For part two of "How To Open a Store" I discussed commercial leasing and renovations with retail architect Charles Mallea of MSM Architects in New York City. Mallea has designed stores and showrooms for such couture clients as Gianni Versace, Nino Cerrutti, Emanual Ungaro and Boss and mass-marketers like Rave and Rave Girl and the G & G shops. Besides his partnership with MSM Architects, Mallea is a professor of interior design at The Parsons School of Design in Manhattan.

I've divided our conversation into two parts: the first is a guideline for researching and leasing retail space. The second will help new retailers determine basic store renovations and give approximate costs.

Shortly into my conversation with Mallea it became clear that there are pitfalls to signing a lease for commercial space that could lead an uneducated retailer into financial ruin. Like the retailers in Part I of my story, Mallea stresses researching the neighborhoods where you are considering opening your store and hiring an experienced real estate lawyer to review your lease.

UNDERSTANDING RETAIL LEASES 101

Tina Barry: WHAT SORT OF RESEARCH DOES A NEW RETAILER NEED TO DO BEFORE THEY BEGIN THEIR SEARCH FOR RETAIL SPACE?

Charles Mallea: Yahoo (and other Internet sites) has a real estate site that gives population information by zip code. If a person is looking on the Upper East Side [in New York City] she would type in the zip code of the neighborhood and all the demographics of that area would be given. Information such as the size and ages of families living in the area, and, what's most important for your readers, the average retail spending figure for each family. It is a simple way to find out if the neighborhood has the kind of income that would support your store. The Census Bureau also has a site with similar information.

It's also important for new retailers to walk the neighborhood themselves. Walk around the area. Find the commercial strips. In New York City, where are the subways stop? Which way do people go to and from work? Where are the schools? See who is shopping in the stores and at what time of day. The question a potential owner of a children's wear store has to ask is, "Are there enough mothers shopping during the time my store is open to support my business?"

TB: ANY ADVICE ABOUT CHOOSING A REALTOR?

CM: Find someone, preferably someone who was recommended by a retailer you trust, who specializes in leasing commercial space in the neighborhoods you are interested in. A renter does not have to sign an exclusive agreement with a real estate agent, you can shop the realtors in the area--use them as a source of information.

If you see a space and the realtor pressures you to sign a lease--there's a mad rush to sign a lease--walk away. A landlord should want to know as much about you as you do them.

There are also a number of Internet sites from real estate brokers with commercial listings, as well as local papers.

TB: ONCE A POTENTIAL TENANT HAS CHOSEN A SPACE HOW DO THEY FIND AN APPROPRIATE LAWYER?

CM: Use common sense here. Never use a landlord's lawyer. Bring in your own impartial person. Find an experienced real estate lawyer who has reviewed thousands of leases and knows what to look for. This is the person who will protect you and will point out areas in the lease that could adversely affect you.

TB: WHAT DOES A NEW RETAILER NEED TO KNOW BEFORE SIGNING A LEASE?

CM: It is imperative that new retailers know this terminology: useable vs. rentable square feet and the loss factor. Landlords love to throw around those terms; it makes them seem savvy and confuses the client a bit.

TB: CAN YOU EXPLAIN THOSE TERMS FOR OUR READERS?

CM: Useable is the actual square footage of the space. Rentable is what you're typically charged for which includes the building's exterior walls, and probably a percentage of the lobby and/or basement areas. What the landlord does is divide up the entire space--all of it, even areas like the hallways, elevators and stairs that you may never use--among all the tenants and the leaser will be charged for it. So, if on the lease it says 3,000 square feet, you may only have a 2,000 sq. ft. space--useable selling and storage space---for your store. That 1,000 sq. ft. that you don't use for your store, but are charged for, is the "loss factor." In New York City it can be 20 to 30 percent of your monthly charges.

Many prospective tenants come into a space with a tape measure in hand and measure the space, or pace off the actual square footage. You should always do this. If the lease says 1,000 sq. feet of useable space you can come back with, "I counted 800 sq. feet." You'll want that figure when it's time to negotiate the lease. This is also where being prepared--having done your homework--will work in your favor. Comparison-shopping for rent is important. It's like buying a car. You can always say, "Well, a similar space on 19th Street is selling for $1,000.00 less a month." The landlord may be open to negotiation.

