Negotiate Your Commercial Lease
Franchisees – Negotiate Your Commercial Lease
Whenever I speak at franchise shows and conferences, I am continually reminded how for many franchisees, negotiating a good lease or renewal against a landlord or their agent can be a challenge. While a franchisee thinks of marketing and managing, savvy real estate agents and brokers are specialized sales people. Their job is to sell tenants on leasing their location at the highest possible rental rate.
Franchisees may go through the leasing process once or twice in their entire lifetime – yet they have to negotiate against seasoned professionals who negotiate leases every day for a living.
Whether you are negotiating a lease renewal or leasing a new location for the first time for your franchise, these are some tips for tenants:
Negotiate to Win: All too frequently, tenants enter into lease negotiations unprepared and don`t even try winning the negotiations (opting to simply hold their own or not lose). If you are not even negotiating to win, you won’t. With big commissions at stake, you can be sure the landlord’s agent, on the other hand, is negotiating fiercely to win. Tenants should remember that it is okay to negotiate assertively.
Be Prepared to Walk Away: Try to set aside your emotions and make objective decisions. Whoever most needs to make a lease deal will give up the most concessions. A good franchise in a poor location will become a poor business.
Ask the Right Questions: Gathering information about what other tenants are paying for rent or what incentives they received will position you to get a better deal. Consider that your landlord and his agent know what every other tenant in the property is paying in rent, so you must do your homework too.
Agents … Friend or Foe? Real estate brokers typically work for the landlord who is paying their commission. It is not normally the agent’s role to get the tenant the best deal – it is their job to get the landlord the highest rent, the biggest deposit, etc. Typically, the higher the rent you pay, the more commission the agent earns. If you are researching multiple properties, try to deal directly with the listing agent for each property, rather than letting one agent show you around or show you another agent’s listing. Your tenancy is more desirable to the listing agent if he can avoid commission-splitting with other agents.
Never Accept the First Offer: Even if the first offer seems reasonable, or you have no idea of what to negotiate for, never accept the leasing agent’s first offer. In the real estate industry, most things are negotiable and the landlord fully expects you to counter-offer.
Ask for More Than What You Want: If you want three months free rent, then ask for five months. No one ever gets more than they ask for. Be prepared for the landlord to counter-offer and negotiate with you as well. Don’t be afraid of hearing `no` from the landlord – counter-offers are all part of the game.
Negotiate the Deposit: Large deposits are not legally required in a real estate lease agreement. Deposits are negotiable and, more so than anything else, often serve to compensate the landlord for the real estate commissions he will be paying out to the agent. The Lease Coach is frequently successful with negotiating to have the tenant’s deposit returned upon renewing a lease.
Measure Your Space: Tenants frequently pay for phantom space. Most tenants are paying their rent per square foot, but often they are not receiving as much space as the lease agreement says.
You are the Customer: Far too often, franchisees act as if they are applying for a lease. Remember that you are the customer to the landlord. If you want to be in the driver’s seat for the lease negotiations, you must remember who is serving whom. The tenant sets the meeting time. The landlord’s agent drops off and picks up documents to you and so on. Shrewd tenants never pick up the restaurant bill if dining over lunch with the landlord or their agent. You must never put yourself in the position of the seller. You must always appear to the buyer … and the customer never pays for lunch.
Make All Offers Conditional: When negotiating a new lease, make your Offer conditional upon certain things – such as financing, franchise territory acquisition, satisfaction with the formal lease agreement, construction estimate costs and so on. This will let you legally and ethically rescind your Offer to Lease if outside circumstances hold you back. If you need more time, simply request an extension in writing so you can potentially remove your conditions at a later date.
Who Should be the Tenant? Don’t enter in a Lease Agreement (or an Offer to Lease) under your personal name. This will make you personally liable for everything. Instead, form a corporation or holding company which will become the tenant. If you are negotiating on location, but don’t intend to incorporate until a later date, then the Offer to Lease should sate that the tenant is Your Name on behalf of a company to be incorporated later (or Nominee. If you are opening multiple locations, it is often wise to form a new company for each lease agreement as further protection. Corporations also have tax benefits over sole proprietorships.
