AR Workshop is a DIY studio franchise, and Patrice Chatman was once just a comfortable customer. Then she became a part-time teacher. And in 2023, she bought a location in Westfield, New Jersey—inheriting a studio she loves and a lease with a steep learning curve.
“Before I officially took ownership, I think we were projecting somewhere between 27% and 30% of our gross revenue would go to rent and utilities,” she says. About a yr later, that number is 43%. “Rent is definitely tough.”
Chatman isn’t alone. In April, the online marketplace Alignable reported a spike in small businesses unable to pay their rent in full. The survey of 4,171 small business owners found that 43% were behind on rent that month, a result unseen in similar surveys the platform has conducted since March 2021.
Image Source: Zohar Lazar
As inflation has driven up the cost of every thing in recent years, even small-business owners locked into decades-long leases are finding rent less reasonably priced. And those looking for recent spaces to rent face high prices as high rates of interest pressure landlords to raise rent as their business mortgages — with average terms much shorter than 30-year mortgages — come due.
“With a commercial property, your loan may only be for five years, and then your interest rate resets. So if you bought it and your margin was 4% or 5%, but now you have to refinance it and interest rates are 8%, you lose your entire margin,” explains Arthur Greenstein, a business real estate broker with Douglas Elliman in Dallas.
For Chatman, buying AR Workshop meant taking on the remaining lease from the previous business owner while also getting a crash course in various kinds of business real estate leases. She learned that a gross lease—in which the tenant is responsible for an agreed-upon monthly rent and the landlord pays for all other building expenses, like an apartment building—is just one of many options. Tenants who sign a net lease (there are three types: triple, double, or single, which you may see written as NNN, NN, and N) typically pay a lower rent but are responsible for some or all of the expenses, such as maintenance, insurance, and property taxes. These forms of leases often give businesses more control over their space. Another option is a percentage-rate lease—in which the tenant pays a lower base rent and the remainder is calculated based on their gross income.
No matter what lease you select, negotiating protective provisions is one of the best ways for small-business owners to protect themselves from rising costs. When Rob McMillen co-founded Mildred New York, a barbershop on Manhattan’s Lower East Side, in 2017, he signed a 10-year lease with a built-in rent increase of lower than 5%. While he’s responsible for a portion of the property tax increases, there’s a cap on how much they will be. “We had a big tax assessment a year into our business that could have really devastated us if we hadn’t negotiated a cap on that property tax liability,” he says. “If you’re dealing with a commercial or retail lease and there’s a potentially variable amount, try to get as much of a fixed or capped amount as possible.”
First and foremost, AR Workshop franchisee Chatman recommends hiring someone to aid you translate real estate jargon. “You should shop around for a lawyer the same way you shop around for a life partner,” he says. “It’s okay to ask a billion questions.”