TB: WHAT ELSE SHOULD A NEW RETAILER KNOW ABOUT COMMERCIAL LEASES?

CM: Well, there are payment clauses in a lease--this is where a good lawyer is a necessity--that can be worked out. For instance, you may want to begin paying your monthly rent at an artificially low price, then have higher escalations later on, as your business grows. There will be a base rent and then there are escalations--meaning yearly percentages that you agree to--those are negotiable. You also need to know hidden charges in the lease, such as you may be charged a percentage of some of the building's common charges like gas or fuel oil in the winter.

You can also negotiate a rent-free grace period that can act as a yearly rent reduction and give you a period of time (2-3 months) to perform your improvements before officially paying rent.

There are issues with heating that a new leaser should be aware of. A landlord has to provide heating for all commercial spaces in New York. If the building is entirely commercial, with no residential tenants, then the understanding is a landlord does not have to supply heat in the evenings or on weekends. The landlord will provide just enough heat to keep the water pipes from freezing, but not enough to be comfortable in. If a leaser plans to keep the store open in the evenings or on weekends then they will have to either pay the landlord for additional heat or supply their own heat. If the store is in a 24-hour building, a residential building, then the space should be heated all day and evening. Air conditioning in summer is typically not provided unless there is an existing AC system in the space installed by a previous tenant.

There's also subleasing. Subleasing is renting a portion of your space to another tenant. The right to sublease has to be written into the lease. The landlord must agree to let you sublease and then the landlord is entitled to a certain (negotiable) percentage of any of the profit you are making on the sublease of the space. The landlord typically wants you to share on any profit you are making from his/her building.

CM: And, then there is "assignment."

TB: WHAT IS ASSIGNMENT?

CM: Assignment is one of the issues that potential leasers never consider. It's a difficult issue to face; it means your business has failed or the space isn't working out for you. Assignment means that you are turning over your lease to someone else.

The idea behind assignment is that turning the lease over or "assigning" the lease to someone else will recoup some of the money that you've spent on renovating the space. There should be a profit built into the rent when you assign. Some landlords will allow you to assign a space, but will expect a percentage of the profit on your rent, like subleasing.

It's a complicated issue that a good lawyer will work out in your lease. Some landlords will not allow assignment at all. That means you will be stuck paying the lease for as long as you've agreed to lease the space. Consult your lawyer on the personal protection offered by forming a corporation or the repercussions of personally guaranteeing the rent, something you should try not to do.

TB: HOW MUCH OF THE PROFIT FROM ASSIGNING CAN A LANDLORD ASK FOR?

CM: It's all negotiable, the best thing to do is try to estimate how much money you'll spend on the lease and the renovation over the total length of the lease. Say you have a five-year lease and you put fifty thousand into the renovation. You would want to add ten thousand a year to the rent so that at the end of the five years you will have recouped your investment. Any profit over ten thousand dollars a landlord can take a percentage of.

A potential leaser should discuss different scenarios with their lawyer. "What happens if I go out of business?" "What happens if I want to rent part of my space?" "What happens if I have a partner and we don't get along? Can he/she buy me out?" Those are all questions that need to be addressed. A leaser needs a mechanism written into the Partnership Agreement that you have agreed to with your business partners that will allow for a buyout--either you're bought out by your partner and they continue to hold the lease or vice versa.

(This is typically not in the lease, but in a Partnership Agreement that becomes part of your Corporate Documents)

TB: WHAT ABOUT PARTNERS AND LEASES? HOW DOES THAT WORK?

CM: This gets complicated. Did you go into the lease as an individual with sole proprietorship or as a partnership or corporation?

TB: WHAT WOULD YOU SUGGEST A NEW RETAILER DO?

CM: I would file as a corporation. You need to protect your personal assets and filing as a corporation will ensure that. Your personal bank accounts, home, whatever, can't be touched to cover the cost of the lease. But, unfortunately, if you file as a corporation you are responsible for the lease for the entire duration. (You might have to file bankruptcy, or dissolve the company, check with your lawyer.) Typically, most landlords will just keep your deposit and re-rent the space for a higher price in order to recoup their cost of legal fees..