Select the Best Lease Length: While a five-year lease term is still standard (or even 10 years for some franchise systems), it is not necessarily the best term for your business. Consider your own future. Lease terms can also be negotiated in months, rather than years. Instead of signing a five-year lease, opt for a 56- or a 64-month term instead. This can work to your advantage as you can begin a lease term heading into the busy retail season and end your term going into the slower season.
Go Slow for a Better Deal: Franchisees often rush a lease deal and leave valuable incentives or inducements on the table. If you have the time to work with, I recommend that you take it. Often, The Lease Coach gets tenants more free rent, more tenant allowance or even a lower rental rate just by refusing to sign on the dotted line too quickly. If the agent or landlord is anxious to close the deal, you can use stalling tactics to better your position. Franchise tenants who invariably have regrets will usually tell you that the whole process happened so quickly they hardly realized what they had agreed to.
Negotiate, Negotiate: The leasing process is just that – a process, not an event. The more time you, the tenant, have to put the deal together and make counter-offers, the better the chance you have of getting what you really want. Too often, tenants mistakenly try to hammer out the deal in a two- or three-hour marathon session. It is more productive to negotiate in stages over time.
Educate Yourself and Get Help: Unless you have money to throw away, it pays to educate yourself. Taking the time to read about the subject or listen in on a webinar will make a difference. And, don’t forget to have your lease documents professionally reviewed before you sign them. With hundreds of thousands of dollars in rent at stake, personal guarantees and other risks, you can’t afford to gamble. I n leasing, tenants don’t get what they deserve, they get what they negotiate.
Another contentious issue for new and current franchisees I often hear about is how much real estate help a franchisor does or does not provide. There are, essentially, three main ways that most franchisors provide this kind of support. These are summarized below:
1) The franchisor will conduct site selection, secure and lease the location and then sublease the unit to the franchisee. With this arrangement, the franchisee is obligated to accept the chosen location; however, he/she does not accept final responsibility for the lease. The franchisor, having signed the “head lease” for the location, will ultimately be liable. Should the franchisee struggle or pull out entirely, the franchisor will often try to resell the business to a new franchisee.
2) The franchisor will delegate the leasing process to the franchisee to find and lease his/her own location, often referring him/her to a broker. This is, typically, the worst scenario for the franchisee. A franchisee may be inexperienced in such matters and not know exactly what to look for. You’ve likely heard the adage of “location, location, location” and there are many elements involved with making the best decision.
3) The franchisor or its area manager/developer will conduct site selection; however, will leave the lease negotiations to the franchisee. Typically, franchisees have little or no experience with such matters. The franchisee may well enter into the process unprepared and neither asks the right questions or negotiates effectively. As a result, that franchisee can blindly agree to an inappropriate lease term, accept too much commercial space for his/her actual needs and/or miss out on receiving valuable tenant inducements (including tenant allowances, build-out assistance and/or free rent).
Therefore, before signing commercial leases, franchisees need to understand exactly how much help the franchisor will provide. You can learn what you need to know by asking the following questions:
1) Does the franchisor have an in-house real estate department or person working on salary or receiving a commission from the landlord?
2) Does the franchisor have a real estate department/person who contacts brokers to show properties? Despite what many franchise tenants believe, brokers work for landlords and earn healthy commission checks for signed lease deals. Therefore, that broker may be trying harder to serve the landlord than working in a franchise tenant’s best interest.
3) Does the franchisor have a so-called “Area Developer” who matches franchisees with brokers to conduct site selection? As above, this still leaves the franchisee paired with a broker.
4) Does the franchisor leave the entire matter (of looking for available space and negotiating the commercial lease) to the franchisee?
For a free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail DaleWillerton@TheLeaseCoach.com. Speaking and training enquiries welcomed.
Dale Willerton – The Lease Coach is a Commercial Lease Consultant and author of “Negotiate Your Franchise Lease or Renewal”. Need help with your new lease or renewal? Got a leasing question? Inquire about having The Lease Coach speak at your next franchise conference.