This article is only intended for business owners who need a business location separate from their home address to conduct business. Therefore, this article may be entirely unapplicable to owners conducting business online or for whom their home is sufficient (check for HOA rules, city ordinances, and permit requirements if operating from home).
One crucial factor in the long-term success of your business is a suitable business location. The right location can provide you with several key benefits, including visibility, high foot traffic, access to the workforce, tax breaks, and reduced delivery times for suppliers. However, there are many different items to consider when finding a business location, not all of which are immediately clear. Furthermore, the commercial real estate market is flooded with technical jargon that makes it difficult to understand what you are signing up for. In this article, I want to address these issues and provide you with clarity so that you can make an informed decision about your business location.
Let’s get started!
Considerations
Think back to the time you bought your first house or signed the first lease agreement on your apartment. You probably had several “must-have” specifications for your new home, such as proximity to work, safety, square footage, building material (wood, brick, etc.), access to the interstate, property taxes, and so forth. The same process is true for your small business’s new “home”, but the specific considerations will differ slightly. While this may not be an exhaustive list, I hope it gives you some very important criteria to think about.
Visibility & Foot Traffic: if you operate a brick-and-mortar store that is heavily reliant on foot traffic and visibility, this will be an important item on your list. All else being equal, a store placed in an area with more foot traffic will achieve higher sales than a store in a low foot traffic area. You could theoretically count the number of people that pass through the location at certain times of the day, but there are a few easier ways to evaluate foot traffic and visibility. The first is, of course, to just look at the area as you drive by during certain parts of the day. You should also look at signage, highway access, and public transportation routes, because these typically drive a higher volume of people. It could also be wise to look for any complementary businesses. For instance, a coffee shop could benefit from being near (or inside) a bookstore.
Market Demographics: consider what the people in the area are like. If you own an upscale restaurant, you will need to situate yourself in an upscale area to target the right demographic. This involves market research and a basic understanding of the area you are considering. Try to answer questions like: is there a demand for your business’ offerings in the area? Is the area growing and how will this impact your business? Are there existing competitors that would make it difficult to conduct business? Is the area safe for you and your employees? What is the population density in the immediate area and does this serve your business well? What is the average income in the immediate area and does this indicate an ability to purchase your goods and services?
Cost: you need to establish how much you are willing to pay per month for your business’s location. As a general rule, real estate increases in price with higher visibility, more favorable terms, etc., so there is a trade-off between the revenue generated by high visibility and the rent expense you incur every month. You also have to consider all the related expenses that your landlord passes on to you, as these typically vary between landlords. If your budget is within the normal market range for what you are looking for, do not get pressured by landlords into committing to higher rates on unverifiable promises of extraordinary revenues.
Suitability: this is an incredibly important, but often overlooked, consideration. When I refer to suitability, I am referring primarily to the physical building’s suitability to the goods or services you want to provide. I am not referring to the suitability of the surrounding area, which is more of a demographics issue. Certain businesses require certain things to be present in the location they operate. If I own an ice cream shop, I will be very concerned with accessibility and foot traffic, but not so much with parking (high turnover of customers). However, if I own an auto repair shop, I am more concerned with car traffic and parking availability than foot traffic.
Zoning & Permitting: local governments separate their jurisdictions into a variety of different zones that can be used for different purposes (common examples are residential, commercial, industrial, agricultural, and mixed-use). Make sure to comply with all zoning requirements when you pick your location. You do not want to sign the lease and then find out what you are doing is technically illegal. Check your local zoning office before signing any leases to make sure you are good to go! You should also consider how one location might create a need for additional permits when compared to another location and consider if this is worth the hassle.
In a broader sense, it would also be a good idea to check the tax implications of one location over another, especially if you are considering two locations in different states or municipalities. Higher taxes do not automatically disqualify a location, but they would certainly be a relevant factor.
Property History: this is probably the least important consideration for most business locations, but it is still worth looking into. A pattern of failures in businesses similar to your own may indicate some hidden problem with the location.
