The Top Three Reasons Landlords Won’t Lease to New Businesses - and How to Overcome Them
Trying to secure the perfect space for your retail business will leave you feeling like Buddy the Elf when he first gets to Manhattan pretty darn quickly. You hop off your iceberg all full of excitement and sprinkles, only to get ignored or dismissed by everyone along the way who thinks you’re either wasting their time or straight-up insane.
That’s because your perfect brick-and-mortar space is locked within an ecosystem we call commercial real estate, and CRE (its street name) is not hospitable to outsiders. It has its own language, process, and players that make it nearly impossible for you, Buddy the Elf, to get taken seriously. Even though you know exactly how to run your business.
It’s not fair, but it is true - here’s why. Commercial landlords have absolute discretion when leasing their space - it’s not like an apartment, where as long as you pass the credit check, you’re golden. Part of commercial landlords’ job is to vet the businesses that want to occupy their space based on who they think will be successful in the long term. More often than not, they end up sending Buddy the Elf packing back to the North Pole.
Three big red flags are sure to make commercial landlords reject a first-time retailer:
1. The business owner doesn’t have
the capital they need to get open - and
they may not even know how much they need
The start-up costs required to open a brick-and-mortar business create a huge barrier to entry for new retailers, but it turns out that raising the money needed to get open and float the business in its infancy is only half the battle. The first step is to have a strong, thorough Capital Budget that includes reasonable estimates for all of your big line items. Buildout cost will be a biggie, but you’ll also need to account for pre-opening marketing costs, wages for training staff, all the licenses and permits you’ll need to get open… and on, and on…printed catering menus don’t just magically appear, right?. Landlords need to understand that you have a realistic sense of your costs to get open, and a plan to raise the capital needed - whether through bank loans, friends and family etc.
Beyond that, businesses need to be able to secure the lease, which comes in two forms; one is a security deposit (basically a giant wad of cash equivalent to two months’ rent) and a lease guaranty. What’s a lease guaranty? It’s a legally binding promise (so formal it’s spelled with a “y”) that requires business owners to have the financial means to pay the lease even if the business folds.
2. The business plan isn’t complete,
compelling or… existent.
For a first-time retailer, your business plan is one of the most important sales tools you have. It’s your moment to inspire confidence with prospective landlords as well as other “gatekeepers” like brokers and bankers. And yet, all too often, would-be retailers phone it in on the business plan. They put something together because they know
they have to have it, but it’s missing the magic that makes a potential investor get excited. Often, it’s missing sections entirely, so even after reading the plan, the landlord is left with more questions than answers. And far too often, it looks like someone slapped it together on a Word template in a Red Bull-fueled all-nighter…not a strong impression.
The business plan conundrum has been a bit of a Catch-22 for retailers because it turns out that commercial real estate professionals are looking for something quite specific when they request a business plan, but they don’t actually communicate to you what it is that they’re looking for. And so, nine times out of ten, whether you put your blood, sweat, and tears into it or you outsourced the business plan on UpWork, it won’t be what the landlord is looking for.
3. The business owner has no
experience with commercial real estate.
If it’s your first time renting a retail space, OF COURSE, you don’t have prior experience with commercial real estate… and yet, as it turns out, this is a major deterrent to working with new retailers for commercial landlords.
Here’s why - the process of renting a space takes months, and it’s complicated.
You’ll need to have access to experts like brokers and contractors and attorneys. You need to know what’s coming next, and you can’t ask the landlord to explain the whole process to you - they just don’t have the patience. That’s because established brands - like Starbucks and Target - have commercial real estate departments within their company, who are experienced in doing these deals. They may be tough to negotiate against, but they understand the rules of the game and will show up to play appropriately.
At Pedal Retail Advisors, we think this system isn’t fair. We believe that if you have a dream and the grit and dedication to pursue it, you should have access and credibility when it’s time to enter the world of CRE. That’s why we created Dream Space - a brick-and-mortar accelerator launching next week designed to help new retailers overcome all three of these pitfalls.
Who are we? We’re retail-loving real estate brokers and real estate-loving retailers. We’ve brokered more deals and signed more leases than any normal person ever should, and we’re on a mission. We’ve worked with every type of dream and every type of dreamer, and we’ve perfected the method that prepares and equips them to find and secure their perfect brick-and-mortar spaces.
In 12 weeks, Dream Space will transform your dream into a clear course of action. Whether your dream today is hazy or clear, you’ll finish the program with a confident understanding of what you need in a space and what you can afford, how the real estate process works and how you’ll work it, and how to negotiate like a pro. Best of all, you’ll be armed with a powerhouse business plan that eats all other business plans for lunch.
GUEST WRITER: Abby Davids Rocha, Retail Real Estate Broker & Co-Founder, Pedal Retail Advisors
Dye Culik PC will occasionally invite unpaid guest writers to share topics related to business and franchise topics. As with all our articles, these guest articles are not considered legal or other advice, and any questions about the content should be directed to the guest writer using the contact information included. Images used in the post are licensed to the guest writer.