Experts give their top do’s and don’ts when negotiating leases
A lot has been written about taking advantage of the hard times to renegotiate your lease. But no one is telling you how to do it. Until now. Here’s a cheat sheet that will help you prepare for the next meeting you have with the landlord.
Tenants may think they have the landlord over a barrel in today’s market, but that is not always the case. Here is some advice from the experts on what to do and not do in order to negotiate the best deal for your franchise business.
The do list:
• Do your homework and consult with real estate experts so you have a good understanding of your real estate market. Find out what current market rents and vacancies are for your trade area or shopping center, and what other tenants are getting for rents, lease terms and concessions.
• Present your business in the best financial light possible. “Even though it is a tenant’s market, landlords are more cautious than ever as to the financial wherewithal of the tenant,” says Ryan Cunningham, president of Javelin Solutions. The Englewood, Colorado-based firm provides real estate and site selection services to the franchise industry. Landlords are more flexible and willing to deal with tenants that have strong credit, Cunningham adds.
• Create “buckets” to capture the many issues that come up when negotiating leases. In most cases, lease terms fall into four buckets or categories—financial reporting, opening risk, payment/performance terms and franchisor requirements. Once the individual issues are grouped, it’s easier to prioritize your issues and let go of minor irritants pushing on business critical issues.
• Present strong arguments when negotiating a point. “If you can come up with a valid story on why an issue is of concern, such as instances in the past where this issue negatively impacted a client’s business, you have a better chance of winning the point,” Cunningham says.
• Be up front with the landlord about what you need to get a deal done. Cutting to the chase can end up saving a lot of time and back-and-forth in negotiations.
• Work to understand the landlord. “The type of property owner you’re negotiating with is going to dictate the kind of deal that you’re going to get,” says Gregory Vojnovic, vice president of development at Popeyes Louisiana Kitchen in Atlanta. A small, private owner may have different objectives and flexibility to negotiate compared to a large publicly traded real estate investment trust (REIT) owner. In addition, some owners may have the resources to deliver on points such as tenant improvement packages, while others don’t. Knowing that can save a lot of time in structuring a deal that works for both parties.
• Make sure you understand how a landlord calculates common area maintenance (CAM) costs so you are aware of all expenses.
• Hire a professional broker to represent you. Choose a broker that has specific experience with your property type, such as restaurant real estate, and who has knowledge of your geographic area.
And now for the don’ts:
• Don’t be scared off by past failures in a space. “Just because a tenant has gone bad in a space, don’t assume that it’s not a good location for you,” says Michael Parkhill, senior vice president and director of real estate at Jersey Mike’s Franchise Systems Inc. in Manasquan, New Jersey. Jersey Mike’s has gone forward with leases in solid locations that fit the company’s criteria, even though other sandwich concepts have failed in the same spot. “It has worked great for us, and we also save on build-out costs,” he adds.
• Don’t take extreme positions that landlords cannot accept, such as the right to cancel at any time with three months notice, or no security deposit. “Landlords will not accept terms that give the tenant control of the lease term,” Cunningham notes. Be reasonable in your demands.
• Don’t do a deal just because you’re afraid of losing a location. Be patient and disciplined and make sure the space is right for your business model and concept.
• Don’t do a deal just because it’s a bargain. “People who own good real estate know they own good real estate, and they don’t just give it away,” Vojnovic says. Make sure you are choosing real estate that is right for your brand, and your decision isn’t being swayed by a low rent deal.
• Don’t wait until a lease term is ready to expire to approach the landlord. Tenants are finding success in mid-term negotiations where landlords are willing to offer rent discounts in exchange for longer term lease commitments.