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Occupancy costs is everything that it costs you to be in the building; rent, common area maintenance (CAM), taxes, insurance, electrical, gas, water, fees, etc. For most franchise businesses, these costs historically range in the neighborhood of 6 to 9 percent. From my perspective at Roetzel & Andress, I continue to see downward pressure on occupancy costs. Good franchise systems are taking advantage of this and attempting to lower their occupancy costs.
What can you do to lower your occupancy costs? REVIEW YOUR LEASE.
Here are three questions a good operator can ask in order to reduce occupancy costs when reviewing a lease.
What is your rent? Annual base rent is an occupancy cost that can be negotiated, and is usually the biggest. Some questions to be asked are: What is the landlord currently asking for vacant space? What are the rents per square foot in competing centers (i.e. are you paying above-market rent)? Do I have an early out? How long until my lease is up? Many landlords are willing to renegotiate lease terms in exchange for an extended term.
Perhaps you could agree to some sort of “rent-relief” (short-term reduction in annual base rent for a fixed term). If you agree to any payback of the “rent-relief” make sure you tie it to a fixed sales threshold. A good operator equals a valuable tenant for the landlord.
What is your CAM? In some centers, CAM charges are high. One method that may instantly reduce CAM is to have a "cap" to the CAM charges. Also, make sure you are only paying your fair share of the CAM. The landlord should be responsible for paying the CAM on any vacant space. You should only be paying CAM based on your total square footage (t.s.f.) divided by the t.s.f. of the leasable space in the center (not “leased space”). Watch out for how “repairs” versus “replacements” are defined. Nothing can ruin your day faster than realizing that you are responsible for fixing the HVAC unit. Finally, make sure that your CAM does not encompass the landlord’s administrative and/or overhead cost. Most CAM provisions are drafted to heavily favor the landlord, and need to be scaled back by a skilled attorney. It follows that the lower the CAM, the lower your occupancy cost.
Is the landlord in violation of any covenants or conditions of the lease? Pay particular attention to vacancy levels and any anchor tenant provisions. Perhaps the landlord may have violated a CAM provision. Any potential default increases your leverage in re-negotiating, or exiting, the lease.
These are three quick questions every operator should ask himself or herself when thinking about ways to reduce occupancy cost. Remember, lower occupancy cost equals higher profits. A skilled attorney can help guide you through your options when thinking about these three questions and how they apply to your particular situation.