How much rent can a coffee shop afford?
I made a short video about one rule: your occupancy cost needs to be 10% or less of your net revenue. It got a lot more attention than I expected.
A lot of people asked me the obvious follow-up: what is occupancy cost? Fair question. I didn't know what it was for the longest time either. So let's break it down, and then I'll show you how to use it when you're looking at a space.
What occupancy cost is
Very simply, occupancy cost is what it costs you to occupy the space. I count three things.
1. Rent and triple net (CAM)
Your base rent is whatever you pay per square foot. On top of that, most commercial leases add triple net or CAM (common area maintenance) charges, which is another per-square-foot fee. I usually put rent and triple net together because they're usually paid in the same check.
2. Utilities
Gas, electric, water, and data or telephone.
3. Liability insurance
I include the liability insurance that covers the shell of your location.
Add those up and that's your occupancy cost.
My rule: keep it under 10% of net revenue
Your total occupancy cost should be below 10% of your net annual revenue.
When I say net revenue, I mean all of your gross revenue minus transaction fees, because that money was never really yours to begin with. Sales tax, discounts and refunds come out too. Whatever's left after that is net revenue in my book.
Running the numbers
This can be simple back-of-the-napkin math. Here's an example.
Say your fully loaded occupancy cost is $3,000 a month:
Rent (including triple net): $2,000
Utilities: $600
Liability insurance: $400
That's $3,000 a month. Multiply by 12 and you get $36,000 a year. Divide that by 0.10 and you get $360,000 a year in net revenue. That's how much your shop needs to bring in to afford that space.
If you're open seven days a week, $360,000 works out to a little under $1,000 a day in net revenue. That's a helpful gut check. Can this location, at this size, realistically do that many sales every day?
You can also run it backwards. If you think a location can do $250,000 in net revenue a year, your total occupancy cost shouldn't go above $25,000 a year, or about $2,083 a month, for rent, triple net, utilities and insurance combined.
When this matters: before you sign anything
This rule applies in real life when you're evaluating a space to lease. If you're thinking about opening a coffee shop, ask whether the rent, triple net, insurance and utilities will come in below 10% of your net revenue before you ever submit a letter of intent (LOI).
It can be quick napkin math, like above. Or it can be a much more complex spreadsheet, because you can't just plug in any number and call it good. The real numbers come from the broker, the landlord and your own sales estimates, and each one needs to be checked.
A few things that throw the number off
The math is simple. Getting honest inputs is the hard part. Here's where I see people get tripped up:
Leaving out triple net. The base rent looks affordable until CAM charges are added on top.
Guessing low on utilities. A coffee shop runs an espresso machine, grinders, a brewer, refrigeration, ice and often ovens all day. Your utility bill is tied to the equipment you run, so think about utilities and equipment together.
Forgetting the build-out months. If you start paying rent the day you sign and the build-out takes months, you're paying occupancy cost with zero revenue coming in. Ask the landlord for free rent during the build-out. I go into this more in another post, "Check the power before you sign a coffee shop lease."
Counting gross instead of net. Use net revenue, after transaction fees, sales tax, discounts and refunds. Gross makes a space look more affordable than it is.
If you want to go deeper
I built a site feasibility workbook that walks through this and a lot more before you submit an LOI: traffic, parking, accessibility and the other things that catch new owners off guard. You can find it at blue42os.com.
Planning a café in LA, Ventura or Santa Barbara County?
Rent is only half the equation. The other half is the equipment that has to earn that rent back every day. If you're weighing a space and want help picking an espresso machine, grinders and brewer that fit your volume and your budget, reach out. We'll help you match the equipment to the space and the menu.
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