Commercial Real Estate Types
I want to now deal with some of the common real estate types. I am specifically discussing leases in this section, which is essentially an agreement to rent the facility from a landlord for a specified period of time. Purchasing or financing the purchase of commercial real estate without any lease agreement is typically done by more established businesses, so we will forego that discussion.
Net Lease
In a net lease, you (the tenant) pay rent plus a portion of the operating expenses of the property. Net leases are the most common type of lease agreements in the market. There are four main types of net leases:
Single Net Lease (N Lease)
In a single neat lease, the tenant pays base rent plus the property taxes on the building. It is called a single net lease because there is one “singular” additional operating expense the tenant has to pay, which is the property tax. The landlord handles everything else. In a N lease, your base rent will be relatively high, but your effective rent (total lease costs) will be very predictable, since the only variable that could change is property taxes; however, you will have to rely on the landlord to handle maintenance and other issues with the property, which could take time.
Double net lease (NN lease)
In a double net lease, the tenant pays the base rent plus the property taxes AND insurance. The landlord will handle the rest of the expenses. In an NN lease, your base rent will be relatively medium, and your effective rent will be fairly predictable; you will still need to rely on the landlord for maintenance and other issues that arise.
Triple net lease (NNN Lease)
In a triple net lease, the tenant pays the base rent plus the property taxes AND insurance AND most other operating expenses, like utilities, maintenance, and repairs. In an NNN lease, your base rent will be relatively low, and your effective rent will be relatively unpredictable compared to other lease methods. However, you now have a high degree of control over the building, which means you can handle maintenance with relatively little dependence on the landlord. It also means you have more control over the operations you run and the expenses you incur. This makes NNN leases a very popular form of net leases.
Absolute triple net lease (Absolute nnn lease)
An absolute triple net lease or a bondable net lease is the extreme version of the NNN lease. Essentially, the tenant pays for absolutely all costs related to the property. This includes rebuilding the property after a natural disaster or unusual event. These leases are rare and generally only used for major corporations, since effective rent can fluctuate wildly based on a variety of variables.
Gross Lease
In a gross lease, the tenant only pays base rent, and the landlord covers all of the remaining costs. Base rent is relatively very high, but it is technically 100% predictable, unlike any form of net leases. There are two types of gross leases:
Full-Service Lease: in a full-service lease, the tenant pays the base rent, and the landlord must cover the rest of the expenses. This leaves the tenant with almost no control over building maintenance and manageable expenses. However, it makes budgeting very simple as the full lease cost is equal to the base rent, which is established in the lease agreement.
Modified Lease: in a modified lease, the tenant pays the base rent plus any agreed-upon operating expenses with the tenant. This is quite a popular option, as it allows for both parties to optimize their desired level of control over the property and its expenses.
summary of net lease vs. gross lease
| Lease Type | Who Pays Property Taxes? | Who Pays Insurance? | Who Pays Maintenance? | Who Pays Repairs? | Gross/Effective Rent Predictability |
|---|
| Gross Lease (Full-Service) | Landlord | Landlord | Landlord | Landlord | 100% |
| Single Net Lease (N) | Tenant | Landlord | Landlord | Landlord | High |
| Double Net Lease (NN) | Tenant | Tenant | Landlord | Landlord | Medium |
| Triple Net Lease (NNN) | Tenant | Tenant | Tenant | Tenant | Below Medium |
| Absolute Net Lease | Tenant | Tenant | Tenant | Tenant | Very Low |
Percentage Lease
In a percentage lease, tenants pay the base rent (usually fairly low) and a percentage of their gross sales. A key aspect of percentage leases is that this percentage of gross sales is only applied once the business achieves a certain number of gross sales, called the break-even point. By the way, this is unrelated to the topic of break-even point in managerial accounting (where total revenue = total expenses). For example, a tenant and landlord agree on a monthly base rent of $2,500, a break-even point of $50,000, and a percentage of 5%. Let’s say the business earns $75,000 that month. The 5% begins accumulating on any revenues earned above $50,000, so since $25,000 were earned above the break-even point, the additional rent paid by the tenant is 5% * $25,000 = $1,250. Therefore, the business pays $3,750 in effective rent that month.
