Bluestone and Hockley Real Estate Services
Allen owned a local restaurant chain and was looking for a new location for another restaurant. He always worked with Sheryl Smith because she was so organized and his lease negotiations were so easy. Everyone wants easy negotiations, but Sheryl had gotten it down to an art. Allen had negotiated 25 leases over the past five years for his company, but Sheryl was the one that made him wealthy with her approach to lease negotiation.
You may ask what the key is to the success of their partnership. It is the way they approached the deal. Once they targeted a property, they both decided on the goals they wanted to reach and then drafted a proposal to lease.
The main issues usually addressed in a proposal—location, lease term, rent schedule and use—are not complicated. But Allen and Sheryl liked to be more specific.
Since the leases were always triple net they defined who was responsible for the maintenance of the exterior walls, the roof, the gutters, downspouts, landscaping and parking lot. They also specified who would paint the exterior of the building and when, as well as the kind of paint and colors that would be used.
Because Allen was in the restaurant industry they also spelled out how the HVAC (heating, ventilation and air conditioning) units were to be maintained. Typically in a triple net lease the tenant is responsible for all HVAC maintenance. The most knotty issues arise when a compressor fails or the whole units fail, since new HVAC equipment is very expensive and typically lasts 15 to 20 years. If the equipment was in place when Allen took over the location he inspected the equipment from stem to stern. If it was less than five years old, he usually took it in “as is” condition. If it was more than five years old, he insisted that the owner either be responsible for replacing it when it failed or they agreed to split the cost on a 50/50 basis if Allen agreed to a 10-year lease. Allen also agreed to a regular maintenance contract for the equipment and changed the filters on a monthly basis.
Allen realized that he would be paying a prorated share of the taxes and insurance if he were in a strip shopping center, and all of the taxes and insurance when he was located in a free standing building. Typically he was also responsible for his share of the utilities (water, sewer, rubbish, gas, electricity) and Liability and Property Damage insurance.
As Allen and Sheryl approached a deal, they asked the landlord for a drawing (schematic to scale) of the space, so that Allen's contractors could estimate the tenant improvements to the space early in the negotiation process. This helped them in their negotiations, especially because they then knew how much money they wanted to ask the landlord to contribute to the construction costs.
They also addressed some very technical issues in their proposal. If Allen opened a store and the concept did not succeed, he wanted to make sure he had the right to sublease the location to another party (with the landlord's written approval, which shall not be unreasonably withheld).
He usually only signed five-year leases with three five-year options to renew. He did this because he could control his increases, but also close a store if the store was at the wrong location. As they say in real estate and in retail: Location. Location. Location. It is what will drive your success. Allen had once opened a store at a good site, but found a better place about a mile away on the same street. He opened a new store there and it brought in twice the revenue of the first. In addition, he knew that he was going to retire someday and the many renewal options of the leases helped him with his exit strategy.
For his restaurants located in a strip shopping center, he made sure he had enough parking and the right to as many parking spaces as he needed. He had seen many restaurants fail because there was not enough parking, and the patrons did not want to walk very far. He also was a fanatic about store visibility and signage. He made sure his locations were easy to find and to see, (not blocked by other buildings) and insisted on as much signage as the law allowed.
When one of his stores was in a great location, he negotiated in a right to expand his business if adjacent space opened up, asked for the right of first refusal to purchase a property and requested the right of first offer. In other words, the landlord would offer him the property first before it was put on the market. He was constantly planning for his retirement, and he knew that he wanted to own as much real estate as he could. He knew that if a location were a good one he would be able to buy the location to maintain his market position; if the location were a bad one, he would let the options expire and move out at the end of his lease term.
A clearly defined lease proposal that outlines all of the important issues involved with a deal will make it easier for a landlord to respond, will insure that the lessee will be able to conclude a successful lease, and enable the lessee to buy the real estate. All of this, in the long run, is what will make you wealthy.