What Should Your Business Pay In Rent?

Years ago a Business Opportunities Broker could make a simple formula to determine how much a retailer could truly afford to pay in rent per month. If a retailer puts his monthly rent puts into his cash register in three business days, the business is doing well. If he puts it in one day, he is doing great. If he puts it in five days, he is going out of business.

Landlords marketing retail spaces looking to maximize income while offering a competitive rent, have a much more difficult time determining what rent is really fair, unlike office and industrial properties where you have true rental comparisons. If a retail space offers you great exposure to traffic it may garner double the rent than a competing store that is right next door with space that is facing away from traffic. Using this formula creates a realistic way for both landlord and tenant to determine a fair rent. For example, let’s assume that a store in Union Square of San Francisco is seeking $15,000 per month for 1,500 square feet and there is a prospective tenant that sells high-end clothing. Let’s further assume that this retailer is open 10 hours a day. This would mean that the retailer would have to sell at least $500.00 per hour in order to pay their rent in three working days. At an average sales price of $1000.00 per item, that would represent one item needing to be sold every two hours. If you figure 10 customers per hour visiting the store and at least 1 out of every 10 customers buying something, this amount of rent could be achievable.

Can this formula also apply to office and industrial space? Absolutely. If you have a company that has a gross income of $100,000 per month and you have 10 employees using 200 square feet per person, you would need approximately 2,000 square feet of space. If the asking rent were $2.00 per foot, the monthly rent would be $4,000.00. Taking the $100,000 and dividing it by 30 days you earn $3,333.00 per day. Therefore, under this example you are paying your rent in just over one day meaning that this is a very acceptable rent. In fact, this firm could double their monthly rent and still be profitable under this formula. In San Francisco, doubling the rent would allow this tenant to move into a Class A building.