Chapter 1
Yes, You Can Negotiate a Great Commercial Lease
In This Chapter
Making the most of this book
Starting the commercial leasing process
Seeing the leasing process through the landlordâs eyes
The business terms of a commercial lease agreement, combined with the location, represent the platform that your business or company is built upon. Your business may be able to change its products, services, pricing, and marketing â but once youâve signed a long-term lease commitment, youâve got to make the location work. Itâs do or die time. And the more money you spend building out your location, fixturing it, and stocking it with merchandise or inventory, the more capital you have invested in the success of that business.
If we could have one wish come true, it would be that business owners take the leasing process more seriously and realize that when the dust settles, they better have gotten it right, because profit is king. And it all starts with the location and lease agreement.
This book aims to spell out how you can successfully negotiate a great lease. But first, a few preliminaries.
Understanding What a Profitable Lease Agreement Is
A profitable lease agreement does two things:
It lets you the owner, operate a successful business, drawing a good salary from the company while servicing the bills, loans, and debts of the company. It gives you the privilege of employing people, and possibly allowing for future expansion, and thereby becoming truly rich and profitable at multiple levels.
It enables you to acquire equity and goodwill, possibly leading to selling the business, recouping the investorâs capital, and either retiring or allowing you to open another business.
The future salability of the business is often overlooked by business owners. The Lease Coach is often hired to work with entrepreneurs and business owners when buying or selling a business because a commercial lease agreement is involved.
Too often, The Lease Coach sees business owners not only struggle to take home a salary, but at the end of their 5- or 10-year lease term, they end up closing the business because no one wants to buy it. There was a story in Daleâs local newspaper about a family-run business that after 30 years simply closed its doors for retirement. No one wanted to buy the business, which was a shame. You can assume that the owner of the business didnât get rich running his business or it would have had many suitors willing to buy it. If you spend all those years building a business and then you canât sell it, you canât get those years back.
Avoiding bad leases and knowing what makes them bad
A bad lease agreement may hold you back from making a good profit. A bad lease agreement could mean a bad or mediocre location. Dale and Jeff see this all the time. Great retailers, superb restaurateurs, exceptional service businesses in poor or mediocre locations do less business than they could in a better location. On the other hand, perhaps you picked a great location, but leased too many square feet (or too few), this can be a problem as well.
Combine a poor location with a high rental rate and you have a recipe for disaster. Your business will never succeed, let alone sell for a profit. Too many entrepreneurs are shopping for cheap space, but for the most part, you get what you pay for location-wise. This isnât to downplay the need for skillful negotiation; you donât want to pay too much for a good location â itâs all relative. In many of the larger plazas and enclosed malls, the property in general may be recognized as an excellent location, but getting stuck in a quiet area of the property may make your business less visible than you would like.
A lack of adequate parking for your customers can make for a bad lease. A multi-unit restaurant tenant The Lease Coach is currently working with for a midterm rent reduction has come to the unfortunate realization that their newest location is parking starved. Just when people are hungry and want to come to their restaurant, the parking lot is already full of vehicles. Customers come in to complain that they canât find a parking space even close by â and many times cancel their reservation, go back to their cars, and drive away.
High rental rates â especially if combined with restrictive terms that make running your business difficult, if not impossible â can also hamper your future success.
Making a good lease a great lease
Brevity in a lease agreement is the enemy of most tenants. A good lease agreement is longer, not shorter. Never assume that what the lease doesnât say will play out to your benefit later â it wonât. As the tenant, you want everything that could possibly be an issue addressed in your lease agreement.
Often itâs whatâs missing from a lease agreement that really comes back to hurt the tenant.
For example, if a business owner wants to sell their business and assign their lease agreement to the buyer, the lease must have a comprehensive lease-assignment clause. However, landlords often include conditions controlling or potentially prohibiting the lease assignment (unless suitable wording is added for the tenantâs protection). Another example is that most lease agreements have a permitted use clause stipulating what products or services you can sell â or perhaps not sell. If you open a ladies clothing store and realize you also want to sell shoes, handbags, watches, and other accessories; you may not be able to sell them if your lease agreement specifically states that your permitted use is ladies clothing. Anticipating what items you may want to stock or sell will allow you to negotiate and add appropriate wording to the permitted use clause.
Making a good lease great requires anticipation of what may change in your industry, in the economy, and with future competitors, and then capturing all that into the lease agreement.
Making a good lease great means removing, deleting, or negotiating restrictive clauses in the lease agreement that will hold your company back. For some tenants, the renewal-option clause can be the difference between whether you get to stay in your location for several renewal terms. A demolition clause can force you to move out of the premises if the landlord wants to knock down the building and put up a different type of building. A relocation clause can force you into a costly relocation. All of these are scary scenarios requiring proper guidance from a professional lease consultant who is working for and being paid by you to protect and serve your needs â the tenant.
Negotiating a truly profitable lease agreement
A profitable lease agreement may include an exclusivity clause preventing your indirect competitors or neighboring tenants from selling your primary permitted use products or services. A profitable lease agreement would include a clause allowing you to operate the days and hours of your choosing. This can also mean the right to close or open early/late hours on days where it is unprofitable to remain open. One landlord wanted to require that an optometrist tenant (our client) open on Sundays. We negotiated so that the doctor was allowed to close on Sundays and holidays.
Try to think in terms of whether youâd buy this business based on its current lease agreement. As a prospective buyer, what parts of the lease agreement would you not like? Would the rent seem high? What about the operating costs? Would a shortage of parking or an undesirable neighboring tenant drive away both your potential customers and buyers of your business? Thinking about these issues beforehand can make all the difference to your decision-making process.
Seeing yourself from the landlordâs perspective
Business owners often fail to understand that a landlord doesnât just want any tenant; they want the best tenant possible. Most landlords prefer to have national chains and companies with locations and offices across the country. One of the jewelry store chains The Lease Coach works with has several hundred stores in 19 different countries with a strong presence and track record for both success and for paying percentage rent. The jewelry chain started with corporate stores and once success was imminent, they began franchising. As a landlord, you can see why this type of jewelry store concept may be preferable to a mom and pop operation or independent tenant.
Whether youâre launching a new concept or copying a successful one is relevant to the landlord. Your business plan, your financial status, and your background are important to the landlord. If youâre a respected mechanic with years of experience, you may be successful running an auto repair business because that business is one you know. But if youâre a schoolteacher who suddenly receives a large inheritance, and can now quit your job and open the business youâve always wanted â a personal fitness business, a cupcake shop, or a restaurant â the landlord may not be as certain about your future success.
Landlords love to lease space to national chains and franchisee tenants who ...
