Maximize Your Restaurant’s Lease
QSR Magazine | Special Online Feature
| January 2007 | by Fred Minnick | page 1
Don’t let landlords get the best
of you. Be informed and know your tenant rights.
For 15 years, C.J. Engelsher has dreamed
of opening Meltz, a fast casual that will offer premium
sandwiches.
Right now, Meltz only exists on paper.
Engelsher, a Le Cordon Bleu chef and former Carlson’s Restaurants
Worldwide general manager, has been searching for the right location.
He wants a 2,000-square-foot end cap smack in the middle of an
Orlando, Florida, business district or shopping center.
When he found the perfect spot, he was
ready to start making sandwiches. However, Engelsher and his partner
made no hasty business decisions.
“A lot of people will just
find the location, be happy with it, and sign the lease,”
Engelsher says. “You can’t do that. There are so many
hidden things to your detriment that you need a lawyer to look
the lease over.”
After his lawyers read the Meltz lease,
Engelsher learned the common area maintenance and tenant improvement
allowances were too steep for the proposed rent—mid $20s
per square foot. But the deal breaker was the open date. The landlord
wanted December, Engelsher requested May.
“Anytime you settle on a site
and it falls through, you feel…a little disappointed,”
Engelsher says.
Although disappointed, Engelsher at least
investigated the contract. Only 50 percent of independent operators
invest in brokers or real estate attorneys, says Marty Kotis, president
of the Council of International Restaurant Real Estate Brokers.
With 52.7 percent of limited-service operators leasing land and
building (NRA 2004), Kotis says there’s plenty of help available
for franchisees.
Most franchisors offer real estate and
lease support, he says. “The only ones who don’t are
the franchisors who don’t care about the building or the
franchisee’s lease…They just want to sell franchise
agreements.”
Even independent operators have free consultation
available, Kotis says, through commissioned brokers. But Engelsher
says some brokers don’t have the operator’s interests
at heart.
“We worked with a broker
who obviously only cared about his commission check,”
Engelsher says. “When we challenged some fees, the broker
said, ‘the key is to get in there before somebody else gets
it. Don’t worry about this other stuff.’ It was obvious
where his loyalties were.”
Nonetheless, Kotis warns operators not
to tackle lease negotiations themselves or to hire general commercial
real estate consultants.
Non-restaurant brokers and real estate
attorneys “tend to over-butcher a lease,” Kotis says,
and “cut out critical points.”
Letters and exit strategies
There’s more to a lease than rent
fees, says Marc Frankel, managing director of Newmark Knight Frank
Retail. As an expert lease negotiator, Frankel has represented
Chipotle Mexican Grill, McDonald’s, and California Pizza
Kitchen, as well as Rite Aid, Marriot Corporation, and several
landlord companies. Whether his clients are developers or tenants,
they sign a letter of intent before pursuing negotiations.
“A letter of intent is not
a binding document, but it gives you something to work with,”
Frankel says. Typically included in this letter are base rent (industry
average is 8 percent of total sales, he says), maintenance, rent
commencement, utilities, and renewal options. These points serve
as the process’ foundation.
“Negotiating a letter of intent will save a lot of pitfalls
and might save $30,000 in attorney fees during actual lease negotiations.”
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