Lease Negotiations

I’m currently in the process of buying an existing pizza restaurant. I’m now in the process of negotiating the lease with the landlord. He said he’s willing to work out better lease terms with me, but said I have to make the first move. I have a broker but wanted some additional input.

Any thoughts on a percentage lease where its a low rate ($/sf) plus a certain % of my total sales.
Current lease is triple net. I’m not sure I want all the responsibility of operating cost (however it is a relatively new building < 5 yrs old)
I want to close for 2 months rent free. Is it reasonable to pay 2 months deposit?

What other things are must have’s in the lease?

Thanks in advance.

What term is left on the lease? Little hard to determine an angle without some details . . .

I tend to stay away from percentage rents – really dislike the idea of them. I would rather pay a higher base with no percentage as you will pay less in the long term if you are successful.

Not uncommon to get free rent while building out but its different when taking over a lease. Definitely ask for it.

2 months rent. Depends on how much the rent is, but its in the ballpark of 1 month plus other security deposits.

Make sure your exclusives are right. It still surprises me when people sign leases without them.

Ask for TI’s. Spell out improvements that will benefit the landlord should you leave. i.e. if it didn’t have AC or something of that nature.

Your leverage is how much you are going to improve the business and project a better image for the center – how strong you are financially and the business savvy you have.

It’s 3 years into a 10 yr lease. Lease is not market (favor landlord), but both parties want out. I’m in the catbird seat, but I need at least 1 year flexibility. How are people feeling about the economy? I’m getting the sense that the rest of 08 will be tough and hopefully by early 09 the market/economy will turn the corner? Thoughts?

Is it more common to give a personal guarantee?

less than 5 years on the building and the first pizza place went out of business. to me that is a little worry. negotiate a new lease with the landlord without a %

1st advice: Hire an attorney. Leases are contracts to pay A LOT OF MONEY. Your broker (if they do a lot of leasing which MOST DO NOT) can help with the deal points but you really need an attorney that does a lot of lease work to go over the lease.

I have no problem with % rent if the % makes sense. Bottom line, if your occupancy cost comes in under 10% of sales rent will not be your problem. Look for a base or “minimum rent” that is below market value and a % rent with a “natural break point”.

For example, on 1000 square foot location, if market rent in your area is $20 per foot the annual rent would be $20,000. If your “minimum rent” was $16,000 and your break point for percentage rent at 8% was 200K in sales you would have a “natural break” as 8% of 200K is 16K. You would then pay 8% of sales above the 200K level meaning you would have to do another 50K before your rent rose to the market. You want the % to be calculated on the longest possible period of sales, hopefully anually, certainly not monthly. Quarterly is OK, semi anually is better. Why does it work? Because you benefit if sales are soft and the LL benefits if the location produces traffic.

I have quite a bit of experience with leases having done site work for a national retailer around the US and I do some lease consulting on the side (including for another poster on this board). In my experience, the locations where I worked with % leases and was paying a lot of % rent were the best locations we had and the best LL relationships we had. Everybody wins.

Triple net leases are the standard. As long as they exclude capital items and have basic protections for the tenant I think they are fair. For a LL to do it another way, they will need to raise the rent to cover the unexpected.

Getting a couple months off on rent during the year… Why would a LL do this? You might get them to spread the same anual rent over 10 months, but in the end, getting a return on investment for the value of the building is what the LL needs and is fair.

Deposit: if you have solid credit and are willing to sign a personal guaranty I don’t see why there should be a deposit at all. Absent either of those things, two months is pretty fair.

As some of the other posters have implied, there are several money buckets in a lease. Some in your favor, others in the LL’s favor. Be sure you are paying attention to all of them. Sometimes you can get or save $$ in places you might not expect.

Thanks for the advice. Lease worked out well. 10-yrs triple net lease with first three months rent free, personal guarantee rolls off after three years and 2 months security deposit + 1st month. I get 1 month applied to rent after 1 year. 2 5-year extensions. I’m scared sh!tless but very excited.

Feel free to provide any perils of wisdom or things to look out for as I begin my pizza odyssey.

I’m sorry if I misunderstood your post,but did you sign a 10 year lease with 2 five year options? Is that correct?