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I have spoken to too way too many businesses who are unrealistic when it comes to budgeting for their retail leasing and build out needs. When leasing retail space business owners and companies must budget for MORE than just the monthly rent. Below I will touch on security deposit, 1st months rent, and tenant improvements since they are the biggest ones however you will have a few others plus your specific trade needs.
Security Deposit and 1st Month’s Rent Due At Lease Signing
Landlords will typically need a check for the security deposit and first months rent at lease signing. The security deposit will normally be equal to what the last months rent will be, however this depends on the landlords perception of your financial strength. If they perceive your financials to be weak then they may ask for more. The security deposit amount will typically include your base rent and operating expenses (NNN). For example if you are leasing 3,000 sf and your base lease rate is $25 sf in the last year of the lease and the NNN are $7 sf the security deposit needed at lease signing will be $8,000.
The first month’s rent due at lease signing will be equal to whatever the base lease rate is in year one of the lease. So when leasing 3,000 sf and the base lease rate is $23 sf and the NNN are $6.50 then the first months rent due at lease signing is $7,375
What you should budget for = $15,375
Tenant Improvements
Commercial construction in Austin, Tx is not cheap and the cost will depend on your use (e.g. medical more expensive), existing condition of the space, and market conditions (e.g. contractors busy and charging more). Just to white box a 1st generation retail space will cost on average $30 to $40 sf. After that depending on your specific needs most retail businesses need flooring, paint, build a few walls or rooms, etc. which will cost another $15 to $25 sf. If your leasing 2nd generation space and it’s in decent shape you might only spend $15 to $25 sf.
All that being said you may qualify for and be able to negotiate a tenant improvement allowance. Whether or not the landlord gives you a tenant improvement allowance depends on the landlords perception of your financial strength, market conditions, vacancy rates, landlord investment strategy, etc. If you have strong credit in Austin, Tx you can typically expect to negotiate a $5 to $15 sf tenant improvement allowance on 2nd generation space and $20 to $35 sf on 1st generation space.
What you should budget for = It varies and you should assume the worst but do what you can to negotiate as much as you can. If your leasing 3,000 sf of 1st generation space I would budget for $100,000 to $150,000. If you are leasing 2nd generation space then estimate $40,000 to $60,000. If you don’t have a clue then talk to a few contractors as you prepare your business plan.
Total Amount to Budget For When Leasing Retail Space
Again it depends on a number of factors stated above however If I were leasing 3,000 sf of retail space I would budget the following:
Amount to budget for if leasing 3,000 sf of 1st generation space = $150,000
Amount to budget for if leasing 3,000 sf of 2nd generation space = $80,000
If you can negotiate with the landlord to get them to give you a tenant improvement allowance then you can subtract that amount.
