Why This Innovative Idea Can Help Reduce Business Failure Rates More businesses can flourish through strategic partnerships between entrepreneurs, landlords and local governments.
By Justin Leonard Edited by Micah Zimmerman
Opinions expressed by Entrepreneur contributors are their own.
Many great business concepts have yet to be discovered due to economic barriers. Landlords generally prefer to fill vacant spaces with national tenants, which include household names like H&R Block, Sherwin-Williams, Chipotle and Starbucks. It is difficult to find a place that sells pie by the slice because the availability of traditional bakeries is limited. In many cases, the only remaining bakeries are found inside grocery stores.
Similarly, there are only a few candy stores left. Some have managed to stay alive through subsidies and other means. But almost every candy store has to sell liquor to survive. The reason candy stores have to sell liquor is that commercial real estate costs have become unaffordable.
At this very moment, the next great business is being incorporated in a garage, college dorm room or storage shed. Only a few of them will last long enough to become success stories. But more businesses can flourish if local economic conditions are favorable for growth.
Many factors impede entrepreneurship. One of them is the cost of the rent. Currently, in order to lease 2,500 square feet of commercial space in a good part of town, expect to pay around $4,000 per month plus more for related expenses. Additional costs associated with occupying a commercial space include city taxes, electricity, water, trash, insurance and general maintenance. With a security deposit included, an entrepreneur will pay at least $8,000 to move in. This does not include tenant improvements. For example, if an establishment wanted to build a dividing wall or countertop, the expense must be paid by the tenant unless there were negotiations otherwise.
On average, there is a 3% increase in rent costs each year. Once all contractual obligations are fulfilled, a lease can be renewed. At the time of renewal, there can be as much as a 20% price jump in the base rent amount. The cycle of escalating rent continues so long as the lease agreement remains in effect. At some point, the cost of rent will become too high. This might hurt those who want to continue operating out of their existing location but can no longer afford the rent.
For many businesses, the cost of rent is usually the second highest expense after wages and benefits. Leasing a commercial space comes with risks. For example, while there are exceptions to every rule, landlords typically require minimum lease terms of 3 to 5 years in desirable areas. But this can be problematic for entrepreneurs looking to test the waters with a shorter lease term. A prudent business owner might attempt to negotiate a 1-year lease before committing to a longer lease. However, the move could raise red flags because landlords are more interested in an entrepreneur's ability to demonstrate financial strength. Such obstacles are likely to stifle economic expansion.
As previously stated, in order to cultivate strong businesses, the surrounding environment must be optimized for success. One possible solution is a strategic partnership between entrepreneurs, landlords and local governments.
Related: 6 Criteria to Follow When Leasing a Commercial Space
A business incubator program where everyone wins
Most major universities have an incubator program for entrepreneurs. With convenient access to funding, mentorship and other resources, collegiate initiatives boost start-ups. A similar program could be implemented to benefit local economies in ways never seen before. Here is a summary of how each participant wins:
Start-ups have a better chance of survival, especially within the first few years. Property owners receive various incentives from the city in exchange for program participation. The public sector generates more revenue due to an increase in new and growing companies.
Related: 5 Major Deal Points to Know Before Signing a Lease
Incentivize entrepreneurship to curb business failure
Landlords and city councils should consider doing more to incentivize entrepreneurship. One way would be to offer reduced or fixed-cost rent. Shopping centers and industrial parks often have several vacancies and are almost never fully occupied. Property owners would not necessarily lose money by setting aside a small portion of their available inventory for inclusion into the program. Also, there is no rush to achieve maximum tenant occupancy at a given location because they usually own multiple properties.
Related: Know Your Rights When It Comes to Commercial Real-Estate Rental, Reap the Rewards
Benefits for each participant
The following are broad ideas that could work once refined. In exchange for program participation, city councils could offer preference to landlords through various initiatives, such as contracts and tax benefits. Start-ups would be more inclined to seek out commercial locations that incentivize entrepreneurship with lower fees, fixed rent costs and other perks. Mentorship could also be incorporated into the program, as this would help reduce the attrition rate for early-stage businesses.
Landlords would also benefit because tenant occupancy would likely increase over time. As part of the program, business owners would continue to rent with the same property owners beyond the initial development period. The scenario would look something like this: For up to 24 months, the entrepreneur would rent commercial space at a reduced or fixed cost. Once the initial development period has concluded, there would be an option to extend the lease in 12-month increments. Part of the arrangement could also allow for expansion to larger facilities or relocation to other properties owned by the landlord. At this stage, a standard lease agreement would be negotiated, and the entrepreneur would give preference to commercial inventory owned by the landlord.
For local governments, the primary objective would be to assist companies that eventually develop not just local but national or global impact. An advantage for cities and states is that it may birth the next great business, which could mean a boon to the surrounding economy and beyond. A significant portion of revenue for local governments comes from sales taxes. Accordingly, a program that helps businesses succeed would translate into more tax revenue for cities and states.
