Negotiating Terms of a New Lease

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Permalink Reply by David Stein on December 18, 2007 at 8:14am

As a Broker heavily involved in Tenant Representation in South Florida with a focus primarily in restaurants please allow me to submit my comments to the orginal post. Please consider the fact that most of these are a result of experience in and are specific to the Miami Metro Market.

1. Site selection; this is obviously one of the primary considerations when expanding. Do you plan on being home bound or work bound? Are you a destination concept? Is there real any real pedestrian traffic? Is parking an issue? Can people get to your concept before they decide to move on? What type of competition surrounds you (read: are you the tenth smoothie concept within a three block radius?)? Do the demographics match your target customer base? Do the projected demographics accurately reflect the current population? Can you get sufficient signage and are you visible from the street?

2. Personal Liability. This is and will continue to remain a stickler for years to come. As it should be painfully obvious the turnaround rate on restaurant space is extremely high. As an independant concept owner, what incentive does the Landlord have to lease to you vs. leasing to clothing store? Can he borrow against the strength of your tenancy?

3. Tenant Improvement Allowance. See above. Why would a Landlord cut a check to someone for $100k when they can't even garauntee that they will be in business six months after? For some of the larger properties owned by larger institutions or for the office building/hotel with ground floor space the situations are bit different. Generally speaking, unless you are Starbucks or a celeberty chef the likelyhood of a Landlord cutting you a check equal to 2/3 of their net operating income is extremely slim with no real upside for the Landlord.

4. Rent before opening. Most Landlords who are properly represented are not going to sign an open ended lease; it is in the best interest of the prospective tenant to have all their ducks in a row prior to sitting down for negotation. Was this space a food use before? What type of new permits do I need to pull? Do I have build-out estimates already?

5. Once again, why is a Landlord going to lease to you with no rental income stream for a year? There are other methods to offset the first few months rent.

6. Percentage Rent in Miami is not very previlant. For the most part, avoid it like the plague. I don't know anyone who wants the Lanlord in their books.

7. Warm Shell Build-out. What is the incentive to the Landlord?

8. Why would they? If your concept fails and you want to dispose of the lease this license only adds value to your location and will help recoup some of the money you invested (if your lease is assignable).

9. If it's a single tenant property do not pay for outside seating. If you are part of a multi-tenant building there may be some element of CAM for your outisde seating areas. Do make sure you have the proper permits for outside seeting if necessary.

10. Correct. Tenant Rep's get paid from the Landlord.Unfortunately there are rare situations where the listing broker and/or Landlord refuses to cooperate and pay.

If anyone would like further information or is planning on expanding in the South Florida market please feel free to contact me at:

Dstein@naimiami.com
305-938-4000

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Permalink Reply by Michael L. Atkinson on December 19, 2007 at 9:55am

All good points. The reality is everything is subject to negotiation and interpretation.

I was talking with an operator just yesterday about this. Tom is the COO of a growing Sushi chain that has remained in one market for some time. They are an award-wining restaurant concept, great package, excellent food and experienced team with a decent balance sheet. As they venture into new, unknown markets, where their brand equity is zero, they have been able to negotiate very favorable leases with TI's over $100 a foot. In fact, at one lifestyle mall, $130 a foot on a 6,500 sq. ft. location. Why? because they bring a lot to the party, like...

Experience
This mitigates risk and provides a better tenant to the landlord.

Package and track record
This helps generate buzz in the local market. They have a lot of media stuff for the "ego" wall so customers know they are the real deal. A good package also means, typically, an expensive package so the operator has "skin-in-the-game. Landlords like it when there is something beyond their reputation at risk.

My experience has been that good concepts (regardless of whether there is a celebrity chef involved or not) with a track record could be an attraction. Smart landlords use this as a marketing vehicle to attract the other valuable tenants to round out their mix.

There are no guarantees in life. The landlord can't guarantee thru-put any more than the operator can guarantee performance and success. There has to be a win-win relationship.

Restaurants are expensive to build these days. Even a burger joint with a clean package can cost over $400 a sq. ft. Asking the landlord to pay less than 20% of the total development costs isn't out of line. For one, you are improving his property. So there is a strong the likelihood that $75 a foot will go to plant and facility not a refer. And, the landlord can control where the TI is spent.

