AR Workshop is a DIY studio franchise, and Patrice Chatman was once just a happy customer. Then she became a part-time teacher. And in 2023, she bought the Westfield, New Jersey, location — inheriting a studio she loves, and a lease agreement with a steep learning curve.
“Before I officially took ownership, I think we were forecasting that somewhere between 27% and 30% of our gross revenue would go toward rent and utilities,” she says. About a year in, that number is 43%. “Rent is definitely a struggle.”
Chatman is not alone. In April, the business networking platform Alignable reported an uptick in small businesses that were unable to pay rent in full. A poll of 4,171 small business owners showed that 43% were delinquent on rent that month, a high not seen in similar surveys by the platform since March 2021.
Related: 5 Major Deal Points to Know Before Signing a Lease
Image Credit: Zohar Lazar
As inflation has increased the cost of everything in recent years, even small business owners locked into decade-long leases are finding their rent less affordable. And those seeking new rental spaces are facing high prices, since high interest rates pressure landlords to raise rent as their commercial real estate loans — with average terms that are much shorter than 30-year home mortgages — come due.
“For a commercial property, your loan may be only five years, and then your rate is going to reset. So if you bought it and your margin on it was 4% or 5%, but now you have to refinance it and rates are 8%, you lose your whole margin,” explains Arthur Greenstein, a commercial real estate broker with Douglas Elliman in Dallas.
For Chatman, purchasing an AR Workshop meant taking over the remainder of the previous business owner’s lease, while embarking on a crash course in the different types of commercial real estate leases in the process. She learned that a gross lease — where the tenant is responsible for an agreed-upon monthly rent price and the landlord pays for all other building expenses, like in a residential apartment building — is just one of multiple options. Tenants who enter into a net lease (there are three types: triple, double, or single, which you may see written as NNN, NN, and N) will typically pay a lower rent price, but are responsible for some or all of expenses like maintenance costs, insurance, and property taxes. These leases often allow businesses more control over their space. Another option is a percentage lease — where the tenant pays a lower base price, and the remainder is calculated based on their gross income.
Related: What to Know When Leasing a New or Existing Space
Regardless of the lease you choose, negotiating protective stipulations is one of the best ways for small business owners to shield themselves from rising costs. When Rob McMillen co-opened Mildred New York, a barbershop on Manhattan’s Lower East Side, in 2017, he signed a 10-year lease with a rent increase below 5% built in. Although he’s responsible for a portion of property tax increases, there’s a cap on how much. “There was a big tax assessment that happened a year into our business that really could have crumbled us if we did not negotiate a cap on that property tax responsibility,” he says. “If you’re dealing with a commercial or retail lease and there’s a potentially fluctuating number, try to get as much fixed or capped as you can.”
Above all, AR Workshop franchisee Chatman recommends enlisting someone to help you translate the real estate jargon. “You should shop for an attorney the same way you shop for a partner in life,” she says. “There’s no shame in asking a gazillion questions.”
Read the full article here
