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need help with leasing a space

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smiling_with_hope

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I am planning on opening a small NY style mom/pop pizzeria like I grew up working/eating in back in NJ/NYC during the 60-70’s. I have worked in many commercial bakeries/pizzerias over the past 45 years. Currently I run the Smiling With Bakery Program(see link below) that teaches special needs high school students work skills. I will be continuing the concept of hiring/training people with developmental disabilities with this shop. I want no more than 1,500 sqft with an open kitchen concept with the pizza making front and center for customers to watch/converse with and seating for 20 or so. This plan is hopefully going to get in motion next summer. I have been watching spaces for lease and existing food businesses for sale(equipment, but not the building - it is rented). Most of the spaces I have found online have at most a grease trap yet a few were former pizzerias/restaurants but don’t mention having a venting hood system. I realize I have to check with the fire dept, building codes, to see what kind of venting system is needed for my gas deck ovens. I will be coming with a lot of what I need in equipment so am not really interested in buying an entire existing shop’s equipment but would be interested in some of it. I am wondering if this route could be cheaper than setting up an existing place that only has a grease trap in place?I have the making/ordering/bookkeeping/BOH inspection parts down pat. I have a sound business plan in place and will be getting a lawyer to create the business.

Where I am as green as a bean is with negotiating renting a space/asking for things to be added by the landlord. I am going to contact SCORE for help as well with the setting up a business.

How much can I realistically get off the asking rent price? The area has lots of vacancies.
What is realistic with having the landlord put in the hook ups I need?
What length of lease/renewal options, etc, are normal?
What is the norm for putting a sign on the building(landlord or me pays) and what process does one have to go through to put one up?

I know there is no cut and dry answer to my questions but to be aware of what is in the ballpark would be great going into the negotiation process.

Here is what I will need in a space as far as hookups:

up to code venting for a stack of deck ovens

water outlets/drains/grease traps for the following:
3 compartment wash sink
single sink for vegies
hand washing sink
mop station
restroom
ice machine
washer/dryer hook ups

I know this stuff can get expensive to put into a place and wonder how one can negotiate with the owner on having this stuff put in.

Thanks! Walter
 
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Good plan to find a local S.C.O.R.E. counselor. I am one. My experience is that my colleagues here come from a variety of backgrounds. Make sure the office you are dealing with knows you need one that is knowledgeable about small commercial leases. I was the inside leasing manager for a national retailer and am currently a licensed broker working in business brokerage, commercial property leasing and sales. A local commercial broker should be able to guide you in all these questions. DO NOT hire a residential broker! Some quick responses to your questions below:

How much can I realistically get off the asking rent price? The area has lots of vacancies.
There is no simple answer to this, expect that you are asking the wrong question. It is not about what you can get off the asking price since who knows whether the LL is asking a fair price or not. You need to become informed about what current lease rates in your area are for similar properties for similar lease periods. This LL may be asking a realistic price or he may be asking 2X what is fair. You need to become informed about what lease rates are in your area in order to respond.

What is realistic with having the landlord put in the hook ups I need?
This depends somewhat on both the nature of the property (do these services exist in the building for example, or would connections have to run to the street?) It also depends on just how tough the leasing market is. LL’s will do more to get a tenant if tenants are hard to find and next to nothing if there is a waiting list. It also depends on what you are paying in rent. This is a just a math problem. For example, it may work better for everyone for the LL to pay for utility upgrades in return for somewhat higher rent since the upgrades stay with the property. There is no “standard” or “normal” approach to this. Of course, it is best if the location you are looking at was previously used in a similar way and already has the key features.

What length of lease/renewal options, etc, are normal?
There is no “normal”. Look at the investment you are making and the investment the LL is making. It makes more sense for a LL to contribute to build-out if they are getting a longer lease. You may also lock in a lower rate for a longer period if your lease market recovers and vacancies drop. You would not want to spend a lot of money on getting open and then have the LL come back with a huge increase at the end of your lease since it would cost you a lot to move and you are stuck with it. On the other hand, you will be asked to sign a personal guarantee (you should insist that it expire after a reasonable period) and a shorter lease will reduce your exposure should your venture fail.

