The 6–10% occupancy cost rule (don't break it)
Occupancy cost = annual rent + CAM + property tax pass-through ÷ revenue. Restaurants want it under 10%, retail under 8%, services under 12%. Above those bands, no amount of operational excellence saves you — labor + COGS + marketing + debt service won't fit in what's left.
- • If a landlord wants rent that pushes you over 12% on realistic revenue, walk.
- • Percentage rent (base + % of sales above a breakpoint) can lower base rent in early years.
- • 5+ year lease with 2× 5-year options gives you re-negotiation leverage in years 5 and 10.
Trade-area analysis 101
Pull census tract data (free at census.gov) or use Placer.ai / Esri for the 1/3/5-mile rings around the site. Map population, median income, daytime employees, age skew, and ethnicity vs your concept's target customer. Then count direct competitors in the 1-mile and 3-mile rings.
- • Daytime population matters more than residential for coffee/lunch concepts.
- • Capture rate of 1–3% is realistic for new concepts; 5–10% is exceptional.
- • Each direct competitor in the 1-mile ring drags capture by ~5%.
- • Income index: model adjusts ticket-friendliness vs $75k median baseline.
TI allowance, free rent, and other lease economics
Landlords compete on TI allowance ($/sf they pay toward your build-out), free rent (3–9 months in year 1), and percentage-rent breakpoints. A $40/sf TI on 2,000 sf is $80,000 of build-out you don't fund — often the difference between a 60% and 120% 3-yr ROI.
The 30-day foot-traffic stress test
Before you sign: park across the street for 4 weekdays + 2 weekends, count people in your demo who pass the door, and multiply by your realistic close rate. If the math doesn't match the calculator output above, trust the count, not the spreadsheet.
Related guides
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Read the guideFAQ
How do I choose the best location for a small business?
Start with trade-area demographics (3-mile ring population, income, age skew matching your target customer). Then layer foot/vehicle traffic, competitor density, and rent. The location wins when projected occupancy cost is under 10% of realistic revenue AND 3-yr ROI on build-out clears 100%.
What is a good occupancy cost ratio?
Restaurants: 6–10%. Retail: 5–8%. Service businesses: 8–12%. Anything above those bands means rent is eating your margin — no operator survives 15%+ occupancy for long.
How much rent should a small business pay?
Reverse the formula: max rent = realistic annual revenue × your industry's occupancy ratio. For a $750K revenue restaurant: max rent ≈ $60K–$75K/yr ($5–6K/mo). If the asking rent is higher, the location only works at higher revenue than you can prove.
What is a TI allowance?
Tenant Improvement allowance — money the landlord contributes per square foot toward your build-out. Typical range: $15–60/sf depending on lease length, market softness, and your credit. Always negotiate it — it materially changes your 3-yr ROI.
How do I estimate revenue before opening?
Three methods, in order of reliability: (1) Use FDD Item 19 or industry AUV benchmarks for the comparable concept; (2) Run the trade-area capture model in this calculator and stress-test 30% lower; (3) Stand outside the site for 30 days and physically count traffic. Real operators use all three.
How this calculator is built
Independently maintained
Written by Sam Doshi and the RevenueLab editorial team. We don't sell the data feeds this tool is built on.
Sourced from primary data
Benchmarks come from public AdSense / Stripe / IRS disclosures and reader-submitted data — never third-party "$X per view" claims. Full methodology.
Last reviewed
June 2026. We re-check every figure on the platform on a rolling quarterly cycle.
Editorial standards
See our editorial policy and disclaimer. Results are estimates, not advice.