How to get 'free' money out of your landlord
By Michael Walters, president of Falcon Realty Advisors' Restaurant and Entertainment Group
When it comes to opening a location in a shopping center, obtaining a lease with a prime location and reasonable lease terms can be difficult for many small restaurant concepts.
A startup hoping to secure a spot in a new shopping center will most likely be underwritten by a big landlord and required to provide extra guarantees or collateral to minimize risk for the landlord. And let's face it, the landlord has the power in this situation to only conduct deals with whom they choose. Regardless of the fact that these smaller restaurant brands may know their way around the kitchen better than most, they're typically not as informed when it comes to the ins and outs of the negotiating process.
For example, although these startups may be familiar with the Tenant Improvements allowance — the amount a landlord is willing to spend so that the tenant can retrofit or renovate the office space — they are often unaware of the "secret" allowance that landlords actually budget for Tenant Improvements.
This "secret" allowance is the "free" money all landlords truly budget in every deal negotiation. But the real question is: When does the Tenant Improvements allowance become not "free" anymore? Since the majority of startups are only being offered market rate, which already has Tenant Improvements figured into it, anything over this price means you end up paying for it in excess rent.
So during negotiations, the trick is for the tenant to be able to determine when they have pushed the landlord to their limit for its "free" allowance. Since the Tenant Improvements allowance is one of the most outstanding lease benefits, tenants should enter negotiations prepared to negotiate vigorously for the "free" allowance. But every situation is different, so it is important for tenants to embark negotiations understanding who the landlord is, their financial flexibility and what type of restaurant tenants they're looking for.
For unadvised startups, not having access to this market information and showing up unprepared can often lead to money left on the negotiating table that instead could have increased the Tenant Improvements budget. Unfortunately, this is often what results in the difference between a successful startup and a failed one.
Especially since comparatively, restaurant chains often have a limited need for expensive build-outs due to their established and typically more cookie-cutter nature, making them a more attractive tenant. This allows the chain to negotiate on their own behalf and obtain a lower lease rate. Since newer concepts can be more specialized, it is imperative to utilize every dollar of the Tenant Improvements allowance acquired to build out the startups' unique concept.
Because of this specialized design, the startup will have to make the tough decisions based on the tradeoff between a higher Tenant Improvements allowance and higher rent long-term. Although startups lack the economies of scale held by the established brands, this can be used to their benefit in negotiating the lease structure with the landlord.
Since the typical landlord is more favorable to the established credit histories of franchised restaurants, smaller competitors have to find a way to differentiate themselves. In addition to potentially paying a higher rental rate than others, stand-alone restaurants can also market their "fit" with the theme of the development instead of an established brand stealing the spotlight.
The good news for all is that many landlords are willing to put the money into Tenant Improvements to generate the best tenant possible, regardless of being a startup or chain restaurant.