A lease of five years with a couple of five year options is pretty common in many places. Pay close attention to the clause that controls increases in rent and VERY close attention to the clause that determines rent during the lease options. I recommend not signing an option that calls for “the then market” lease rate unless the method of determining what that market rate is is carefully defined. LL’s like to determine that “market rate” for themselves with your “option” being simply to accept it or move out. Again, working with a local commercial broker should be able to help here. Perhaps nothing in your lease could be more expensive than getting this part wrong.

What is the norm for putting a sign on the building(landlord or me pays) and what process does one have to go through to put one up?
The norm is that you pay for your own sign and it belongs to you. (You take it with you if you move) The LL pays for directional signs if it is a multi-tenant center that has a common sign listing all the tenants. Of course, nothing is carved on stone tablets and these items can be negotiated too. Normal process is that the sign you do will be the same type of sign used generally on the property, that it will comply with local codes, the LL will have to approve it and you will get a sign permit (read tax) from your local city. In my city this permit costs $50.
  1. There is no such thing as a “standard” lease.
  2. Your LL’s broker is not working for you. He is working for the LL. Get your own.
  3. Attorneys are good at protecting your interests by making sure the terms you agree to are correctly worded, but generally not very good a negotiating the terms to begin with for the simple reason that they don’t know what is going on in the leasing market. You need an attorney to look over the document before you sign it, but do not rely on them to help you get the best deal.
  4. VERY few LL’s give you a good deal out of the goodness of their heart. They give a good deal when they believe that they need to in order to attract a good tenant. Become informed about your market so that you actually recognize a good deal and be willing to walk away from a deal that is not all it should be.
 
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Bodegahwy: Thanks so much for taking the time to share all this information. It has helped a lot. Since the area we are going to is 2,400 miles away I can only look on the internet listings. Some of the places were subway sandwich shops, papa johns, and such. I wonder if they took the venting system/sinks/coolers/etc with them and thus the spaces are listed with grease receptor only but are basically ready for what I need. I will contact the landlord with these questions. I am going to call SCORE this week and talk to someone. I saw in their FAQ section they can do email consulting. I want to build my knowledge base as strong as possible before the actual looking for a space begins. Walter
 
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I would never lease a space I had not visited. At the very least, do not sign until you visit!
In most cases, I would expect the ventilation related stuff to still be there but sinks and coolers etc are often removed.
Just ask the LL.
 
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I would not lease a space before seeing it. I am just getting the layout of the city in my mind by checking where each space is located and the rental rate. Luckily we have a couple friends that have lived there for many years and know the different parts of town. I sent the real estate agent handling the spaces an email asking what is actually there or set up for the things I will need. Thanks! Walter
 
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You should see if you can find a commercial broker to represent you. Since the LL has a broker, that broker would have to split his commission with your broker and it would cost you nothing. They might also find you some other spaces to consider. In any case, they will be able to inform you about market lease rates etc.
 
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Thanks again! I will do that. You mentioned signing a personal guarantee. Does that mean I have to have $ in the bank that they can see to cover the rent for x amount of time and what is a reasonable length of time? We are going to form a LLC. If things go bust before the date expires how does that work? Can I start a business with not much in funds in the corporate account? I have personal $ that I would prefer to feed to the business as needed if that is possible that way $ isn’t tied up in the corp bank account because I figure it might be best that way in that I don’t have to pull it our if needed for personal reasons. Does this make any sense? This is my first business but our personal credit rating is almost as high a rating as it goes if that helps any. Walter
 
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Your personal guarantee will state that if your business fails, you will personally make good on the lease. It does not mean you have to have those funds on deposit anywhere, only that you personally will pay if the LLC can’t. (By the way you should check with your accountant about the idea of using an LLC. Most accountants will tell you that an S-corp is a better way to go).
 
