This morning, I drove past the retail center where my store used to be. Several piles of snow had been constructed to make way for cars to enter and exit the parking lot. It brought back memories of snow and problems with my landlord and paying out money I didn't have... <shiver> and why I wish as a small business owner, I would have kept an emergency fund.
I thought I discussed this story in detail in my book, but apparently not. On page 27-28, I wrote a teeny tiny bit about the related topics, but I never tied it together in the larger story.
Here's the small extract from those pages:
"Common Area Maintenance (CAM) increases: In addition to rent, you typically also pay something called CAM or triple-net. This covers the maintenance costs like landscaping and snow removal in your shopping center. It’s typically not fixed—it goes up and down each year based on the real cost of the year before. Also, when the landlord figures out whether or not it goes up or down, they can also charge you a one-time payment to cover the previous year’s actual costs (or give you a credit if costs were less than expected). Well, after the first full year, when our assessment came in, we owed almost twice our rent! It was a lot of money at the time and was completely outrageous. It almost put us out of business.Snow Removal: Our first winter brought a huge snow storm, and even though we were required to be open, the snow removal in our parking lot was miserable. We got phone calls from several customers saying they tried to get to us but couldn't. In two or three days, I estimate we lost at least $500 worth of business solely from the people who told us they couldn't get through. I don’t want to think about how many couldn't get through who we don’t know about. "
I need to tell you the story today, because it's a GREAT example of the unexpected financial things that could pop up. It's a GREAT example of why you NEED to have an emergency fund if you're a small business owner.
Yes, in February 2003 we were hit with an unexpected snow storm that dumped an unusually large quantity of snow on the region. Everything was closed, of course. But as a fairly recent business owner that catered to families with kids, all of whom had a snow day, I felt the need to make sure my store was open.
I drove my Jeep Wrangler and was able to make the trek out of my neighborhood and down to my store. I opened the place up and was greeted by phone calls from people complaining about the snow in our center's parking lot and how they couldn't get to us. At the time, all I could think about was the lost business. I'm pretty sure if our lot had been clear, we would have netted another $500 or something that day.
Eventually, the snow melted and things returned to normal. I forgot all about it.
Until that December, when I received a letter from the landlord saying I owed an addition $6,000 in rent. Note that this was TWICE my normal monthly rent. So that's A LOT. And if you look at our sales numbers for those months, it was about a third of what we were bringing in. In other words, $6k was A LOT of money to me at the time.
Needless to say... I freaked out. (It was Christmas Eve, too, btw.)
When I calmed down (a little), I spoke with other store owners in my shopping center. Everyone received a similar letter and everyone was in the same freak-out mode. Since CAM was assessed based on the square footage of your retail space, a store that was twice the size of mine had a $12,000 bill. Also, CAM for the next year is always based on the previous years expenses, so my new CAM more than tripled for the next year.
We got together as a group. I hosted a meeting at my store after hours one night. We wanted to see if there was anyway to fight this. If we did, it would have to have been done as a group - none of us could afford the legal fees to do it as an individual. We invited a business lawyer I knew.
Everyone understood that CAM could fluctuate, but we were all baffled as to how it could go up this much. Apparently, there was some issue between our landlord and the snow removal company and the snow removal company took the landlord to court to get their payment. Our landlord was able to pass on not only the additional snow removal charges, but their legal fees as well!
We were not successful in getting the landlord to reduce the charge... how could we? Our lease's were pretty straightforward. The only thing that they agreed to was to let us pay it over time. I think I paid mine over the course of 6 months. Which was still an extra $1000 a month in rent that I hadn't planned in the first several months of 2004.
What can you take away from this?
1) You MUST have an emergency fund! An emergency fund could have covered this.
2) When negotiating a lease, I have since learned that you can ask for things like a cap on CAM. (Doesn't mean you'll get it, but I never even thought to ask.) You can detail out things you won't be responsible for like legal costs incurred, etc.
3) If I didn't mention the emergency fund, let me say it again: You must have an emergency fund. You never know when you'll be hit with something unexpected and out-of-the blue.
PS... the following year, when CAM was reassessed, since there were no major snow storms or legal things that could get passed on to me and my fellow tenants, the new assessment went way down and I think I even got a (small) CAM refund.