Leases, in broad terms if you prefer

I’m wondering what terms might be out there for leases. We’ve had very different quotes for properties, obvious differences in location etc, but the differences are striking.
Scenario: Small town, city population under 2,000, but within +/- 5 miles a population of about 10,000. It’s also the county seat of a decent-sized outer-ring suburb, you can’t swing the legendary dead cat without hitting a law firm, realtor, and bail bondsman. Public parking for county employees and public is usually pretty full, but plentiful.

1)The location nearest the courthouse complex (1 block from about 120 employees, and a couple hundred people doing business every day, another 150 employees 3 blocks away) would be ideal, but it’s never been a restaurant. It will take excessive $$ to build out. Landlord has no interest in helping with the build-out, in fact his requested deposit is so outrageous I suspect he has ulterior motives. No accusations, obviously. But he has taken a dream situation and made it totally unattractive. That we will pass on this location should be a sign that his demand is totally ridiculous.

Next best location-wise is 2 more blocks away, strip center, too far for most foot traffic in this situation, but not a bad place. The rent is actually pretty similar, but the deposit much more reasonable and still close enough to be highly viable for the lunch crowd.

Another option: About a mile away, unfinished space in a strip center, still to the studs. There is a great development just across the street, new businesses going in there. The rent here is actually about half, for the same space as the other two. It may be a better situation overall than #2

We’re considering an offer of base rate +% to the more reasonable landlords. I’ve not done this type of schedule before, wondering what has worked for start-up local operations? DI and delco, pizza salad sandwich. We have very modest projections for the start up to 6 months, breaking even at best for 2 months, then steadily even for a few more months. We’ll have a lot of family/close friends involved in operations to start, all experienced in restaurants if not pizza.
Is it practical to propose a sliding scale of %? Base rate for 2 months, maybe a little under their original quote, then two months in start the %? Or, wait for a year to start a %, paying only an agreed-upon base? This seems rudimentary, but in this era I’m not sure what to propose.

This is just my own biased opinion. I would never base my lease on a percentage of sales. Sure it might be a way to get a lower starting rate but if you are a booming success there is a good chance you are going to pay way more for you space than you would have with a bit higher lease. For example you are paying $15/sq ft plus 5% of sales or $20 not based on sales for 2000 sq ft. You are winning the game on the percentage lease until you hit $200,000 in annual sales at which point you are even. Any sales after that you are paying an extra 5% of your sales to the landlord. At $250,000 in sales you would have paid $2500 extra.

The other aspect that would bother me is disclosing my sales volume to an outsider.

As a new indi store it is very unlikely that a LL will do a % deal with you. They simply would not trust enough to do it.

A % lease can be a great deal for everyone and I would not hesitate to sign one in the right circumstances. There is a reason that many national retailers and chains are fine with this type of lease. Some key elements of a good one:

  1. Base or minimum rent is BELOW local market rent. I like to see about 70-80% of the local going rate for a comparable property.

  2. Percentage rent has a break point. In other words, you do not start paying any percentage rent until sales exceed a stated value. What is referred to as a “natural break point” is when the base rent equals what the percentage rent would be applied to the break point.

  3. NO Monthly or quarterly calculation. You want your low months to offset the high months.

This is an excellent risk sharing model and gives the LL good reason to keep the property in good order and recruit good neighbors.

Location is a CRUCIAL part of business and good locations cost more. At least this way you only pay if it works and you have a rent reduction if the economy hits the skids.

For example:

Going rate is $16 per foot for 2000 feet = $32,000 per year

% rent lease might be at $12 per foot with a break point at 350K and 7% rent thereafter.

Base rent would be $24,000 per year. You would not hit 32K rent until sales reached 520K.