Advertising Expense

Occasionally a landlord will request the tenants to contribute to an advertising fund to promote the shopping center within the nearby community trying to drive additional customer traffic to the center. If your franchise brand mandates that you also advertise locally, point this detail out to your landlord and they may waive or reduce your shopping center advertising fund contribution.  (Read More) 

AM vs. PM Side of Highway

Understand that certain businesses like restaurants and coffee shops (among many others) are dependent on the vehicle traffic generated by the “going to work or coming home” side of the highway. Make sure you “pick” the right side for your business.  (Read More) 

Architect Engagement

Before you can construct your new business in that leased shopping center space you will have to secure a building permit. You won’t be able to apply for that permit until you have architectural plans prepared. To minimize the chance of you paying “dead rent” engage your architect immediately after you have an LOI fully executed. 95% of the LOI’s that are fully signed become fully signed leases since the majority of the major business points are all agreed to.  (Read More)    

Anchor Co-Tenancy

I can’t tell you how many times I have asked a tenant this question. “If your anchor tenant wasn’t there, would you still want to be part of this center?”  The answer is almost always no. Then you must negotiate an anchor co-tenancy. If your anchor was Whole Foods and your business was dependent on the quantity and quality of the customer traffic they generate, what would you do if they left and were replaced by a discount grocery like Sav-A-Lot or a Kohl’s department store. The profile of all the traffic coming into that shopping center would be radically different and your business would severely impacted.  (Read More) 

Brokers

Did you know there are specialties in the broker industry? There are residential brokers, industrial brokers, office brokers and commercial brokers to name a few. And some of the commercial brokers have sub-specialties like restaurant brokers. Choosing a commercial broker that closely mirrors your future business will provide you with potential sites you didn’t even know where available. These are called “off market opportunities.”  (Read More) 

Cap on NNN Expenses

NNN are TAXES, INSURANCE and COMMON AREA MAINTENANCE. (CAM) Every tenant should request an annual cap. Since Taxes and Insurance increases are outside control for the landlord, 99% of the landlords will not cap these increases. But CAM is within the control of the landlord and an annual cap should be requested. 5% -8% annual cap is norm, sometimes higher sometimes lower. For a tenant, any cap is a good cap since it will limit the annual increases of these CAM expenses.  (Read More) 

Continuing Operating Provision

We’ve all seen it. Example: A Wal-Mart anchored center generates tons of traffic for all the small shop tenants in the parking lot. Then Wal-Mart decides to build a new super center a mile away and all those small shop tenants are stuck with years left on the lease and no traffic from the vacant Wal-Mart. If they had a continuing operating provision they would have been entitled to a rent reduction or the right to terminate their lease since the anchor tenant is no longer operating.  (Read More) 

Dead Rent

Throughout the PRS website we share the fact that paying rent before you are NOT OPEN is dead rent and not paying rent when you are OPEN is free rent.  I wanted to add an additional clarification because we hear this from our new subscribers so often. Once the landlord provides you the keys to your leased space, (turnover) and you embrace the permitting and building part of the process, that IS NOT a FREE RENT PERIOD. Yes, you are in the space and not paying rent BUT you are not open. That is your BUILD OUT PERIOD. Many new tenants underestimate their BUILD OUT PERIOD, and they miss their Rent Commencement Date (RCD) resulting in DEAD RENT. Always make sure you negotiate enough BUILD OUT TIME to construct your business before your RCD occurs.  (Read More) 

Exclusive

How many times have you seen multiple hair salons or multiple pizza parlors in the same shopping center. WHY? Because the first one that signed a lease neglected to negotiate an exclusive to close the door on an exact competitor coming in behind them. If your business is specialized, include an exclusive or select a different site where you have an exclusive.  (Read More) 

Financing Contingency

You found a great site and the lease is negotiated and ready for signature, but your SBA Loan is still in process and your funding isn’t secure. The landlord is applying pressure to sign the lease or lose the location. What do you do? Add a financing contingency providing you with up to an additional 60 days to secure funding or you have the right to terminate the lease. The landlord will now have the security of his future tenant and you will be granted additional time to finish the funding process.  (Read More) 

Future Roadway Construction

If the location you have selected has major future road construction planned in front, please just pass on that site until the construction is complete. Tenants have suffered for months and in some case years when the roads in front of their shopping center have been torn up. If you are aware of future road construction, just pass on that site.  (Read More) 

Inspections

Remember when you last bought your home? Didn’t you hire someone to perform a home inspection before you closed on the house? If you are about to lease a second-generation space, especially if it’s a restaurant PLEASE spend the money to have the premises, utilities, HVAC units, bathrooms, professionally inspected. If the inspection reveals concealed damage, you can incorporate those variables into your next round of landlord negotiation before the lease is executed.  (Read More) 

