How To Negotiate a Lease
Once Richard’s Foodporium™ has approved
a location for a franchisee, the next step is
negotiating the lease with the landlord. This
is where having a professional commercial
real estate agent representation will pay off.
In addition to helping a franchise operator
scout out and locate a winning retail space,
agents acting as a tenant rep can give
invaluable input in negotiating a lease. If you
find yourself without a tenant rep, then this
article will help guide you to getting the job
done yourself.
When negotiating a lease, have your attorney review the lease provisions, and make sure
you fully understand your rights and responsibilities under the lease.
Items that Richard’s Foodporium incorporates into lease negotiations include the following:
I.
Lease Term. We suggest setting up a lease term that will equal the term of your
franchise agreement when renewed. For example, since Richard’s has a 10 year
franchise agreement we strongly push for a 5 year lease with a 5 year option.
Rent is normally quoted in “base rent” or the monthly charge for the space plus a
CAM charge or “Common Area Maintenance”. The CAM is a charge the landlord
passes on to all the tenants of the center in order to cover costs associated with
upkeep of the entire center. This could include landscaping maintenance,
garbage pickup, electricity for common area lighting, painting, insurance, and
taxes to name a few.
Some landlords include the cost of the property taxes and building insurance in
the CAM charges while others quote these separately. Regardless of how they
are quoted, CAM charges are EXACT charges billed to the landlord and prorated
to ALL tenants based on the size of their space in relation to the size of the center
as a whole. Landlords do not make profit on CAM.
Make sure you clarify any and all charges that would be expected, as well as how
and when they would be billed. You will want to make sure you understand the
total charges that will be applied to the unit at any time, in order to more
accurately understand your total rent and charges per square foot.
II.
Cap on Rent. Ask for a cap on both Base Rent and CAM charges for no more
than 3 – 5% increases a year. Leases should be quoted with yearly increases
based on a cost of living index or the rate of inflation. It is common to have caps
on base rent yearly increases, however it is rare for a landlord to agree to caps for
CAM since some of those are expenses over which they have no control. There
are exceptions to this and therefore it is worth asking for when negotiating a
lease.
III.
Tenant Improvement Money. Often a landlord will include a construction
allowance to help offset the cost of leasehold improvements, especially with
spaces that need a large amount of work. It is usually quoted in $ per square foot
and varies depending upon how much work needs to be done in order to deliver
a usable space. A $3 per square foot Tenant Improvement Allowance (TIA) will
equate to a $6,000 construction allowance in a 2000 square foot space.
It is important to point out that negotiating TIA may deter a landlord from giving
the lowest amount of base rent to a tenant. The tenant improvement money may
offset a lower base rent. Calculations of tenant improvement money vs. lower
base rent over the life of the lease needs to be analyzed to assure that the tenant
is getting the lowest cost for the space. Spaces which don’t necessarily need
much in the form of leasehold improvements may allow for negotiation of a lower
base rent as an alternative to asking for a construction allowance.
IV.
Free Rent. Asking for a period of rent abatement is very common with lease
negotiations. Typically we ask for at least the first 3 months of rent abatement
with our lease negotiations. This is often a concession of free rent given to help
alleviate the time it takes to build out the space and can also be given to help
keep your expenses down while getting the business up and running.
V.
Signage. Negotiate sign space on the pylon or street sign of the shopping center
if available. Usually the pylon signage is tied to the lease of a specific space or
square footage. However, if there is pylon space not being used and there are no
negotiations on the space in process, negotiating the pylon sign is highly
recommended.
Some centers have the signage “attached” to a specific space (normally the
larger spaces) while others may have a small yearly charge for the use of the
sign.
VI.
Escape Clause. A co-tenancy escape clause is an option in the lease to
terminate or renegotiate rent in the event the anchor store leaves the center or
closes down. An anchor closing or moving to another center can have a
devastating impact on traffic flow in the center. While not necessarily an
important factor with some businesses, it is an item to seriously consider. How
will your business be affected if the anchor moves or closes down?
There is another type of escape clause called a “Kick-out” which gives the tenant
the ability to terminate the lease in the event a certain dollar amount in gross
sales is not achieved over a certain period of time. For example, a kick-out may
read “tenant may terminate the lease if gross sales do not exceed $250,000 by
the end of the second year.” The dollar amount and term of the kick-out can vary
and are usually based on projections made in the tenant’s business plan.
VII.
Non-competes. A non-compete involves having a clause added to the lease
whereas other tenants cannot sell similar items that you sell. This may be difficult
if there is another store already established in the center that sells similar items,
and, if this is the case, can be written with exclusions of current tenants.
Non-competes are sometimes difficult to obtain with landlords, especially if the
non-compete is written too tightly or broadly.
VIII.
Miscellaneous. Assure that the lease allows for window signage to be displayed
as well as exterior signage supplied by the tenant. Ask about the ability to
sponsor or hold outdoor events, use parking spaces for events, any coordinated
marketing between tenants, etc.
These are the main points of negotiating that Richard’s looks for with new sites as well as
when renegotiating an existing expiring lease. There are other points to consider as well
based on specific regions or business climates.
The bottom line is EVERYTHING is negotiable with leases. And given the current
condition of commercial real estate today, the tenant has the upper hand. A word of caution,
make sure that all conditions are put in writing in the body of the lease. Unwritten promises
tend to fall victim to short term memory loss in the minds of management companies.