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Finding Leverage

To win new lease, first define what both sides have to lose


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Ian Kidd has been a franchisee of the Great Harvest Bread Co. for years in Duluth, Minnesota, and did a brisk business from both his coffee shop and his bake shop. But when his lease came up for renewal this year, the landlord told Kidd he was giving the coffee shop space to a Jimmy John’s franchisee. 

Kidd quickly hunted for other properties, but couldn’t find anything. Frustrated, he was forced to renew his old lease on the bake shop space under the same terms as before, plus remodel it to cram his coffee operation into the smaller space. It cost him $40,000, and the landlord didn’t pay a dime.

But it didn’t have to be that way. All leases are negotiable, especially when situations change, says Mark Dufton, CEO of consulting firm DJM Realty, Melville, New York.

“Any tenant should be looking at that and not just sort of blindly renewing or exercising their option,” Dufton says. “In the past a lot of the franchisees have tended to do the work themselves,” but the restructuring exercise “is a completely different world.”

In fact, the market is changing quickly. According to the National Association of Realtors, retail vacancy rates will decline from 11.9 percent in early 2012 to 11 percent in the first quarter of 2013. Meanwhile, rents will rise by 0.7 percent. 

A change in mindset

More significant, though, are changes in mindset. Dufton says tenants have a lot of leverage now compared to the end of 2010. “We went through a period a couple of years ago where virtually every Realtor and franchisee was trying to renegotiate their rent,” Dufton says. “It really got out of control. The landlord community wised up to that and kind of put the clamps on it.” Now he believes the pendulum is swinging back toward tenants.

Seth Werner is seeing the opposite. He’s president and CEO of North American Corporate Advisors in Miami. With weaker players out of the market, it’s harder to renegotiate now than it was before.

“No new properties have been built to speak of, and rents have come down significantly,” Werner says. “The pendulum is swinging both in the favor of the bank and the landlord in these negotiations.”

So how to negotiate in this new environment? Ask Steven Monroe. As co-chair of the restructuring group at Newmark Grubb Knight Frank, a real estate service firm in New York, he’s had plenty of experience reaching out to landlords. He’s working with a KFC franchisee with 77 sites, and says that whether you have few or many sites, the key is to turn an emotional issue into a mathematical one.

“The first thing a franchisee should do is look at his lease and what his exposure is,” Monroe says. Whether it’s a personal guarantee or cross-collateralization with another property, tenants need to know what they stand to lose if they default.

Once you see how much you have to lose, flip the equation. Landlords also have a lot to lose if you leave, so play that to your advantage.

“It’s pretty simple—quantify to the landlord what his costs are going to be,” Monroe says. Beyond money they’ll lose by having a space vacant, landlords have other costs. So, they’re often willing to compromise.

Concessions needed

Of course, you’ll have to compromise as well. In exchange for a reduction in rent, prepare to give up a couple of parking spaces or an exclusive-use clause, or agree to stay longer.

In some particularly lively markets (California, New York and New Jersey are strong right now), your most valuable asset may be the space you’re in. 

Bridget Grams, a principal at Huntley, Mullaney, Spargo & Sullivan in Roseville, California, says sometimes, however, it’s best to just relocate. “Rent reductions between now and the end of the year are going to be more difficult to get,” Grams says. “But consensual lease terminations are going to be easier. Landlords want their space back.” 

 


 

Four items to keep in check

Have you checked your lease lately? It’s important to periodically review to make sure everything is in order. Here are four things to watch for.

Accurate information: Steven Monroe of Newmark Grubb Knight Frank says he’s amazed at the discrepancies that can pop up between leases, databases, and the real world. If your lease says you’re paying for 6,000 square feet, but your store is only 5,000 square feet, you’d better get that straightened out.

Percentage of sales: Many leases are based on a percentage of sales, often with a maximum cap. If you’ve gotten into the habit of paying that maximum cap, but your sales have dropped significantly, double-check to see that you’re not paying more than you need to.

Notice date: If you want to renew or cancel your lease, there are often deadlines you need to watch out for. Note these on a calendar so you know when they’re coming up.

Termination/renewal options: When negotiating a new lease or renegotiating an old one, stability can be very important. Offering to stay in a space over a long time period can sway landlords to reduce rent.

 

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