Lease Renewal Timing

How long did it take for you to find your first location? Include the site search period, the LOI negotiation, the Lease negotiation, architectural plans, applying for a permit, selecting a contractor, constructing your business then scheduling the grand opening. 12 months, 18 months, 24 months? As you approach the end of your lease that is the same lead time you need to have your current lease extended so you can rest assured you have a place to operate after your end of term. Don’t assume your landlord will be reasonable and grant you a modest rent increase. Be prepared with enough lead time for the possibility of having to relocate.  (Read More) 

Liquor License Contingency

Some variables are outside your control. Like when will the local liquor board approve your application to sell beer and/or wine in your restaurant. In Pittsburgh, a restaurant was giving away free beer when a meal was purchased because the rent started before they had a liquor license. A contingency would have prevented that unfortunate costly situation.  (Read More) 

Location, Location, Location

Great expression and we’ve all heard it before. Actually, there are SIX variables that contribute to great site selection. Proper Square Footage, Correct Demographics to mirror your customer base, Accessibility, Visibility, Parking and Economics. Which is most important? The one you compromised on. If you don’t have all six, keep looking for the right site.  (Read More) 

Market Rent Options

An option, after the original lease term, is a period of time that the tenant may extend their lease. 95% of the time, these options reflect a negotiated and agreed upon fixed base rent number. For example: Original term $20.00 psf for years 1-5. Two five-year options, each with a 10% bump in base rent so (if exercised) years 6-10 will be $22.00 per square foot and years 11-15 will be $24.20.

Occasionally a landlord will request the tenant to agree to “market rates” at the time an option is exercised in the future. This structure should not be agreed to by the tenant. An option should be a tenants option and they should have a fixed base rent number agreed to for the option in the LOI stage and that will of course be included in the lease. In those circumstances when the tenant does agree to market rate option rates, seasoned tenant negotiators will refer to those are “phantom options” because they hold little value to benefit the tenant. Also, under no circumstances should a tenant agree to a mandatory increase in the option period when agreeing to a market rate structure.  (Read More) 

Negotiating Options

If you signed a 10-year lease you probably received two-5-year options. And hopefully you agreed to specific base rent psf figures in those options. If so, you are in the perfect position to approach the landlord in the 8^th year and advise them you can’t afford to exercise the existing options, they are just too expensive. If you are successful in renegotiating your options look at the occupancy costs you just saved. If you were not able to renegotiate the options your fallback is to exercise the option. But you tried.  (Read More) 

Norm

In commercial leasing there is “norm”. What is “norm?” Answer: A typical, acceptable deal structure that every experienced broker, landlord and tenant has used over and over. The perfect example is term and options. If a tenant leases a space for 10 years, they should receive two five-year options. Lease a space for 5 years and receive one five-year option. That is “norm.” Novice, or first-time tenants, going it alone, rarely are successful negotiating “norm” and their lease structure reflects those omissions.  (Read More) 

Parking

To maximize tenant sales, you must ensure you have enough parking for all your customers. For illustration I’ll use the example of a 2,000 square foot free standing restaurant with 40 seats in the dining room. You should assume to fill all those 40 seats you will need 20 parking spaces assuming two people per car. Then add the number of employees you have, assume 6 (front and back of house) and you need 26 minimum parking spaces. Don’t fall in love with a site that doesn’t have enough parking spaces. Otherwise, you’ll never maximize your sales potential.  (Read More) 

Parking Restrictions

Based on how desirable your tenancy is, the landlord you may or may not be able to include a parking restriction that will limit parking intense uses like a gym similar to Planet Fitness or Orange Theory Fitness for example. As a desirable tenant you may also request specific parking spaces be labeled only for your customers.  (Read More)     

Personal Guarantee Language

Every lease will contain this provision and no two are the same. If you close your business before the end of your term the landlord will hold you personally accountable for all or a portion of the base rent and triple nets. Tenant Improvement Allowance, Extensive Landlord Work for your tenancy, Broker Commissions paid, all play a part in how your personal guarantee language will be structured.  (Read More) 

Pro Rata Share (part 1)

Every tenant knows they pay their prorata share of the triple nets, (CAM, Taxes and Insurance). For example: If you lease 2,000 square feet within a 100,000 square foot shopping center which includes a 50,000 square foot supermarket, the tenant will pay 2% of the triple nets, because you are leasing 2% of the shopping center. Be careful. Is the 2% of the shopping center based on leasable area or leased area. (Able vs ed) Because if it is based on leased and your 50,000 supermarket vacates the center your prorata share just doubled from 2% of NNN to 4%. And to make matters worse you lost the traffic that anchor was generating.  (Read More) 

Pro Rata Share (part 2)

