When you think of Profit Centers, you normally think: Birthday Parties, Food Sales or Games Income! However, when you scroll down a Profit & Loss statement, you will see that line items like Lease Cost and Loans Payable have just as strong an impact on overall costs, and therefore, the total final profit picture – your bottom line!
When you begin to go forward with your project in earnest, you will immediately see the challenge of finding the proper space for your use at the right price and conditions and how it will effect all the other parts of your project. In some cases, it may be the major reason why you will have to invest $ 500,000 instead of only $ 300,000 – and that’s a proven fact!
The purpose of this article is to try and help you focus on how to search for the best space available and how to try and secure it for lease at the best price and terms possible. Check out WHAT IS A FAMILY ENTERTAINMENT CENTER? to learn what this industry can help you profit.
SPACE: Supply & Demand May Present One of Your Biggest Challenges !
This is usually the ‘juggernaut’ in most projects! Clients often do not have any control over the space they need to find before forward with their concept. There is one undeniable fact which will define the financial requirements of your project: it is the local supply and demand factors associated with space availability in your area.
This will determine, for example, how much in leasehold improvements a Landlord might be willing to supply, or not supply; what the base per square foot lease rate in your market is; what the CAM costs are (costs for common area maintenance, snow plowing, etc.)…and how flexible, if at all, a Landlord might be with regard to negotiation and possible give-backs. The supply of, or demand for, space in your particular area will have a strong impact on your project’s overall cost, your investment requirement and in some cases, it may even limit the scope of your project.
What Should Your Space Realistically Cost? Where Do You Find It?
The good news is: in the FEC (Family Entertainment Center) industry, the old real estate adage of Location, Location, Location does not usually apply.
Generally speaking, FEC locations are not located in new or high-end retail space. In most cases, that ‘Field of Dreams’ adage does work: If you build it, they will come! The area you are looking to locate in has to be a safe, relatively clean neighborhood, with good parking and easy accessibility. It does not have to be in a high traffic, high visibility retail area. Your customers will find you via your web site, initial advertising and, mostly, by word of mouth.
If you have done some research already on new or high-end mall space in your area, you probably have encountered cost per SF numbers for space in these locations that will tend to make you gag! Lease rates quoted can be anywhere from $ 25 – $ 30 per SF and up, with CAM charges at an additional $ 2.50 to $ 5.00 per foot – outrageous numbers!
The Retail Industry functions on sales per square foot, with most retail stores of a limited size. The Family Entertainment Industry functions on the best use of a significant amount of square footage to accomplish sales. Simply put, to provide an FEC space that satisfies the complete demands of their customer will require operators to need too much square footage at too high a cost in a new, high-end retail mall situation.
The ‘Other’ Types of Space:
Of all the operations we have helped open in the past 6 years, about 80 % are in spaces that would be considered light industrial, business park or ‘old’ retail’ settings. These are that would be considered light industrial, business park or ‘old’ retail’ settings. These are the normal choices associated with the type of space used for most Birthday Party places and FEC locations….and with good reason! The costs are much lower and the space is usually better suited for an FEC or Birthday Party concept. and FEC locations….and with good reason! The costs are much lower and the space is usually better suited for an FEC or Birthday Party concept.
Light industrial
Is exactly as it sounds: 4,000 – 5,000 SF units, generally with small office areas up front, 16’ – 22’ high ceilings and fairly open, unencumbered space in the back section. The upside to these spaces are much lower lease rates, in the range of $ 6 – $ 10 / SF and lower Cam charges. The downside is that you are often offered a ‘vanilla box’, whereby you must provide all improvements at your cost, sometimes even air conditioning, which itself can cost $ 40,000 and up. Further, these spaces often require Use Variances – a process which can take as long as 3 – 6 months. The cost for the build out of a 10,000 SF light industrial space can easily top
$150,000.
