No matter how you operate your business, the success of your nail salon is heavily dependent on your lease. A good lease provides a strong foundation you can build on. A bad lease makes it difficult for that location to operate successfully. Yes, one bad lease can undo the good job you do on the rest of your business. In fact, a single unsound term in an otherwise beneficial lease is enough to cause great harm to your business.
Salon owners can choose among different types of retail properties. For the most part, this comes down to a choice between a shopping mall and a store located on a busy street in the midst of other retailers. In examining your choices, look closely at the rent. But look just as closely at how much revenue each space will allow you to generate. Remember, it’s not just what you pay, but what you can earn that is important.
Also, know yourself. Mall owners exert a fairly high degree of control over their tenants. This includes setting the hours that you have to be open for business, and when you’ll have to close. Shopping mall owners will take control over your signage and many other details that you might want to decide for yourself. On the other hand, owners of a strip retail stores take a more hands-off approach. Can you live with the greater degree of control taken by shopping center owners? Which location do you think will allow you to make the most sales? Which lease will let you keep more of what you earn?
What You Need to Know
Here are other factors you’ll need to consider when shopping for a location and negotiating a lease:
Tenant allowance: Tenant often invest great sums of money to prepare leased premises for occupancy. When you’re shopping for space, find out how much it will cost to prepare each space for your business. All else being equal, try to lease the space which costs the least for you to renovate. The savings from a slightly lower rent at one space can be eaten up quickly by much higher renovation costs.
In order to encourage tenants to occupy their property, many landlords provide a tenant improvement allowance. This can provide tenants with part, or all, of the monies required to open for business.
Odor: This article will not discuss the systems you can install to reduce odors. Our focus is on your lease. However, your lease negotiations can help avoid problems due to dodos. Make sure that your landlord knows exactly what you plan to do in the space. If you’re moving your salon, invite the landlord into your existing space. This way he will be aware of any odor associated with your business. Make sure the leased space is properly ventilated to the outside of the property. Also, have the space inspected to see that it is sealed off from any surrounding units.
Large landlords generally have experience with salons and their special needs. They are anxious to protect their properties and other tenants from any odors. Work with the landlord and its consultants to eliminate this problem. Make sure you cannot be placed in default, so long as the odors caused do not exceed those at your previous location.
Use: Your lease includes a use provision. Of course, the lease has to provide you with permission to operate a nail salon. Typically, the landlord will try to include narrow language. So, for example, the landlord will often want a use clause permitting the application of nail polish for customers, and only that activity and no other. This closes the door to numerous profitable activities, including the sale of nail polish and related beauty supplies. A narrowly drawn use clause can also prevent you from expanding your services or selling your salon to someone offering other services.
There are a number of services that are compatible with nail salons. Leave the door open to other profitable activities like tanning and hair services by including a list of activities that other salons offer. Finally, ask for broad language to cover unanticipated services. Try to negotiate for the right to offer services that you as the tenant, in your reasonable judgment, believe are compatible with the operation of a nail salon.
Exclusivity: You may want to locate in one part of a larger property owned by the landlord. Larger properties include a shopping mall or a strip of retail stores owned by the same landlord. Exclusivity means that you and only you, are permitted to offer those services covered in the lease’ use term. Securing exclusive right helps your bottom line, now and later by keeping other nail salons away from your location.
Relocation rights: If you’re planning to locate to a shopping mall, examine the lease carefully for relocation rights. Many malls undergo regular renovations. Just as you are, shopping mall owners are always looking for ways to increase their income. This often includes changing the tenant mix, including taking smaller stores from one part of the mall, moving them to another part of the mall, and filling the original space with a large tenant (called an “anchor”).
Try to have the relocation clause removed. Landlords will be more agreeable if the mall has been renovated recently. Sometimes the landlord won’t remove the relocation clause. In this case make sure you will be moved to a spot with similar exposure, parking, and foot traffic. Of course, insist the landlord pay for all costs associated with your relocation.
Three Types of Rent
Retail rents are generally divided into three main areas: minimum rent, common area maintenance, and percentage rent.
Minimum rent: Minimum rent is the rent you pay to occupy the space, generally measured on per-square-foot basis. Make sure you’re not paying any more for your space in a similar location. Also, make sure that the square footage in the lease is the actual square footage of your salon.
Common area maintenance: Retail tenant often pay for all or almost all of the expenses related to the operation of the property, called Common Area Maintenance or CAM. This includes property taxes, marketing, advertising, insurance, security, maintenance, and improvements. In addition, landlords often add an administrative and management fee to compensate them for the administration and management of the property.
CAM expenses are often a significant burden for retail tenants. Retail leases generally break CAM expenses into those items that are specifically included and those that are excluded. Of course, most landlords also add a general clause so that all expenses, whether or not specifically listed, related to the operation of the property will be included in CAM.
Before signing the lease ask the landlord for last year’s CAM burden. This information will allow you to enter into the transaction knowing what your financial commitment is. If the figure is too high, ask for a ceiling, so that no matter what the actual figure is, it will be lowered to this ceiling. You can also cap or limit increases. So, if the first year’s CAM is $7 per square foot, you can limit annual increases to 3% per year.
