Lease Negotiations - Need tips from those in the know

Pizza Shop Talk The Think Tank
1

Received a counter offer for the space I am seeking. My “intent to lease” papers were not really much of an offer but more to secure the size of space I need. Here is what they are offering.

  1. Minimum 5 years lease
  2. Base rent increases shall be 3% annually
  3. All interior walls to code taped paint ready
  4. Ceilings - suspended 2x4ft acoustical tile ceiling per local code at 10-12 feet with r-30 insulation
  5. Flooring - broom clean concrete slab
  6. One ADA public restroon
  7. Lighting - standard 2x4ft recessed light fixtures per energy code
  8. Electrical - One three phase 200 amp panel
  9. Heating and Air Conditioning for tenant use, distributed and diffused
  10. Drawings: Landlord shall supply tenant’s architect with as-built drawings of the lease premises.

I did not get the end space I wanted, they are giving this to a coffee shop so they can use the drive through design. I am getting the next space inward. First thing that jumps out at me is the two parking spaces right in front are both handicap parking.

So what do I counter with, what should I ask for etc? I was thinking of asking for at least one parking space in front of the store with a sign stating “15 minute parking for pick up”

This is all new to me so I don’t know what I should ask for, how much, do I ask them to comp some the build out, maybe credit back againt the monthly rent. Offer a lease tied to sales, one that is progressive, or maybe have the rent set for the first 3 years (3% will be about $150 after the first year).

It is late in WA so I will check this in the morning. Thanks for the help in advance.

2

I had 2 handicap stalls in front of my store and I insisted they be moved to anothe part of the stripmall as I would rarely have them used for that purpose. My suppliers love the ramp (all shipping comes throught the front).

3

First off you need to ask for the first few month rent for free. You’ll need this while doing the build out. It sounds like a new construction building, and since you’re looking for alot of seating, I’m sure two bathrooms will be neccesary. Ask them for the second one. Ask them to do the floor coverings, ceramic in the kitchen, and whatever you’re looking for in the dining room. This is a good start, not unrealistic. I’m sure there’s more you can ask for, but don’t get too greedy. The 3% is pretty standard. Also ask for multiple options for 3 year lease extentions. Although you will probably renegotiate the lease after 5 years, if rental property goes nuts where you are at or if the landlord sells the building for a larger development, you’ll be sitting in a much stronger position.

4

Take Paul’s advice & insist on abated (no rent) during build-out. To be a little more specific, ask for rent abated untill you receive your C of O (certificate of occupancy).

Also, if this is a new building that isn’t yet at near 100% leased, you could get some additional build-out dollars factored into your lease payments. Landlords can generally do this if they don’t yet have permanent financing in place. Think of it as an interest free loan. Tie the build-out dollars to permamanent improvements that remain if, or when, you leave. Flooring is a good example. So an additional 10K, would be factored into the first five years of your lease. Could be another $1.50-2 per square foot.

Good luck!

5

Great info, I will get started on the counter proposal. This is a new building not even under construction yet. They are scheduled to break ground in Mid-April with completion around September. This is the last retail strip they are building with the anchor stores.

The previous spaces were taken up fairly quickly with no empty space at this time. The new strip they are building is about 10K sf total. I will be using about 20% and I think a coffee shop next to me will be around the same. You can see 40% of the space is already spoken for.

With the ahcors, the college and a new indoor sports complex all less than a mile, it is a busy hub. I stopped by the subway to get some lunch and asked about business. I was told the weekend was actually busier than during the week because of all the sports teams from the complex before and after games on Saturday and Sunday.

6

The landlord is hosing you on what he’s offering. He’s offering the basic stuff that all new build landlords offer. That doesn’t look like a counter offer at all but a first offer that really blows.

I’m going to tell you something now and I’m sure you’re not going to listen to my advice but I’ve got to say it:

I know you truly want to get into this building because it’s new and you think the customers will flock into it and that it’s a can’t miss situation you’re in.

Well, first look at the corner spot you just lost. Now you don’t have the premium spot you wanted. Second, look at how much this landlord wants for this space (if I’m not mistaken over $30/square foot).

You are trying way too much way too quick. I truly feel that you’ve really got to watch your overhead because if you’re not careful it WILL get away from you. You seem like a cool cat and I hate to see bad things happen to good people. This place is going to break you. The rent alone in this spot is over $7,000/month… not including triple net charges which you can be sure he’ll tack on. I think you need drop this place like a bad habit (I know it’s hard to do because you think this is “made” just for you). You need to look for a free standing building where you can pay 1/3 of the rent and your landlord will do anything to get you into his spot.

You want tips from those who know… this is what I know. Take this from a guy who’s experienced this first hand. -J_r0kk

7

Good point J-Rock. I didn’t look at the numbers, shame on me. I like to see rent obligation between 3-7%, max. Excellent advice–

8

I think it works out to about 5K per month, which in my market would be way too high. From what I understand, there are some markets where this is common, but you better plan on doing some significant sales.