Business Parks
Usually slightly higher in lease rates but they are normally complexes that are better kept up, in terms of grounds and maintenance. However, Business Parks often have limited ceiling height, so the 3 to 4 level Soft Modular Play Unit or a tall Inflatable will not work here and a strong Design becomes more important. However, the upside can be in taking over an existing location that may be in very good condition and have bathrooms, common areas, air conditioning and a kitchen area already built out and in place – Thus saving valuable initial investment dollars. However, specifically for the limitations in height and layout, Business Parks are not the optimum choice for FEC or Birthday Party places.
Look For That ‘Ugly Duckling’!
What are loosely defined as ‘Old Retail Locations’ can be hidden gold mines! With old retail, or ‘Ugly Duckling’ space, if you will, you would be looking to lease a unit in a mall or strip mall that may be on the down side and has seen better days. It may be your task to bring customers into what is presently considered a ‘dead’ shopping location. This will be your greatest risk and challenge!
However, with a bit of dedication and thorough searching, it may be possible to find that one ‘old retail’ location in your town that is just experiencing renovation or has a new owner in the picture. These locations in flux will generally have a landlord that putting significant investment dollars into revitalizing the property and getting spaces leased again. He will usually be open to negotiating your lease terms and to possibly paying for some or all of your leasehold improvements. You may also have your choice of multiple spaces and can pick the one that most closely fits your requirements.
The most important positives with these types of ‘old retail’ locations are: (a) The space is generally an approved use for your project already (b) There is usually more than adequate parking available (c) Some or much of your build out and services may possibly be in place already and/ or need only cosmetic work (d) Finally, you may find a landlord that will be amenable to negotiation on all parts of the deal: lease and CAM rates, lease periods, security amounts, leasehold improvements and, possibly, initial rental credits.
Some Hints in Searching for Your Space:
Drive around your area thoroughly and drive through every business and retail location in your town. Don’t just drive along the front of a space – drive along the sides and in back also. You will get a feel for the condition. Further, you can assess the surrounding or neighboring units at a facility, which will give you a feel for the other business types located there, the clientele and the condition of the premises. You may also be able to find out if there are any ‘like’ or child-based businesses in the complex. This may give you an indication on whether a ‘Use Variance’ may be an issue or not?
- Don’t only look for ‘space for lease’ signs, especially in ‘old retail’ locations. Try and determine whether a space looks empty or not leased. In some cases, a landlord may want to get the complex fixed up before he puts signs up – If you can get to him first, you may be first on the list!
- Go to the town’s tax clerk. They will be able to give you the owner’s name and how to contact them. They may also be a valuable source of information on what is happening with that property. However, approach them nicely and with courtesy – Remember, they are often underpaid and overworked public servants.
- Check all the ins and outs of your town, might just yield that that one special site location or possible ‘Ugly Duckling’ retail situation that will be the absolute best fit for your concept, budget and space requirements.
- You can also use Newspaper Ads or a Real Estate Firm in your search, but I would caution that you qualify your needs, as noted above, before you agree to visit a site or work with one specific broker. Get a feeling from telephone discussions as to whether the real estate agent is a commercial ‘pro’ or just a residential agent handling a commercial space request.
The Landlord Meeting and Presentation – Be Proactive and Be Prepared:
You must remember at the outset that a landlord’s sole objective is to rent all his available space at the best rate he can with the least amount of risk. Remember that your FEC concept will most likely be considered a ‘start-up’ business by the landlord and, therefore, a perceived risk to him. It is your task to convince him otherwise. The supply and demand issues cited above will also be a big factor in determining the risk the landlord will be willing to take when looking at your project.
Walk In Strong!
Have a well-defined idea of the amount of square footage you are looking for and what rate you are looking to pay. Specifics like ceiling height desired, number of parking spaces you’ll need and what major attractions and services you are looking to include, as well as build out requirements should be first-hand knowledge to you. This will define and economize your search and give the landlord a positive initial impression of both you and your project.
You Should Have a Business Plan and Facility Design In Hand to Show a Landlord.
