Tenants Don’t Get the Lease They Deserve, But the One They Negotiate

October 2007 Franchising World

It’s like a boxing match…punch and jab, punch and jab.
By Dale Willerton

A large number of franchisees and even franchise systems attend leasing seminars. Negotiating a great, or even just a good lease or renewal, can be challenging for both franchise companies and their franchisees. When it comes to site selection, there is a jungle of real estate choices and opportunities out there that few tenants know how to maneuver.

While most franchise firms legitimately try to help their franchisees with real estate, more often than not, it’s the tenant who signs the head lease and accepts responsibility for making rent payments. Tenants may go through the leasing process once or twice in their entire lifetimes. Real estate agents and landlords negotiate leases everyday for a living; they are experienced at the leasing process and are good at it.

A daily newspaper quoted me a few years ago as saying “tenants don’t stand a chance negotiating leases against seasoned realtors who do it every day for a living”…and that statement is still true today. Tenants must be prepared to negotiate aggressively. These leasing tips will help introduce a world of possibilities when negotiating a commercial or retail lease or renewal for a franchise location:

Negotiate to Win
All too frequently, franchise tenants enter into lease negotiations unprepared and do not even try winning the negotiations. It’s almost as if they are applying for the privilege of paying the landlord rent money for five or 10 years. If one is not negotiating to win, one won’t. With big commissions at stake, people can be sure the landlord’s agent is negotiating to win and so should the franchise tenant.

Create Competition for Your Tenancy
Tenants must negotiate on multiple sites if they expect to get the best possible deal. If a franchisee falls in love with one location, they often neglect to consider alternative locations. By negotiating simultaneously on multiple sites (even if one is a favorite) one will get a better deal. This also applies to lease renewal negotiations. Most franchise tenants don’t want or plan to move, but that shouldn’t mean letting the landlord take advantage of the situation. Competition for tenancy is good, but one has to create it.

Be Prepared to Walk Away
Try to set aside emotions and make objective decisions. Whoever most needs to make a lease deal will give up the most concessions. Without burning any bridges, try walking away from the deal and see if the landlord’s agent comes running after. If he does, then one can negotiate from a stronger position and get what is wanted. However, if they do not pursue tenancy, one can regroup and re-approach them. Most landlords hold back incentives until this stage. Even a great franchise concept will perform poorly in a weak location.

Ask the Right Questions
Gathering information about what other tenants are paying for rent or what leasing incentives they received, and asking the right questions will position one to get a better deal. Consider that the landlord and his agent know what every other tenant in the property is paying in rent. They also know who got the most free rent and tenant allowance. One must do his homework too and gather information from other tenants and reliable sources. Often the landlord or agent will share deal terms for other tenants if asked, but one must ask.

Brokers … Friend or Foe?
Real estate brokers and their agents typically work for the landlord who is paying their commission. Some franchise systems mistakenly let real estate agents, who are being paid by the landlord, represent their valuable franchisees.

If the landlord is paying the agent a hefty commission, then the landlord expects the agent to get him the highest rental rate, the largest deposit and the greatest security or personal guarantee possible. Landlords typically pay brokers a 5 percent commission on base rent for the entire five-year term (and usually 2 percent for years 6 to 10), therefore, the broker earns more money if the franchise tenant pays a higher rent, leases for a longer term or leases more square feet, even if the tenant doesn’t need a larger area. Because landlords often deduct the dollar value of the free rent and tenant allowance before calculating the agent’s commission, don’t expect the agent to work to get the tenant these incentives. Landlords normally add the agent’s commission into rental rates one way or the other.

Franchise organizations must evaluate each party’s role in the process. One does not need to try to exclude the landlord’s agent if the agent has a listing on the property. Just don’t think that the landlord’s agent(s) are working for the franchise company or the franchisee tenant.

Site Selection “No-No’s”
Never let one agent, who is being paid by landlords, to show an interested party space around town or show another agent’s listing. Always conduct site selection by directly contacting the listing agent for each property. If multiple tenants are trying to lease the same location, the listing agent may be motivated to conduct a deal with a tenant that came to him directly versus a tenant introduced by an outside agent who will now split the commission.

Never Accept the First Offer
Even if the first offer to lease seems reasonable or one simply has no idea of what to negotiate for, never accept the leasing agent’s first offer. In the real estate industry, many things are negotiable and most landlords fully expect to receive a counteroffer. In fact, it is similar to a boxing match. A good lease deal doesn’t materialize over one or two rounds, there needs to be a constant back and forth, punch and jab, give and take process between tenant and landlord. The reason the tenant usually comes out on the losing end of the lease deal is from lack of experience, guidance or stamina.

Ask for More Than You
WantIf the tenant needs three months of free rent, then ask for five months free. No one ever gets more than he asks for, but one should be prepared for the landlord to counteroffer and negotiate as well. Don’t be afraid of hearing “no” from the landlord–counteroffers are all part of the game. Most franchise companies have a cookie-cutter mentality to doing deals, but if a tenant can get more incentives, more free rent, more landlords’ work, why stop with cookie-cutter. It’s okay to go for all one can get in a lease deal.

Avoid Five-Year Terms
For a franchisee to open a store in an enclosed shopping center or retail strip plaza around October makes sense because of the upcoming busy Christmas season. However, instead of signing a five-year lease term, which forces him to negotiate the lease renewal when space is in high demand (right before the Christmas retail season five years later) one can opt for a 64-month lease or a 56-month lease term. Strategically ending the term when fewer deals are being done in the center means rental rates may be more favorable for the tenant. Timing counts in leasing. Coordinating the length of the lease term and renewal options with the length of a franchise agreement makes sense too.

Negotiate the Deposit
A large deposit is not legally required in a real-estate lease agreement. Deposits are negotiable and often serve to pay the real estate agent’s commission more so than anything else. If one is approaching the end of a lease term, part of the renewal negotiations should include negotiating to get the deposit back.

Measure Your Space
Franchise tenants frequently pay for phantom space. Most franchise tenants are paying rent per square foot, but often are not receiving as much space as the lease agreement says.

Educate Yourself and Get Help
The International Council of Shopping Centers and local real estate boards offer extensive multi-day leasing classes for real estate agents and landlords to help them negotiate better deals for landlords. It pays to educate oneself. Taking the time to research and read up on the subject will make a big difference. Don’t forget to have lease documents professionally reviewed before signing them. With hundreds of thousands of dollars in rent at stake, personal guarantees and other risks, one cannot afford to gamble.

In leasing, tenants don’t get what they deserve; they get what they negotiate.

Dale Willerton is founder of The Lease Coach. He can be reached at 1-800-738-9202 or dalewillerton@theleasecoach.com.