By Ron Kustek
Though one doesn’t know the reaction by every reader of this headline, regardless of your initial response, keep in mind that the majority of landlords here are small businesses themselves ━ owning a single building or a single property.
One of the ways a landlord’s small business operates, is to experience minimal turnover (avoiding months of not collecting rents) and usually increasing the rent 4-5% each year to keep up with any inflation (which has been under 2% for years) but also to remain competitive with every other rental space charged by other landlords.
But what if you own a small business and you’re leasing the building, paying for all utilities, improvements, changes, AND you have to pay 4-5% more each year for rent — a fixed cost regardless of sales?
If your profits (not sales) are not growing at the same 4-5% each year, then besides paying more you are making less profit, which can only come from your own pocket.
Many of us say we want the “invisible-magical hand of the marketplace” or “supply & demand” to determine pricing. But a small business landlord can easily increase profits by increasing the rent each year, without putting any more of money into the building or the property — just by collecting the monthly rental check.
Thus, one small business (a landlord) is able to increase its profitability at the literal expense of another small business (a restaurant, gift shop, clothing store, that is leasing).
Thus begins a common failure-spiral.
In order to afford a 4-5% rent increase, a small business may choose not to pay employees a living wage ━ not that they don’t want to, but often because they just can’t afford to.
Certainly, providing healthcare and/or additional benefits may not be possible, because the rent has increased. This may then cause a small business to reduce costs, using lower-quality ingredients, turning off utilities when the location isn’t full of customers, or putting off improving their technology, merchandising or other plans of improvement.
Some small businesses may decide to increase prices to help cover the rent increase — which may not be noticed by tourists, but is a major concern for locals, some who are on fixed incomes and/or living off their finite retirement savings. This results in lower overall sales (and profits) as no local business can survive with tourists alone, and certainly not when we’re trying to keep tourist customers away during Covid-19 times.
The point is, there are no bad people in the aforementioned scenario. There are just business owners trying to maximize their profits with the least amount of expenses. However, we can see that this “formula” and interrelationship among all small business owners ━ may have reached its tipping point.
True, it is often up to the lessee (tenant) and the lessor (landlord) to negotiate their lease agreements, whether for one year or multiple years.
But we’ve all seen when a small business management company sells to a larger commercial property developer, and that developer doubles rents, or refuses to renew a local small business’ lease. Again, this is the “invisible-magical hand of the marketplace” at work, and perhaps it’s time to change that practice.
Consider this: if a local small business (landlord) could only legally charge no more than 2% more each year, their small business (tenant) may more easily be able to invest in building their business, to attract more customers, and/or pay employees more, thus helping the overall local economy. Local customers may not notice a price increase of 2% or less, thus, the less chance of a sales decline. And frankly, if the landlord doesn’t regularly invest their money to improve the property and is just charging what the market will bear, then why should they be generating such an increase in profits at the expense of other small businesses ━ and, at the expense of our community of patrons (customers)?
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Ron Kustek is a former senior executive and also small business owner who is currently a business instructor at Cabrillo College. Contact him at [email protected]