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thanks bodegahwy for more valuable info. Is there a general rule of thumb for how long the personal guarantee period lasts for a first time owner on say a 5 year renewable lease? That will help me figure the amount we need to keep aside if things fail before the guarantee period runs out. I put a request in to meet with a SCORE counselor here in OH. Hopefully I can get a jump on things doing that so when we move it will be a little less stressful. Walter
 
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A personal guarantee is a deal point. It is unlikely that you would get a LL to drop the idea but you can find ways to reduce your exposure. The LL may want a PG for the entire lease. I would suggest asking for it to end after a reasonable time to prove the success of the business. i.e., if the lease has been performing (you pay rent on time) for a stated period of time the PG expires. They may not agree, but it is worth asking. For example, I agreed to a PG on the five year lease for my retail business. That PG expired after three years. Another strategy would be to agree to the guarantee but with a cap on the value that could be collected as liquidated damages such as 6 months rent. i.e. in the event the guarantee came into play, that a flat amount would be agreed in advance of settling all claims.

You do not need to set $$ aside for the guarantee. You just need to understand that the LL can come after funds in the event the business fails if you are the guarantor.
 
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I too was able to negotiate only a 3 year personal guaranty, although my lease is 5 years with potential extensions. I was also able to limit the potential amount of the personal guaranty by including the clause that if the landlord re-rented the space after I vacated but before my lease was up, that I would no longer be responsible. This is a possibility to ask for as well, but I like Bodega’s suggestion of a defined cap better…wish I had thought of that! I will store that away for next time!

It may have already been mentioned but just in case…it is a common request for tenant’s to ask for and receive XX months of free rent at the start to allow for the tenant to build the space out and get open and generating revenue.
 
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In many states the LL is REQUIRED to actively seek a replacement tenant and that the rental income from that tenant offsets the obligation of the guarantor. These are called “mitigation states” in the trade. Sounds good. It is good. But the LL can game the process by using a low rent to attract the new tenant and claiming you are still responsible for the shortfall between what the new tenant pays and the value of your lease. I like to have the PG expire and also have a liquidated damages agreement.
 
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They wanted 5 year personal guarantee, but they ended up settling for rolling 1 year. In my situation it was simon properties but the center was dead. Please pay attention to signage requirements in lease and get quotes before you sign. I had budgeted 2k for a sign and in the end to meet the requirements spent 7k.
 
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rgjujutsu: Thanks for sharing that info. What does “rolling 1 year mean”? I feel like an idiot with all this new jargon. Now if you want to get down with making NYC/NJ pizza pies I got 50 years of that in me:) Walter
 
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Meaning it’s a guarantee for a year that automatically renews every year. So while we have a 5 year lease with an option for another 5 the personal guarantee is limited to 1 year.
 
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thanks again! Does this mean I am responsible for only 1 year(for each year of the lease) of rent on a multi year lease? So if I go out of business in year 3 of a 5 year lease all I would owe would be that years rent? Could someone explain what the term “modified gross” and NNN means? I see this on web listings under the lease info. Thanks. Walter
 
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thanks and that takes a load off me for sure. I thought I would be responsible for all the remaining years as well. Could someone explain what the term “modified gross” and NNN means? I see this on web listings under the lease info. I sure appreciate all this help. Walter
 
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Smiling… You clearly NEED to have a LOCAL commercial broker representing you. There is a lot of knowledge here on the board but it is no substitute for sound professional advice. Please go find a broker to work with you! He or she will be able to explain all these things to you and put it into the context of your local market.

If you have to ask what NNN means, you are not nearly informed enough to be doing this on your own.

With the said, NNN is also called “triple net” and refers to a lease where the “rent” is excluding other costs that are variable and will be added to the payments you make. “Triple” refers to the three categories of expense that will be added: Property tax, Insurance, Common Area Maintenance/Services. I do this for a living and I could write a book on lease negotiation, but will not do so here. Go get a broker! (Not an attorney for negotiation. Attorneys are great for making sure that what you agree to is correctly described but generally are uninformed about the local market and not creative in putting together a deal. When you have the deal done, have an attorney review it but don’t run up legal expenses until you are pretty sure you have a deal)
 
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