On rent. My point of view is from a strip center or shell, not ground up. That would take the form of a ground lease, probably. On a shell, landlords typically negotiate a term for construction that is reasonable. Now in S. Florida, especially Miami, the permitting process is long and getting longer. A former client of mine took a year to get construction going. But, they only paid rent when they opened.

On shells, warm is better than converting a retail store to a restaurant. Doesn't always work but life is a negotiation. :-)

On expensive liquor licenses. This is done all the time in those few areas of the country where the cost to secure a liquor license is prohibitive. If the cost of entry is say, $250,000, (Rare i do admit) this eliminates a lot of good, successful operators that may be perfect tenants. Smart, well-capitalized landlords can buy it, add it to the lease, lease it to the operator and get a ROI. It's an asset that stays on the balance sheet of the landlord. If the operator fails, you as the landlord, have a valuable property that can attract a new tenant fast. In states where this is a tangled web, just attach it to the property.

This just happened at a major resort near Lake Tahoe. The developer wanted a particular tenant but the successful operator balked at the price of the liquor license. They were used to paying a few thousand, including legal expenses. But, the price for admission in this county is $250,000. The developer/landlord eliminated the objection and bought the license and attached it to the location. Problem solved. Happy developer, happy operator (who also scored $125 a ft. in TI) and now, very happy customers. The operator ended up investing about $1.2 million after TI, so everyone has risk and potential reward.

Bottom line, it’s all a negotiation. If you don’t ask, you never get. Small independents will struggle to get good deals and good locations. Good operators with good concepts and a good track record tend to end up with better deals.

RE is tricky and a good broker is worth their weight in gold.

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Permalink Reply by Mark Frank on November 19, 2008 at 5:09pm

You are a master of tact and diplomacy and quite a bit of experience I might add. I really like your thoughtful response. My experience, which is considerable, models your posted response.

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Permalink Reply by Connie, One Fat Frog on November 29, 2008 at 4:05pm

What are opinions about optioning on neighboring properties so that you have first right of refusal when it's time to expand?

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Permalink Reply by Haridas Rao.D on December 18, 2007 at 9:51pm

Sure. The LEASE PERIOD should be not less than 5 years. And it should be renewable too.
We have a small Resort at a height of 2500 ft from Sea level for LEASE. It has only 16 rooms at present but the owner has agreed to provide 9 more. Is asking for only a Security deposit of US$ 1 M and the lease amount is negotiable. It has 10 acres of Land, it is near to 2 wild life santuaries and is a known and Govt recognised Tourist location in Kerala State of India. Any body interested can contact me. The Security deposit is fully refundable but caries no Interest. The Resort was having practically full ocupancy for the 10 months and 2 months of Monsoon are the only lean months.

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Permalink Reply by Haridas Rao.D on December 20, 2007 at 4:06am

Hi Michael,
I have added you as my friend and added a few photos of the same Resort for you to asses its potential to a buyer.
Regards
Haridas

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Permalink Reply by Ric Ruggieri on February 18, 2009 at 7:03pm

I am looking for advice on percentage leases. I need to know the different types, and what is customarily included in the parameters of the agreed percentage. I have read that you should not go over 8% total occupancy cost to remain profitable, no more than 6% of that being just rent. This is going to be the most important negotiation of the lease. Also how do you get the lessor to follow through on commitments. Any help would be appreciated. Ric Ruggieri

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Permalink Reply by Allan Marquardt on May 11, 2010 at 7:39am

A little late, but perhaps this will be helpful to others. Percentage rent should be a two-way thing. It allows the landlord to put his faith in his center when the restauranteur is uncertain of prospects. Of course, there needs to be sufficient faith in the operator, not just that he/she can operate well but that the concept will remain relevant throughout the lease term. If that credibility exists, then percentage rent allows LL to lower the rent to draw the user in without sacrificing upside as a result of the lower fixed rent obligation. If structured properly, the deal should be a win-win for both parties. National chains try to keep their occupancy cost in the 9% range, but that includes the extras beyond rent (like real estate taxes and common area maintenance). Developers, on the other hand, view restaurants in many different ways. Some WANT to see restaurants cycle out to keep a center fresh with the latest concept. They'll view any food retailer whose occupancy cost is below 10% as an opportunity to jack them up above 20%, at which point they'll have to exit, making room for the next operation. The landlord's advantage is the mix of tenants and his/her own success at maintaining a steady draw to the Center. The restauranteur's advantage is his/her track record of operating consistently and growing business.

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