between the delivery date and the rent commencement date to allow for any delays. Landlords may also include penalties if you are not open for business. 

Landlord delivery requirements 

How will the landlord deliver the space? If the landlord is going to do construction before delivering the store, they should provide a Landlord Work Letter. 

Tenant improvements

Tenant improvements refer to your build-out. Some landlords will have specific requirements for store design. Be sure to ask if your landlord has a tenant criteria package and review the requirements with your architect and contractor.

Tenant allowance

Tenant allowance (TA) is money from the landlord you can use toward your build-out costs. TA is also called tenant improvement allowance (TIA).

The landlord offers TA for qualified tenant improvements. Qualified improvements refer to improvements done to the space. You can’t use the allowance toward just any business expenses (i.e., POS system, merchandise, etc.). 

The landlord usually pays the tenant allowance after the build-out is complete. The landlord will also require that you provide lien waivers and receipts. 

Often landlords will require you to pay back the tenant allowance if you vacate the space before the lease expires. Ensure you understand any penalties before signing the lease. 

Permitted use

The permitted use refers to what you can sell in your store. 

Common areas

Understand who will maintain the common area. What are the responsibilities of the landlord and the tenant? 

You should also include language that landlords can’t block your space with kiosks or seasonal activations (i.e., Santa sets).

Repairs

Understand your rights and responsibilities for repairs. If there are leaks, who will fix them? What is the timing? 

Early termination clause

An early termination clause allows you or the landlord to terminate the lease early. A termination clause, or “kick out,” can help mitigate your risk if your store isn’t performing. 

Co-tenancy 

There can be a co-tenancy clause if you are leasing space in a large shopping center. With a co-tenancy clause, landlords will need to have a minimum amount of tenants open. It can also require that specific tenants remain open (i.e., department stores). 

Tenants will have the right to pay a lower rent or terminate the lease if the landlord violates the co-tenancy clause.

Personal guarantee

Landlords will ask tenants to provide financial statements before signing a lease. Sometimes a landlord will ask tenants to sign a personal guarantee as security. A personal guarantee allows the landlord to go after a tenant’s assets if they don’t pay the rent. 

If you must sign a guarantee, understand the terms. You can request that the guarantee “burns off” as you make rent payments to reduce your exposure. 

Hours of operation

Often, shopping center landlords will require tenants to be open during specific hours. Can you close for the holidays? What happens if you close unexpectedly? Ensure there is language in the lease that best suits your business. 

Option to extend

Tenants can negotiate an option to extend. The option gives the tenant the right to renew the lease for a specific period when the lease expires. 

Reinstatement clause

A reinstatement clause states how the tenant will return the space to the landlord when the lease expires. 

Types of retail leases

Permanent vs. temporary 

A permanent lease refers to a lease term longer than one year. 

On the other hand, a temporary lease refers to a lease term of less than one year. While the rent and build-out requirements may be lower, the landlord often has a termination right with a temporary lease. 

Rent structures

There are several different types of rent structures written into retail leases. 

• Triple net (NNN): A triple net lease includes base rent, common area maintenance, and real estate taxes
• Gross + tax: The gross number includes the base rent and common area maintenance. The tenant also pays a separate tax fee
• Gross lease: The tenant pays one rent number in a gross lease, including base rent, CAM, and real estate taxes
• Percentage-rent only: The tenant only pays a percentage of sales

Navigating the retail leasing process

While the retail leasing process can seem overwhelming, physical stores are an effective way to acquire new customers and grow your business. 

Preparation is critical. By understanding your target market and setting a realistic budget and timeline, you can set your store up for success through retail leasing.