Percentage lease agreements are an excellent way for seasonal businesses, commonly in tourist areas, to reduce their costs during slow months. Although they pay more during busy months, it helps these businesses better manage their cash flows and can have fantastic results for both sides. However, such leases should be approached with extreme caution if your business is not highly seasonal, as they are designed to make you pay more than you traditionally would (assuming your business is fairly successful).
Lease-To-Own
A lease-to-own agreement is a lease where the tenant rents the property with either the option or requirement to purchase the property later. The tenant and landlord reach an agreed-upon purchase price at the beginning of the lease, and a portion of each rent payment goes towards a down payment credit for the property. You can think of it as a small chunk of the rent payments accumulating each month to form a complete down payment at the end of the period. Lease-to-own agreements are typically paired with NNN leases, so essentially, you are paying the NNN lease’s effective rent plus an extra amount towards a down payment. In option-to-purchase leases, the tenant has the choice to buy but is not required to. In lease-purchase agreements, the tenant is obligated to buy at the end of the lease term. Lease-to-own agreements are attractive to business owners looking to establish long-term stability, build equity in some real estate, and achieve complete financial control over their location.
You may be asking, why not just save up for the down payment yourself instead of paying it to the landlord? There are a few reasons why. First, you have immediate access to the building you want. This means you can begin earning in your new location without waiting years to build up a personal savings balance for a down payment. Second, it is sometimes helpful for business owners to have a “forced” savings plan to build up equity. Third, and very importantly, since the purchase price is agreed upon beforehand, it is locked into place and cannot move. Usually, the price of commercial property increases over time (called appreciation), so this usually favors you as the lessee because you are paying less than the market price would be for that property. Lastly, it favors businesses that have no credit history yet and want to build their credit profile before financing the rest of the purchase. Lenders will be much more willing to issue reasonable loans to your business if it has a strong rent history.
Commercial Real Estate Term Glossary
When you begin your hunt for the perfect property, you will likely come across a host of commercial real estate jargon that is difficult to understand. Here are a few common terms that would be useful to know before you begin your search:
CAM (Common Area Maintenance) Fees – Additional costs paid by tenants for maintaining shared spaces (hallways, parking lots, landscaping, etc.).
Usable Square Footage (USF) – The actual space a tenant occupies.
Load Factor (Add-On Factor) – A percentage added to a tenant’s rentable square footage to account for their share of common areas.
Rentable Square Footage (RSF) – Includes USF plus a share of common areas (hallways, lobbies, bathrooms). Calculated as USF plus load factor. This is the square footage that rent is actually paid on.
Building Class A – High-end buildings with modern amenities, prime locations, and high rents.
Building Class B – Mid-tier buildings with decent amenities and reasonable rents.
Building Class C – Older, lower-cost buildings that may need renovations.
Letter of Intent (LOI) – A non-binding agreement outlining preliminary lease or purchase terms before signing a final contract.
Tenant Improvements (TI) – Changes or upgrades made to the space by the landlord for a specific tenant, usually negotiated in the lease agreement.
Build-Out – The process of customizing or renovating a space for a tenant’s needs.
Turnkey Space – A move-in-ready space with all necessary improvements done.
Shell Space – An unfinished space that needs construction before use.
Escalation Clause – A lease provision that allows rent hikes over time (e.g., tied to inflation or property costs).
Right of First Refusal (ROFR) – A contractual right that states the tenant gets the first chance to buy or lease additional space before the landlord offers it to others.
Kick-Out Clause – A lease provision that allows a tenant to terminate the lease early if sales don’t meet a certain threshold.
Renewal Option – The tenant’s right to extend the lease at the end of the term.
Non-Compete Clause – A clause that prevents a landlord from renting space to a tenant’s direct competitors within a specific property or geographic area. This is an extremely important and highly desirable clause from the tenant’s point of view.
The Accounting Geek 
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