Commercial Leasing “101” for Franchise Tenants
As we emphasize in our new book, Negotiating Commercial Leases & Renewals FOR DUMMIES, starting the leasing process in the right direction is critical if you want to achieve the best results. If you take the wrong path or veer off in the wrong direction, you may not achieve your goals or your franchise business’s full potential. That is how important the leasing process is. Errors, miscalculations and bad advice at this stage can be difficult to fix later on.
To make the best leasing decisions, you need an inside and outside view of the different types of buildings or properties available. Then, utilize a checklist to help you determine the pros and cons of different sites. The goal should be to lease the premises that will provide you the most profit. On the surface, it seems that picking the best building would be advantageous; however, your particular business may not be able to afford or even justify paying the higher rents in more expensive properties. The last thing a franchise tenant needs or wants is to find out they have signed a long-term lease agreement in the wrong property.
During the initial leasing process, franchise tenants invariably encounter and deal with commercial real estate brokers and their agents. At The Lease Coach, we find that the majority of all commercial real estate is listed with commercial brokers, so the chances of not dealing with one are slim indeed. Franchise tenants need to understand that such agents work for the landlord and earn a sizable commission for each completed lease deal (when the franchise tenant agrees to lease more space, take a longer lease term or pay an increased rental rate, that commission, typically, increases). Therefore, agents are not trusted tenant advisors, but instead, they are professional sales people.
When it comes to negotiating a new lease or renewal, turning to professionals can save you time, aggravation, and money. Professionals you can choose to work with include a real estate agent, lawyer or professional lease consultant. Investigating and evaluating the right professional to help you can be the difference between success and failure.
The rental rate is one the most focused-on business terms, perhaps rightly so because it is one of the biggest factors determining the success or failure of your franchise business. At The Lease Coach, we look at how the landlord determines the rental rates, how to determine what you can afford to pay, and how to negotiate the best rental rate. The rental rate goes beyond one simple number – it can include additional rent often called operating costs/common area maintenance/CAM charges (costs benefitting all tenants associated with maintaining and managing a property, including maintenance, garbage removal, landscaping, etc) and perhaps percentage rent (rent paid by the tenant in addition to the minimum rent calculated on a percentage of sales over a natural or artificial breakpoint), which can dramatically increase the total payment you make each month.
Choosing the right commencement date is also important – this is when you will take possession of the premises once the lease agreement has been signed by both parties. Traditionally, a franchise tenant would spend one to three months building out their space before opening to the public. A lot can go wrong during that time. Franchise tenants must know how to hold the landlord accountable and how to ensure and protect their rights in advance when the unexpected occurs.
As a final note, deposits are also a misunderstood component of the leasing process. Many franchise tenants are misled into believing that deposits are mandatory and are pushed to provide larger deposits than may really be required or justified.
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to JeffGrandfield@TheLeaseCoach.com.
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.