Business Owners: What to Do When the Rent Goes Up'If I go there will be trouble — and if I say it will be double.'
When The Clash released their hit single “Should I Stay or Should I Go” in 1982, they probably weren’t providing social commentary on commercial real estate. But for small business owners facing the challenge of increasing rent costs, it may strike a chord.
Rent is one of the biggest costs for a retail establishment, and a rent hike can significantly impact your bottom line. Take control of the situation with these tips.
Start planning 6 to 12 months ahead
Started considering the possibility of a rent hike well before your lease is up, advised Marc Prosser, co-founder and CEO of FitSmallBusiness.com. “The latest that you want to start working on it is six months before your lease expires, but I would even say a year before would be a good idea.”
Look into the fair market value of your current location, whether you intend to move or not. And leave plenty of time for negotiations.
“Generally, serious negotiations tend to take several months, and then if you need to have a lawyer involved reviewing paperwork, that will add time to it.” -Marc Prosser
Knowing your options gives you more negotiating power, and an backup plan.
Determine how critical location is to your business
After exploring the market, consider the effect changing locations could have on your business. Prosser said the main considerations are the venue’s advertising value and convenience factor.
“One way of looking at a retail venue is as a really big sign, which basically can attract people walking by,” he said. If you’d have to substantially boost spending to achieve the same advertising value in a new space, it may be more economical to stay put and pay the higher rent.
If your business relies on foot traffic, figure out if you could lease an equally convenient and highly trafficked location for the price you’re paying now. For businesses that are more of a “destination,” moving to a new location may have fewer repercussions, Prosser said.
Negotiate for a better deal
It’s important to know what leverage you have for negotiating with your landlord. Is your business more important to the landlord, or is the location more critical to the success of your business? The lessee of a big commercial real estate conglomerate will have little leverage, but a local property owner will have more.
Consider the role your presence plays, if any, in the success of neighboring properties, Prosser said. Do you add value? In a strip mall, for instance, does your business bring more customers to other shops? “If so,” said Prosser, “you can make the argument that when you leave it will actually hurt all the other properties there.”
David Lilly, corporate strategist and founder of Lilly Consulting Group, recommended pointing out the difficulty and cost of switching tenants and getting the space ready for a new business. “It’s going to be a hassle, it’s going to be time consuming, and it’s going to be expensive. So staying put can be in everybody’s best interest.”
If it’s a major rate increase, see if the landlord would be willing to raise your rent incrementally, said Lilly, bumping up the lease by, say, 10 percent each quarter until the desired amount is reached.
Know when to jump ship
In some cases, changing locations will be the best option, especially if it’s an increase of 100 or 200 percent. “There is a certain point where it just no longer makes sense to do business at a particular location,” Prosser said.
His advice: Talk to a commercial realtor for insights into your current space’s market value and your potential alternatives. He or she will be able to explain current market conditions and compare the benefits of one location over another.
Be willing to face the music
Sometimes you can offset a rent hike by increasing your prices, but that’s often not possible, said Prosser. “Raising prices is very very difficult to do.”
If you can’t negotiate a better lease price or find one elsewhere, the option that remains, said Prosser, is taking home a smaller slice of the pie.