Every lease states you pay your prorata share of NNN based on the percentage of the shopping center you are leasing. Be aware, if your shopping center is expanded your prorata share should also be adjusted lower. Example: Your leasing 2,000 square feet in a 100,000 square foot center = 2%. If the center is expanded to 200,000 square feet your prorate share should be reduced to 1%.  (Read More) 

Radius Restriction Imposed by Landlord

Occasionally a landlord may include a radius restriction provision in their lease form. This clause will restrict the tenant from opening an additional location within a certain distance like 1,2,3 miles. Typically, the rationale behind this clause is the landlord has a percentage rent clause and they will be trying to maximize their percentage rent payments. Tenants should avoid having this clause in their lease and never have a radius restriction if they do not have a percentage rent provision in their lease.  (Read More)   

Relocation Clause

Occasionally a landlord will request a relocation clause be contained in your lease that would permit him to pay to relocate you for (as example) the expansion of the shopping center. Every tenant should try to delete this clause. Under defined conditions the tenant can be “made whole” with a relocation clause, but it still includes a major disruption to your ongoing business as the landlord tries to make his center even better.  (Read More) 

Reconciliation Statement

Throughout the year your landlord will send you your CAM, Taxes and Insurance statements. At the end of the year they will provide a Reconciliation Statement that provides all the details of the expenses incurred within the Common Area Maintenance section. These expenses will include grass cutting, landscaping, electricity for parking lot lights, security, etc. and up north snow and ice removal expenses. What can be included in CAM should be listed in your lease. Double check your Reconciliation Statement to ensure additional unauthorized expenses like shopping center advertising used to promote your center haven’t been included driving up your CAM expenses.  (Read More) 

Sales Kick-out

So, you really like the site, the economics seem reasonable, competition is manageable but you still aren’t sure about making a long term, multi-year commitment. Consider a sales-kickout provision. For example: If sales don’t exceed $500,000 in the third year of business (measurement year) you have the right to terminate with six month’s notice.  (Read More) 

Sales Reporting

Landlord’s will frequently request tenants to report sales on a monthly, quarterly or annual basis. Most of the time it is because a percentage rent clause was used in the negotiation and once a breakpoint has been reached in sales, additional rent must be paid to the landlord. Therefore, a tenant providing an audited sales report (frequently the same one provided to the franchisor) is mandatory to ensure percentage rent is paid when owed. Under these circumstances a tenant reporting sales is acceptable. If there is not a percentage rent clause in the tenant’s lease reporting sales should be avoided so the landlord will not be able to calculate the rent to sales ratio which can be used against the tenant during future negotiations like exercising options and end of term renewals.  (Read More) 

Signage

Typically, a new tenant will have two specific locations to install their signage when leasing space within a shopping center. First is above their storefront, subject to landlord approval and local codes. Second is on the shopping center pylon or monument sign based on “panel availability”.  First definitions: A pylon sign is a sign mounted to a pole. A monument sign is a collection of signs constructed on the ground. When a tenant is visiting shopping centers, make a note of the names on the pylon or monument signs. BECAUSE, frequently there are not enough sign panels for every tenant in the shopping center and these panels will be in high demand, and on a first come, first request basis.

If the former tenant space you are leasing had previously secured panels on the shopping center monument or pylon sign, include those specific panel request in your LOI and your lease to be assured they will be assigned to you. Taking a photo of the pylon and pointing to the specific panel being leased (and including it as an exhibit to your lease) is the best way to assure those panels will be assigned to you. Do not assume because the former tenant was assigned those panels they will be assigned to you, as the replacement tenant. Last point, if there are no vacant panels available, and the tenant you are replacing also did not have an assigned sign panel, request the right of first refusal so when the next panel is available (because a tenant leaves the center) it will be assigned to you.  (Read More) 

Site Plans

If the shopping center you have selected is new construction ALWAYS make sure a copy of the approved site plan is an exhibit in your lease. Frequently the city may reject curb cuts, parking spaces, traffic lanes you had planned on for the convenience of your customers. If the site plan changes after you signed the lease you would have the right to terminate your lease rather than be stuck with a location without everything that had been promised.  (Read More) 

Traffic Patterns

Accessibility into your selected site is of the utmost importance. Your site either has FULL ACCESS, RIGHT IN / RIGHT OUT, or you may have a DIVIDED HIGHWAY in front with or without a dedicated turning lane. Or maybe a U-TURN is required to enter or leave your center. Before you decide on a location put yourself in the place of your customer and think would they be willing to deal with this entrance? If not, pass on that site.  (Read More) 

Utility Stub-ins

If you (as the tenant) are leasing a first-generation space, utilities will either be brought to your premises, the building or the parcel. Having the properly sized utilities brought into the premises will be cheapest for the tenant and bringing them in from the edge of the parcel will cost the most.  (Read More)