Commercial Leasing 101 for Franchise Tenants

Joining a well-recognized franchise system can help an entrepreneur find business success; however, starting the commercial leasing process in the right direction is critical for achieving the best results. If you take the wrong path, you may not achieve your goals or even your business's full potential. That's how important the leasing process is – errors, miscalculations, assumptions, and bad advice can be difficult to fix later on.

To make the best commercial leasing decisions, you will need an inside and outside view of the different types of buildings / properties available to you. Then, utilize a checklist to help you determine the pros and cons of each different site (your franchisor should be able to provide you with something listing their preferred site criteria). The goal should be to lease the premises that will provide you with the most profit and not necessarily the one with the lowest rent. While choosing the best building will be advantageous, your particular franchised business may not be able to afford or even justify paying higher rent in the more expensive properties. The last thing a franchise tenant needs or wants to find out is that he/she has signed a long-term lease in the wrong property.

During the initial commercial leasing process, franchise tenants invariably encounter and deal with commercial real estate agents/brokers. We estimate that approximately 95% of all commercial real estate is listed with commercial agents/brokers so chances are high that you will meet at least one during your own site selection. Whether you’re negotiating on shopping mall, retail plaza, or industrial commercial space, it is necessary to navigate carefully as you negotiate with commercial real estate agents.

When it comes time to negotiating a new lease (or a lease renewal …), turning to professionals can save you time, aggravation, and money. Professionals you may choose to work with include a real estate agent, lawyer, or lease consultant. Investigating and evaluating the right professional to help you can be the difference between business success and business failure.

If you’ve never negotiated a commercial lease before, chances are that you won’t find this process very easy or enjoyable. There’s a steep learning curve when it comes to presenting lease terms and negotiating an offer to lease or a letter of intent. Even if you have experience with hard negotiating, you may not be looking forward to locking horns with either the landlord or his/her agent – opponents who negotiate commercial leases routinely and will have experience on their side.

Negotiating the business terms is one of the most critical aspects of the entire lease-negotiating process. The business terms include the rental rate, length (or term) of lease, deposit amount, personal guaranty, and a dozen other details that may not have occurred to you. The rental rate is one of the most focused-on business terms, perhaps rightly so because it is one of the biggest factors determining your success or failure. The rental rate goes beyond one simple number – it can include additional rent often called Operating /Common Area Maintenance/CAM costs and perhaps percentage rent which can dramatically increase your monthly rental payment.

Another factor is your choice of the right commencement date (and how to position yourself to take possession of the premises once the lease agreement has been signed by both parties. It can be very advantageous to you to ensure that your lease agreement and your franchise agreement align with each other – meaning that one won’t run out before the other. Even after a successful negotiation of the basic business terms within the offer to lease or letter of intent, do not glaze over the formal lease agreement (as many tenants do). Take the time to carefully review this both on your own and with your professional advisors as there are dozens of terms that may impact your business now, throughout the lease term, and in the future – when you could plan to sell your business.

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