Real Estate Tips for Leases
Staffing challenges, wage regulations, unpredictable food trends, stormy economic cycles, relentless competition. Sound familiar? Nowadays restaurant operators have to look for every possible opportunity to minimize costs and streamline their operations. And it all starts with your lease. Here are five important things to look out for before you put your signature on the page.
1. Avoid a Fixed Date Rent Commencement. Getting to profitability can be hard enough, so don’t make it more difficult by committing to rent payments before you serve your first taco. Remember that once you sign the lease, you will need time to draw plans, get permits, make improvements, pass inspections and train employees. Don’t agree to a fixed rent commencement date or a rent commencement that is a set number of days after turnover of the space. The optimal lease will have the rent commence a certain number of days (say, 120?) after the landlord has delivered the premises—and the tenant has received its permits.
2. Spell out the landlord’s delivery requirements. Careful due diligence and inspection of the premises by your contractor or architect is essential if you want to avoid unforeseen expenses. If the landlord is making improvements to the space before it is turned over, be sure that these are explicitly spelled out in the lease. Be extra careful to allocate costs around the big-ticket items, such as utility services, HVAC, hoods, the roof and the parking lot.
3. Get a cap on common-area expenses. If you are leasing space in a shopping center or in a shared building, you will most likely be charged for the landlord’s common area operating expenses, or CAM. Typically, you can exclude certain high-cost items, such as leasing costs, roof replacement and excessive management fees. Your best bet is to ask for a cap on CAM in the first year, and then a cap on the annual increases thereafter. This will buy you much needed certainty in your occupancy costs.
4. Negotiate a flexible-use clause. Don’t let yourself get pegged into too narrow of a use clause. You need as much flexibility as possible to change out your concept or your menu if things are not going well. I’ve seen leases where the landlord wants to attach the menu and require that the tenant gets approval over any changes. Look out for this! Given changes in trends, preferences and nutritional science, you need the freedom to make radical changes to your offerings.
5. Limit Personal Guaranties. Nobody likes signing a personal guaranty. If you have to sign a guaranty, try to have it burn off after a set number of years, or get it limited to a specific dollar amount. Of course, you expect your business to succeed, but what if it doesn’t?
You are in an inherently risky business. Make the up-front effort to protect yourself against unforeseen costs so you can comfortably focus on your business without always looking over your shoulder.
Stephen Cohen is a Minneapolis attorney focusing in the retail and restaurant sectors, with a concentration on real estate, development, finance, workouts and strategic planning. For more information, visit his website at www.stephencohenlaw.com, or email him at firstname.lastname@example.org.