Negotiate Your Commercial Lease
3 Min Read By Dale Willerton and Jeff Grandfield
For many commercial restaurateurs, negotiating a good lease or lease renewal against an experienced agent or landlord can be a challenge. While restaurateurs think of marketing, managing, and menus, they are not real estate focused; savvy real estate agents and brokers are specialized sales people. It is the agent’s or broker’s job is to sell tenants on leasing their location at the highest possible rental rate.
Restaurant tenants 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 leasing a new location for the first time for your new restaurant or negotiating a lease renewal, these are some tips for restaurant tenants:
Allow Sufficient Time
For a new location lease agreement, get started nine – 12 months in advance to avoid unexpected situations and delays. Lease renewal negotiations should begin between 12 and 15 months before the lease term expires. As an existing tenant, if you can’t get a decent renewal rate, would you rather find out you need to move with six weeks or six months left?
Never Just Accept the First Offer
Even if an Offer seems reasonable or you have no idea what to negotiate for, never accept the leasing agent’s first offer. More often than not, this first offer is inflated. Many agents use a strategy of starting negotiations at a higher rate that allows them to give in slightly. The Lease Coach frequently completes lease agreements at 15 to 25 percent less that the agent’s opening offer (in one case, we negotiated the asking rate down from $8.00 psf to under $3.00 psf).
Select the Best Lease Length
While a five-year lease term is still standard for many businesses (seven or 10 years in some cases), it may not necessarily be the best term for you and your restaurant. Three years, or even one year, for some tenants may be better if the cost for leasehold improvements is low enough since these are generally amortized over the life of a lease term. The agent – motivated by a greater commission paid by the landlord – will want you to sign the longest term possible; however, the landlord may be more flexible. Take the lease term that is best for you and your restaurant business.
Who Should be the Tenant?
Don’t enter into 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 a holding company that will become the tenant. If you are negotiating on various locations but don’t intend to incorporate until a later date, then your Offer to Lease should state that the tenant is Your Name on behalf of a company to be incorporated (or Nominee). If you are opening multiple locations, it is often wise to form a new company for each lease agreement as further protection. Furthermore, corporations also have more tax benefits than sole proprietorships.
Avoiding Personal Guarantees
Plainly saying “no” may sound over-simplified; however, this will often be all it takes to avoid them. Too many tenants passively accept a guarantee because it was left to the end of the negotiations for discussion. If you are strongly opposed to guarantees, bring it right out in the open to begin with – before you invest several weeks on the deal. In most cases, a limited personal guarantee (which declines over the course of time) can be agreed upon – but should be equivalent to the tenant allowance of other up-front risks or expenses to the landlord and should not be unlimited. If you agree to a guarantee initially, your lease renewal negotiations are an excellent time to have this removed – after all, you are a proven tenant at this stage.
Negotiate All Lease Terms at Once
Resist the urge to look at your lease as a list of individual points that must be all negotiated separately. All the business terms are connected and must be negotiated collectively. For example, don’t agree to the rental rate until you agree to the length of the lease term.
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 … tenant or landlord. Developing a mindset that includes walking away from any deal that doesn’t suit your needs will save you time, aggravation, and money.
For a copy of the free CD, Leasing Do’s & Don’ts for Commercial Tenants, email JeffGrandfield@TheLeaseCoach.com.