A rental facility should be an attractive, well-located, environmentally compliant, long-term “home” for your business that also has room for growth. Total triple net facility expense (facility rent, taxes, insurance and maintenance) ideally should be no more than 5% of your total revenue. We have encountered some higher rent areas (California, Northeast US, etc.) where total facility expense is 8% of total revenue, however, that is the absolute maximum we feel is acceptable.
Here are a few tips whether you own your facility or lease from a third party:
If you own the property:
- It is always best to own the property outside the entity that conducts the day-to-day operations of your rental business. There are a number of legal, tax and operational reasons for this. Consult your attorney and tax advisor and they can fill you in on the specific reasons for your business.
- Charge your rental business a fair market rental rate for the facility. Your real estate should be viewed as a “stand-alone” investment that should get a fair return. If you are “subsidizing” a lower rent or paying no rent at all, you have two investments with less than an acceptable return on investment; your real estate and your rental business.
If you lease from a third party:
- You should have a five year base lease with option periods that give you flexibility for an additional 10 to 15 years. If you are nearing the end of the lease and you have no option periods, the landlord has all the leverage. This can be very problematic if you are planning to stay in the facility or if you are trying to sell the business. We can tell you some horror stories of greedy (or grumpy) landlords with outrageous demands in these types of situations.
- Avoid long term lease obligations; a five year base term with option period is ideal. We have seen rental companies struggle with 10, 15 and 20 year lease terms when a relocation or termination is needed. The need for lease termination may be caused by the need for a bigger (or smaller) facility, a geographic re-location is desired or your business is sold and your current facility is not right for the acquirer.
We will address other facility issues including compliance, zoning and housekeeping in future posts.