We advise every client to get a Business Plan prepared and a Conceptual Design drawn as a methodology for formalizing and quantifying their concept. When presented to a landlord, he will see that you are serious, have invested significant personal time and dollars and will be more apt to listen to what you propose. A landlord needs to know immediately that you are not wasting his time and that you believe in your own dream more than anyone else and that you possess the drive and determination to make it happen!
Negotiate!
Always negotiate….but do it at the right time and place!
Remember, you are selling a landlord on your concept and on your capability to be a great operator first. Get him interested in your ability to succeed and how you will accomplish this. Then, as you work through this process, you can begin to start to negotiate with him. As a landlord spends more and more time with you and begins to take you, your concept and your ability to make it happen more seriously, work to get him to seriously negotiate rates and terms.. I have seen many final leases signed that were vastly different and more favorable to the client than the first draft that was presented. These were all cases of continued and focused negotiation.
Look at all parts of a lease and read the fine print. Make sure you understand all the clauses, multipliers and potential for rate increases. If you do not understand certain parts, ask your attorney to clarify. That is why you hire them.
If you do not presently have a strong relationship with an attorney, it is always a good idea to try find one that has practiced in the town or city you are looking to locate in. Further, a seasoned real estate attorney is strongly favored over a general practitioner and you will quickly find that it will be worth any additional fees their expertise might cost.
Now for the Dollars and ‘Sense’ – Your Space Represents a Profit Center:
What you agree to at the beginning of your lease period is going to follow you all through your business life at that location. The bad news is that it is usually set in stone for the lease period and you cannot go back and rectify a bad decision you made. Thus, you can see the importance of the subjects discussed above: finding the best fair market lease rate, strong negotiation and diligent searching to find a possible hidden ‘gem’ for your space. Further, each additional lease period past your initial tenure will usually be based upon those terms and rates originally agreed to by you when you first started your lease.
Small Percentages Loom Large – Especially Over Time:
At a facility that that grosses $ 800,000 in annual sales, a cost reduction in the negotiated lease rate representing just a 2 % savings can have a substantial effect on your bottom line, especially over time.
For example, a 10,000 SF facility having a total lease rate with CAM of $ 13.50 per SF would have an annual cost for the space of $ 135,000. Therefore, at sales of $ 800,000, this will represent 16.8 % of the total budget. A reduction in the lease rate negotiated of $ 2.00 per SF would result in an annual savings of $ 20,000 per year, or 2.5 % at $ 800,000 in sales. $ 20,000 per year savings represents $ 100,000 over a 5 year lease period. $ 20,000 per year savings might represent almost ½ of the annual cost of your Manager for the year.
As another example, having a landlord agree to pay for the build out of the partitioning, the rest rooms, the kitchen, the flooring and the HVAC system as part of your leasehold improvement package might represent as much as $ 150,000 that you do not have to invest in the project. At 7.25 % interest and a 10 year loan term, the $ 150,000 loan would have cost $ 21,132 per year to repay. Not having to incur this annual cost then is a significant savings, and, again, a boost to your bottom line profit of more than 2.6 %
Of course, you must be comfortable that you have been able to keep your lease rate around, or close to, your targeted, initial level and still get the landlord to include these improvements. A further positive aspect of this landlord ‘give back’ strategy is that you will have to commit less capital to the project – This can be instrumental to your moving forward!
Lease increases can be another area of savings and additional profit. If you can get your landlord to delay a $ 1 per SF increase in your lease rate from year # 2 until year # 3, on that same 10,000 SF example above, this represents a savings of $ 10,000 in year # 2, or 1.25 % in additional profit that year on $ 800,000 in sales.
Final Thoughts
The Space you decide on, and the terms under which you contract for it, will have an impact on your total bottom line and the profit you will make in your business for the life of your lease. Be diligent, be thorough and think ‘out of the box’ to try and find your perfect space.
Look for that ‘ugly duckling’ and use your imagination and drive to see if you can negotiate a strong and beneficial lease agreement with a landlord who, himself, is trying to rebuild his mall location into a successful site, as well. If you can do this, you will be in a win-win situation and take strong advantage of one of the ‘other’ profit centers available to you.