TB: WHAT IF THE MARKET IS DOWN AND RE-RENTING WOULD BE DIFFICULT? WHAT IF YOUR LANDLORD IS JUST VINDICTIVE?

CM: You need to go into these things [lease signing and business planning] with a formula so that you can cover your costs if problems arise. You have to say, "Okay my rent is so much for the year. I'm going to have six months to a year, if possible, in the bank to pay the rent, and in addition I need the first months rent, last month's rent and deposit. Staff salaries need to be covered for six months to a year." And, you need to ask yourself whether you're going to pay for renovations and supplies on credit. Unless you have sterling credit already, vendors are not going to extend that option. So you'll need cash in the bank for your purchases.

LOCATION

TB: ANY ADVISE TO POTENTIAL LEASERS CONCERNING STREET LOCATION?

CM: You must always look at a space to see how successful it will be as a retail shop. Does it have street front exposure? If not, can it be seen from the main street--that's very important. You may be able to get a slightly cheaper rent on the space if it's off the avenue, but people still need to know the shop is there. You need to ask yourself what kind of foot traffic the space attracts.

Also, take a look at turnover in shops. Sometimes there are spaces that are constantly changing tenants and you can never figure out why. There was a myth on Madison Avenue--one side of the street was better than the other. But, you know what? Once people couldn't find spaces on the desirable side of the street, they started renting on the other side of the street and that side worked out just as well.

TB: ARE THERE NEIGHBORS YOU MUST AVOID?

CM: Well, that's a consideration. If there's a restaurant nearby--check out the backyard. See if it's kept clean. How well packaged is the garbage? If the area is dirty, with trash cans left open or bags of debris scattered here and there then there will be a vermin issue--vermin and roaches. If there is a candy store or luncheonette that serves a lot of high school students nearby, you may be stuck with a bunch of kids hanging around outside your shop every afternoon. That's not good for business.

TB: WOULD YOU ADVISE A POTENTIAL TENANT TO PASS ON A STORE IF THERE'S NOT ENOUGH WINDOW SPACE TO DISPLAY GOODS?

CM: If people can't see a retailer's merchandise properly then they may not venture into the store. Your windows are your advertisement. You'll miss a lot of potential sales if people can't see your merchandise from the street. And you'll need to up your advertising budget.

RENOVATIONS

TB: WHAT MAKES ONE SPACE A BETTER DEAL (ASIDE FROM LOCATION) THEN ANOTHER?

CM: Well, first, has the space already been used for retail? If it has been used for another kind of business--storage or some sort of manufacturing for instance--it may not have proper lighting, a useable bathroom or HVAC (heating, ventilation and air conditioning system). If it has been used for retail, then a new tenant may not need to do more than cosmetic work--painting, putting up shelving, laying down a new floor or carpeting. What you're looking for in a space that has been used for retail is a sufficient HVAC, a functional bathroom and wiring that is adequate for the amount of lighting, or a stronger HVAC system, if that's what the tenant needs. Having all of that in place will save thousands of dollars.

TB: HOW CAN A NEW RETAILER TELL IF A SHOP HAS ADEQUATE HEAT AND AIR CONDITIONING?

CM: A new retailer should hire a MEP (mechanical, electric and plumbing engineer) who will walk through the space with a checklist.

He/she knows what to look for and can give a new retailer an idea of the kind of additional heating and AC that might be needed. Don't assume that the heating already in place is adequate. In most shops there will usually be perimeter base heating like a radiator. If that system won't supply enough heat, then new heating will need to be installed. Installing a heating coil in an air conditioning unit that heats up and blows warm air into the space once the AC is turned on maybe one solution.

It's also important to see if there is adequate storage, either a back area that can be sectioned off for storage or a basement storage area. If the space isn't large enough, or there's no basement, then a tenant will need to come up with storage solutions.

TB: WHAT ABOUT WALLS AND FLOORS?

CM: Let's take walls and ceilings first. Unless a space has been kept in pristine condition a new tenant will probably have to refinish the walls--put up new sheet rock, plaster and paint.