Audit rights are important. These rights permit you to verify that the CAM expenses charged by the landlord are accurate. You can tie your audit rights into the default clause. Doing so will make sure you’re not in default while carrying out an audit on the landlord’s expenses.
Percentage rent: Retail leases can include percentage rent on tenants. When tenants agree to pay percentage rent, they owe a percentage of sales over a specific amount, called a “breakpoint”. So, for example, a nail salon paying percentage rent might owe the landlord 8% of sales over $300,000.
Be careful what you include in percentage rent. Your company may offer services which you don’t profit from. These services are a courtesy, designed to increase sales. Credit card fees are an example. Credit card companies often charge vendors a percentage of each sale in order to process the order. You shouldn’t pay percentage rent on revenue that comes in the front door, along with customers, only to have it leave through the exit to the credit card companies.
You should also exclude proceeds from insurance policies. In the event that you experience a problem resulting in insurance settlement, these monies should be excluded from gross sales.
Finally, remember to raise the breakpoint as high as possible for the initial year of the lease. After the first year ends, the lease should not steady increases in the breakpoint, reflecting the steady increases in prices we’ve become accustomed to.
Terminating the Lease
Your landlord may want to include a termination clause in the lease. A termination clause can take different forms. One example is the landlord’s ability to terminate the lease if and when the property is sold. So, even if you’ve paid your rent and done everything else the lease says you should, the landlord can terminate your lease when the property is sold. Do everything possible to avoid having this included in your lease. It basically ends your business at that location.
Termination also comes into play in the event of a default. This type of termination provides the landlord with an opportunity to end the lease if you’re not honoring your commitments. There are financial and non-financial defaults.
Financial defaults occur when the tenant is not honoring a commitment to pay. Non-financial defaults occur when the tenant is not honoring some other type of commitment. For example, although the lease calls for tenants to remain open from 9 am to 11 pm, seven days a week, the tenant has remained closed Sunday afternoon.
In either case, give yourself a “cure period.” A cure period is a time provided for the tenant to fix the problem and honor her commitments. During the cure period, the landlord cannot place you in default, and therefore cannot terminate the lease. Make the cure period for financial issues at least 15 days and the cure for non-financial issues at least 30 days. On non-financial issues, try to include an extension of the cure period for situations where the tenant is acting in good faith in contesting the landlord’s claim that the tenant is not honoring a commitment made in the lease. Also, the cure period should be extended for those problems that can’t be fixed in 30 days and where the tenant is taking continuous action to honor her commitments.
Remember to Negotiate
Like it or not, your lease is one of the most important papers you’ll ever sign. Take the time to learn about this important document. Work with an experienced real estate lawyer to make sure the lease agreement you enter into will allow you to reach your business and personal goals. Remember, the landlord wants you as much as you want the space. Every month the space stays open costs the landlord thousands of dollars.
Look at a lot of different spaces. Carefully consider the plusses and minuses of each. Doing so will educate you about the market. It will also provide you with ammunition for the landlord who tells you, “No one has ever asked for that before” or “That’s an unusual request.” Remember, in real estate it’s what you negotiate. Nothing is set in stone. It’s all up for grabs during negotiation.
Assignment and Subletting
You lease provides you with the right to operate your business in the rented premises. The operative word is you, the tenant named in the lease. Well, what if you want to sell your business? In order to sell a business operating in leased premises, you have to transfer your lease through an assignment or sublease.
Transfers fall into two general categories: those that require the consent of the landlord and those that don’t.
Obviously, you want to be able to transfer your lease without having to obtain the landlord’s consent. Landlords often agree to transfer without consent when certain conditions are met. This includes situations where the person taking over the space is a franchisee of a national chain. This provides the landlord with concrete assurances that the new tenant has the financial resources and experience to successfully operate the business. The landlord may also agree to an assignment without consent if the new tenant has a net worth exceeding a specific level.
Try to negotiate a lease that allows you to transfer the lease without the landlord’s prior consent. However, if you feel you have to agree to a lease allowing a transfer only with the consent of the landlord, make sure the landlord’s consent cannot be unreasonably withheld. Go one step further and document those situations where it would be reasonable for the landlord to withhold consent.
Watch out for “profit sharing” on transfers. When you sell your business, the person taking over the lease provides you with monies that are over and above the rental payments due under the lease. These monies are called “profit”. The profit can come in a lump sum or in monthly payments that are over and above the monthly obligations owed to the landlord.
Profit sharing can require you to transfer all or a specific percentage of your profits to the landlord. Try and find a space where profit sharing is not a requirement. Many salon owners receive substantial benefits when, after years of effort to build the business up, they sell. You’ve built the business up and deserve to keep the profit when you sell.
Randall Airst, Esq. is a senior managing director of AIRST STANN, a commercial real estate advisory firm providing national property solutions for retail tenants, including lease analysis and negotiations for the nail salon industry.