Negotiating a sound lease should involve lots of homework, creativity and charisma
The restaurant industry is a fickle business, rife with long hours, shrinking margins and a plethora of intricate details that make it hard to succeed without sound operating principles bolstered by unbridled passion. It’s almost enough to make you wonder why anyone would bother, especially considering one bad deal — or location — could doom your dream before it begins.
Daniel Frankel, president and owner of Vancouver-based Daniel Hospitality Group, which is home to six foodservice operations, including his newest venture, Burrard Bridge Marine Bar & Grill, has unfortunately seen failure first-hand through the eyes of former employees who have launched their own restaurants. “A lot of people go in and they’re green,” he notes. “[And] you know what? The ones who have closed the doors, it is always because they’ve signed a bad deal.”
Whether the economic climate makes it easier to convince a landlord to agree to better terms or an oversaturated market makes it harder to sign a deal, the particulars shouldn’t change the hallmarks of a good agreement. It all begins with the building. “A restaurant lives and dies on its location,” Frankel says emphatically.
Location, location, location // And so begins the hunt. To start, decide whether to search alone or with an agent, keeping one important detail in mind. “[Some realtors work on a] strict commission paid to the landlord, which means they’re really not working for you, they’re working to make a deal,” explains Doug Fisher, president of the Toronto-based foodservice and franchise consulting firm, FHG International Inc. “Other realtors, especially those who focus on the downtown malls and towers, generally do not get a commission from the landlord, so they ask for anything from a fixed monthly fee to a success fee based on what they find for you.”
Frankel prefers to work alone, and suggests operators contact a lawyer before hammering out a deal, but Joel Friedman, senior vice-president of Franchising and Real Estate at the Vaughan, Ont.-based Shoeless Joe’s chain likes using an agent since prime real estate, fitting specified criteria, has become more difficult to find in Ontario.
Both agree on the importance of doing your homework. Friedman and his team work with a research company. “They do a full demographic study and analysis of the site, including the trade area and customer counts,” the senior V.P. explains. “We have a formula based on our existing restaurants, and they compare it to new locations in our database.” In Vancouver, Frankel does some of his own research, learning the history of the property and surveying potential neighbours about their payment terms and concessions with the landlord — all while taking the state of the economy into consideration.
The site should also be selected based on a certain set of criteria important to the operator. Frankel loves waterfront properties, while Friedman’s agent knows how important it is to find space with features such as good visibility, good access, enough parking and daily traffic.
And, even once the dream spot is chosen, an expert should check the property for structural problems, an inspection that should be carried out by a trusted ally.
Cutting the deal // The informal offer to lease begins with the letter of intent (LOI), which highlights the conditions to be inked into the formal agreement. But, before submitting the letter, consider putting the shoe on the other foot and finding out what potential landlords, like Bryce Margetts, partner of the Vancouver-based Primewest Partners Inc., look for in a lessee. “A landlord really looks at the overall retail centre as a business in percentage rent,” explains Margetts, whose company leases out retail space. “We want to bring in complementary tenants that do just that: they complement each other, drive traffic and everybody does well.”
While it’s important for Primewest to take home the greater of a pre-agreed base rent or per cent of sales, the company also places big value in, not surprisingly, covenant — proof of the worth of a tenant and/or an agreement that may involve the co-signing of another party.
That’s not to say the potential tenant doesn’t have rights, too. The number of stipulations that can be included in the agreement are seemingly endless, but there are some key points to remember. “Always ask for tenant improvements (TIs), and the landlord will usually agree to pay up to about 25 per cent of your total improvement costs,” advises Frankel. “Beyond TIs, you always want to ask for a fixturing period during the construction of your premises. I also [ask for] a free-rent period. The fixturing period is just during your construction. The free-rent period is for once you actually open for business.” Both the fixturing period and the free-rent period usually involve paying some form of utilities and/or taxes and can last for a few months, depending on negotiations. (Tip: Always ask for double what you want, advises Frankel.)
In the same vein, the Daniel Hospitality Group president is quick to point out the difference between TIs and base-building costs. He avoids paying for things like a new floor if the existing floor isn’t in working order. But that doesn’t mean it will be an easy sell. Margetts admits that Primewest is “loathe” to pay for expensive restaurant fit-outs and avoids paying TIs when possible.
All things considered, depending on the region or space, many landlords are willing to offer such concessions, especially if it stands to increase their building’s market value. “That’s a real big benefit and not a real significant cost to the landlord, especially those that have been sitting on empty space for a while,” points out FHG’s Fisher.
But it’s not all about money, and each operator may have stipulations that are more important to them or unique to their brand. “The most important part, if you look at what’s in a lease — besides all the other terms that come in it — is exclusivity,” explains Friedman, speaking specifically to what he asks for when negotiating for Shoeless Joe’s. It’s about “making sure that we exclude some of our competitors; that’s what some of our competitors are doing to us.”
The landlord may try to prevent a different kind of competition. “We usually put a radius restriction clause in a lease saying you can’t open another [identical] restaurant within one mile of this location or five miles,” explains Margetts, conceding that big chains like Tim Hortons would be unlikely to agree to such terms. It’s all part of the negotiating game that, once complete, may end with a deal.
Sealing the deal // This part should be a little easier. Make sure you capture the major points that are important to you in your letter of intent, sums up Friedman. “So when it comes to the lease, there are no more negotiations. It is just the basic terms and checking for errors and capturing what the LOI says.”
But don’t feel pigeonholed into following pre-set guidelines, either. “There’s nothing that stipulates how a deal is done and that you have to be completely orthodox. Be unorthodox; don’t be afraid to ask the landlord for crazy things,” suggests Frankel. “The other thing you have to remember is to be charismatic. They have to buy into you as well.”
Simply put, they have to like you. Frankel’s relationship with his landlord at the Burrard Bridge Marine Bar & Grill helped score him a liquor license transfer from the previous tenant — saving money and time. On the other hand, FHG’s Fisher admits that landing a good price for one client, meant tougher negotiations with the landlord down the road.
“You are going to bed with this landlord — this is your partner,” Frankel stresses. “If you can’t get along with your landlord and if you don’t like the corporation or whoever you are leasing from, stay away.”