In some older spaces there are tin ceilings, and they have a certain charm, but there's refinishing and painting to consider. If there is an existing drop ceiling, that might not work for a specialty children's store--they're unattractive--so there would be the cost of removing the ceiling and refinishing and painting the existing ceiling.

A new tenant needs to look at the existing flooring. If a floor looks cold and industrial it won't work for a better retail environment--especially a children's store. If it's a cement floor it may need to be releveled. If the floor is in okay condition, then industrial carpeting could be put down or you might be able to get away with cheap tile.

TB: WHAT ABOUT LIGHTING?

CM: Again, is the existing lighting sufficient? A new tenant may walk into a space and see one long bank of fluorescent lights. They may be enough to light the space, but is it attractive? Will it cast the proper light on the clothing?

TB: CAN YOU GIVE OUR READERS AN APPROXIMATE COST IF THEY HAVE TO GUT A PLACE AND START FROM SCRATCH?

CM: For the sake of this discussion let's say the space is on Amsterdam Avenue in New York City. For a 20 x 50 space, that would be 1000 square feet, the cost would be anywhere from $50 to $100--that is on the low end--per square foot depending on the look the tenant is trying to achieve. For a high-end tenant, like a couture designer, the cost can run as high as a $1,000 per square foot or more--a lot more. So for the $50 tenant it would cost $50,000.

TB: A TENANT NEEDS TO ASSUME SHE'LL SPEND THAT MUCH?

CM: Yes, absolutely. And, that's without furniture. That figure includes new flooring, ceiling, walls and basic lighting. Furniture, displays and racks can cost $20,000 to $30,000. If central air conditioning needs to be installed, that could easily run $10,000 to $15,000--again, that's on the low side. For big department size stores, we've spent hundreds of thousands of dollars on air conditioning.

TB: WHAT ARE THE BIGGEST MISTAKES PEOPLE MAKE WHEN THEY RENOVATE THEIR STORES?

CM: Not planning carefully enough and under-financing the renovation. New retailers often miscalculate how much merchandise will be out on the floor at any given time and how much of the merchandise needs to be stored away. So they don't design enough hanging stations, or the areas they designate for display could have been better utilized. Each rack should be able to be used for hanging and folding. Again, you want to try to maximize the amount of space you have. The reality of most retail spaces is--you need to pack in as much as you can. So how do you achieve that? You can vary the look of the displays and maximize storage by putting in armoires. Display elements in the center of the store, places where you can display folded goods or use T-stands [metal stands with a center rod and arms all around to hang merchandise] if they work with the look of the store. Or storage solutions like loft-type, overhead storage or maybe benches with under-the-seat storage, could be designed. In terms of vision--it's not matching the feeling of the store to the merchandise. Or, using crummy looking hanging-rounds to hang better merchandise. It just doesn't work. It's uncomfortable too look at. And, people often forget that they need a cash/wrap station that has a view of the door.

TB: FOR SECURITY REASONS?

CM: Unless you have a guard up front, you'll have to police the door yourself. If you're by yourself, or maybe with one other person, you'll want to have all the lines of sight open to all the places in the store.

TB: WHAT ARE YOUR CLIENTS, EITHER HIGH-END OR MODERATE-END, LOOKING FOR NOW IN INTERIOR STORE DESIGN?

CM: It's interesting, and of course those needs change with time and fashion. For instance in the '80s it was all about luxury--think of the Ralph Lauren stores. So the interiors focused on expensive surfaces, traditional carpentry like wainscoting and molding and soft lighting. Now it's a trendier look--a loft like space is important--DKNY and Calvin Klein did well with the minimalist aesthetic.

TB: WHAT ABOUT CHILDREN'S WEAR STORE DESIGN?

CM: Well, that is very trend driven too. It seems that children's shops right now, better specialty shops, have two looks. There's the very spare, Calvin Klein like feeling. Almost an industrial feeling, with a few simple racks--this works very well in tight spaces where clutter would detract from the merchandise. And, then there is the more Ralph Lauren-like look--soft lighting, pretty, pastel walls, custom-made armoires to hold merchandise, carpeting.

For more information on MSM Architects contact Charles Mallea at 212-691-3360. To see photographs of stores and showrooms designed by the MSM Architects log onto msmarchitects.com.