2017 Issue 1 | GearedUp
Leasing Continued from page 25
firsthand. For people looking for multiple locations with some of the bigger landlords and REITs, the ICSC show could be a nice conduit to move some of their deals a little bit faster and set up some meetings that they might not normally get.”
Working with Your Landlord
After the hurdle of finding a space has been overcome, franchisees should work to make sure they will be compatible with the landlord.
“ In a landlord, we look for someone who will maintain the center in first-class condition, live up to his or her commitments in a lease, be responsive to issues that arise and has the infrastructure to support the ongoing day-to-day needs of tenants,” said Bidwell.
“ It’ s kind of easy to say what we look for but then there’ s what we get,” added Cavolo.“ You look for a landlord that is looking for you to succeed and for you to fit in well with their center. That’ s really what we want in any landlord. Another part of it is, do they take pride in their center? Are they going to keep it up? We want that as much as possible. That’ s a big deal.”
Cavolo said his first step in vetting a landlord is to talk to other tenants. If a landlord ever tries to deter him from doing so, it sends up a red flag. There may be legitimate reasons for saying no, but those are typically few and far between, he noted.
“ In fact, when the landlord suggests‘ go ahead and talk to my other tenants,’ that’ s a really good sign. It’ s when they tell you to stay away from them that it is a problem,” said Cavolo.“ That’ s the No. 1 vetting tool that I have. The other is, if they own any other properties in the area, I look at this property and the other property to see what they look like and how they take care of them. That’ s really the best way you can do it.”
Get Down to the Details
Perhaps the most important part of any leasing deal is negotiating the lease contract itself, which is always a give-and-take process. For Sunshine Fitness Management, every time they submit a letter of intent they are sure to let the landlord know there are a few stipulations.
“ We don’ t go from LOI to a full lease review. We negotiate the guaranty and assignment language first before taking time to review or spending money for our attorney to review the entire lease. The guaranty and the assignment we consider potential deal-killers. We won’ t sign a personal guaranty – after a handful of locations, franchisees should be able to sign a cross-corporate guaranty versus a personal guaranty – or a guaranty longer than seven years that decreases yearly after year one and won’ t remain a guarantor upon an assignment. If the landlord is unwilling to agree to those items, we can’ t move forward. We have been fortunate that we have gotten by the assignment and guaranty without issue in all but one situation,” said Dore.
Another tip from Sunshine Fitness Management is to make sure you have the proper team in place when negotiating a lease.
“ Obviously it’ s the little things, like making sure you have an attorney doing it. Somebody that is just starting out in one or two locations may think that it’ s worth saving the five or seven grand, which is completely understandable, as you’ re trying to keep your cost as reasonable as possible,” said Dore.“ A lot of times with an
“ In a landlord, we look for someone who will maintain the center in first-class condition, live up to his or her commitments in a lease, be responsive to issues that arise and has the infrastructure to support the ongoing day-to-day needs of tenants.”
— David Bidwell
PF Miami Developers franchisee
attorney it’ s not so much what’ s in the lease, it’ s more what’ s not in the lease and making sure that you’ ve got yourself covered.”
Dore also suggests running the lease by your insurance company as well to get some additional insight into what protections you may want to add.
For Cavolo, one of the requirements for any property he leases is for it to be hazardous materials free so the club won’ t run into any issues with mold or asbestos, among other things.
“ We also try to put in a permanent contingency clause,” added Cavolo.“ What that means is that the whole lease is contingent upon, whether we sign it or not, the city or jurisdiction giving us the permits to come in and build a club. You can usually figure that out, but you don’ t know if they are or they aren’ t until you start submitting plans. They may come back for some reason and say they aren’ t going to do it, and if they don’ t, what are you going to do?”
Cavolo notes that landlords are often very resistant to that portion of a lease agreement but, with some persistence, will typically agree.
“ We want to have an out if something goes wrong, and we’ ve been there before,” said Cavolo.“ If you run into a real problem where the town is going to make you do something really expensive to get in there, you want to be able to get out. So contingency is a big one – probably the biggest one I would tell people to include.” For Bidwell, while there is a long list of items he tries to include in every lease, there are a few that are key to every deal. Those include iron-clad exclusivity and a personal guaranty that burns off quickly. In addition, Bidwell never agrees to rent acceleration in case of default and always includes rights that are tied to the landlord’ s ability to hold up his or her part of the lease agreement.
His new Lodi club also features a 60 percent gross leasable area( GLA) co-tenancy clause to safeguard him in the event tenants begin to move out, occupancy falls and his business suffers as a result.
After the hot button items have been agreed upon and both the franchisee and the landlords agree to move forward, it is time to negotiate aspects of the lease such as rent and tenant improvement.
“ The three largest levers we have that we try to manipulate and negotiate in the beginning are going to be economic factors such as base rent, how much free rent we are able to get and then how much tenant improvement [ we can get ],” said McGuiness.“ As you get in these smaller markets though, landlords may be reluctant to add a lot of tenant improvement money to the mix, but you should be able to get a lot of free rent and maybe a much lower base rent to begin with. Those are probably the key levers that we look to
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