Archive for June 2007

What does triple net mean when leasing a commercial property?

June 25, 2007 by mrbizplan.

Nancy B. Asks: 

I am looking at various properties for my restaurant startup including a few in our downtown district.  Some of the properties say triple net in the description and other only say net lease.  What does this mean?

Mr. BizPlan Answers:

Triple net, or the designation NNN or net, net, net is a lease agreement where the lessee (you) is responsible for Property Taxes, Insurance and Common Area Maintenance (AKA a “CAM fee”).  The CAM fee is normally quoted in dollars per sq. ft. ranging anywhere from $1.00-$3.50 in my area.  This fee also is used take care of snow removal and lawn care for all tenants.  Normally, the lessee is also responsible for utilities, building repairs and other common fees associated with commercial space.  Essentially, you pay everything you might pay if you owned the building…with one exception, the building payment.  Normally, rent in a triple net property is less than a comparable property that is a net lease (property tax only) or double net lease (property tax & insurance). 

When you are scoping out properties it is important to consider ALL of the fees and expenses involved before you make a decision.  It can be helpful to bring along a scratch pad and rank your properties based on the following information:

  1. Base Rent -Usually quoted as $$/sq ft/year or a month rate
  2. Insurance Costs - from any full line provider
  3. Property Tax Costs - from county website
  4. Average Utility Expense - available from the utility company
  5. CAM fee - given by owner or realtor
  6. Condition of Property & Expected Repairs
  7. Location Traffic and Visibility
  8. Access to Location
  9. Complimentary Businesses or Competition near by.
  10. Length of Available Lease

Regarding the length of the lease, for most startups, I suggesting trying to get the shortest term possible.  Because of the risk factor of new businesses shorter is better even if you have to pay rack rate for the space.  Often, lessors will consider a one year lease with a four renewal in lieu of a five year lease.  This gives you a chance to get 12 months under your belt and decide if the business is going to work out long term. 

That said, never sacrifice a great location in exchange for a shorter term lease.  It has been said, “You only pay for a good location once…you will pay for a bad location over and over again.”

For more info read our article Commercial Property & Finding a Great Location

Good Luck
Mr. BizPlan

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Revenue projection methods for a startup?

June 11, 2007 by mrbizplan.

dlizzy asks:

I am starting a retail store and I am having trouble projecting sales for my financial projections.  Can you give me some advice on how to come up with accurate projections?

 

Mr. BizPlan Answers

Creating financial projections is part art and part science.   First, accuracy is a relative term.  Nobody would reasonably expect you to forecast sales exactly as they will occur in the future.  What is important is coming up with a reasonable range of sales based on 1) your market research of the level of potential demand and 2) your ability to produce or deliver products or services to the client. 
 
Lets say that your retail store is a maternity clothing store.  From your market research you learned that there are 2000 births in your market each year.  Also you believe that about 70% of these people will shop at your store due to lack of competition in your niche.  Based on your product pricing you believe that each sale will average $100.00. 
 
From a survey you did with your relatives and friends you found that the average client will spend $500 total on maternity clothing and you believe you can capture about 70% of those dollars conservatively. 
Using the above numbers your projected sales would be:
 
$100 X 1400 clients X 3 shopping trips = $420,000
 
and/or
 
$350 capture (of the $500 average) X 1400 client = $490,000
 
so your projection should reflect a sales potential of $420K-$490K annually.
Obviously you would not just take that number and divide it by twelve.  I would start out at 50%-60% of your projected sales and grow them over the first 12-18 months.
 
Also, you have to be able to deliver that level of sales so obviously you would need the appropriate number of square footage, employees, etc to deliver $450,000 in sales. 
 
Good Luck
 
Mr. BizPlan
www.DIYBizPlan.com

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