9

You are trying way too much way too quick. I truly feel that you’ve really got to watch your overhead because if you’re not careful it WILL get away from you. You seem like a cool cat and I hate to see bad things happen to good people. This place is going to break you. The rent alone in this spot is over $7,000/month… not including triple net charges which you can be sure he’ll tack on. I think you need drop this place like a bad habit (I know it’s hard to do because you think this is “made” just for you). You need to look for a free standing building where you can pay 1/3 of the rent and your landlord will do anything to get you into his spot.

Good advice and well taken. As of lately I feel like a rag doll being pulled in too many directions. I have next week off with vacation so I plan to leave everything behind for a week and take a break.

Monthly expense for a 32x65 spot is $5633.33 including the triple net. I listed my projected expenses +25% (took what I figured the expenses would be, then added 25% to it) below, first column is weekly based on a 7 day week with the other monthly based on 30 day month.

It is possible I am missing an expense, if so let me now or if some of the number are off for something please point this out.

I do agree the counter is a shaft offer, as I turned in intent to lease papers being blind to what already included. I asked point blank what is included and was not given an answer. Time to play hard ball with them.

Break even point with the projected expenses below, food cost etc. came out to a 60 pizza average per day. Currently our lowest volume pizzeria on a slow week is doing 400-600 average. I know the labor expense will be cut nearly in half as we have decided my wife will work the day shift while I keep my current job. I will work the night after I get of work at 430 pm. This way we can keep money coming in while we get things going.

Again thanks for all the comments, help, advice etc. This project can seen very overwhelming at times. I think I have hit one of those spots so its time for a break.

OPERATING EXPENSES

GAS $230.77 $1,000.00
ELECTRIC $72.12 $312.50
WATER $86.54 $375.00
SEWER $21.63 $93.75
GARBAGE $28.85 $125.00
PHONE $21.63 $93.75
INTERNET $28.85 $125.00
CABLE TV $28.85 $125.00
PAYROLL $3,024.00 $15,120.00
LEASE/RENT 2080sf $1,422.00 $6,162.00
TAXES
INSURANCE
LOAN PAYMENT $576.92 $2,500.00

TOTAL $5,542.15 $26,032.00

10

It really does depend on the area. In my market, that would be just about right as far as rent goes. You can’t touch anything with frontage here for under $32.00/sf right now. And then add about $8.00/sf for CAM on top of that.

Paul7979 mentioned the first thing I thought of… make sure you get those options. I have a 5-year lease with three 5-year options. My rent will continue to escalate at 3% for the life of all the options.

I have to agree with j_r0kk as far as not getting enough from the landlord. You are essentially getting a vanilla shell building with a few cheap throw-ins. The space I’m getting ready to lease for my second location is coming vanilla shell PLUS $20.00/sf in Tenant Improvement Allowance. It’s 2,400 square feet. So, the Landlord will be giving me $48,000 for my build-out. And “vanilla” already includes paint ready demising walls, concrete slab, power-to-the-panel, and HVAC unit (stubbed.)

I’m pretty sure I could do a drop ceiling, ADA restroom, duct work and fluorescent lighting for $48,000. You should be able to negotiate a lot more out of him in terms of TI allowance. Remember, the Landlord will own your Tenant Improvements, not you. S/He should be paying for a significant portion of them.

And no, there shouldn’t be a credit back against the monthly rent. It is standard for a Landlord to pay a TI allowance on a new building.

11

Umm. I am paying 50,000 +/- for my buildout, and getting: 30 lineal feet walls, finished and ready for paint, all new plumbing for kitchen and one bathroom, new gas line for 5 drops, 5 ton HVAC, 10 foot hood intalled with fire supression, beadboard ceiling in 21x38 dining room, drop ceiling in 22x23 kitchen, 200 amp electrical service and 130 drops for lighting/outlets/switches, epoxy flooring in kitchen . . . total sq footage is 2100.

P.S. $800 monthly lease for 5700 square feet plus another parcel 1080 sqft . . . . not leasehold improvement allowance provided. (I have option to purchase within 12 months)

12

you forgot the big one… FOOD COST. figure 25% of sales…

If your payroll is gunna be $3000. figure you gunna average $10,000 a week …

so payroll & food cost should be around 55% or $5500.

13

Gonna be tough to get to that 10K per week without budgeting for advertising!!!

14

Might be wise to budget for maintenance and repairs for equipment, even if new. Without budgeting, it is just a torpedo when it is needed.

15

Actually food cost is on the excell, those expenses listed above are a cut and paste from the entire worksheet. When it was all said and done with food cost, the expenses list above, the break even was about 60 pizza a day average. I might try to post the entire worksheet but it might too wide. I will give it a try later.

16

wow I wish my electric was that LOW
plus I bet you sized the smallest dumpster…28.00?
with the volumme you will need to make $$$ I bet that will increase as well

17

I could be off on some of those expenses. What I did was call the local utilities with address of local business (pizzeria and others) to get the average useage. What numbers are you pushing?