Craig: Hello everyone! Today we are doing a Q&A session on all things leases with American Specialty Toy Retailing Association members Mary Sisson of Kazoodles in Vancouver, Washington and Michelle Sahr of Off the Wagon in Kent, Ohio. They have put together a list of the top questions they and their fellow members would like to have answered. This should be a lot of fun. Who would like to start out?
Mary: I’ll start out. I have a question. As a small business owner, my store completely relies on me and I find it intimidating signing a lease with a personal guarantee for 5 years which seems to be the standard. I mean I feel like things can happen in 5 years. If something happens to me, I don’t want to stick my family with this lease obligation. I was just wondering if there’s anything that can be done to ensure the best scenario for my family and for my business.
C: Yes, absolutely! I have a lot of comments to make about that question. It’s a really good one that I imagine most people want to know more about. First of all, you don’t have to always sign the lease personally. A landlord will always ask you to sign it personally, and it’s to their benefit, but many times we just refuse to and they still want the tenant anyway. So, you don’t always have to is the first answer.
Part of it has to do with, “Are you taking the space as is and is the landlord spending a lot of their money on it or not?” So especially if they’re not spending a lot of money, then they don’t have as much of a leg to stand on in requiring or requesting a personal guaranty.
The other thing to consider is “How strong is your company?”. If your company has been around a long time and has a lot of assets, then again you shouldn’t have to sign it. I can promise you that no public companies or big equity laden companies will have someone in the organization that signs personally. In fact, the wealthier clients I have, the less likely they would even dream of doing such a thing.
So, that would be the first answer: You may not have to and just be aware of that. But the second thing is, if you DO have to sign the lease, then there’s still things we can do to minimize your risk. Again, this is common. We do it all the time. As an example, with a five lease you could say “Alright, I’ll sign the lease personally, but the guarantee expires after 24 months or 36 months or some time frame, if you’re not in default and everything’s fine, then the guarantee expires.
The other thing you can do is limit the amount of money on the guarantee, so it’s just a fixed number, which is a whole lot better than all the remaining months of rent. That would be another thing. There’s also something fairly common that the landlords like when we really get into arguments about it, and that would be what they call an “EVERGREEN” guarantee. In this case you’re guaranteeing 12 months of the lease. So anytime you default, you owe a year’s worth of rent from that point and not the full remaining term, so that can help also.
Finally, you would want to check with your attorney about the laws in your state. In some states, it’s my understanding that if your assets are owned jointly with your spouse and both spouses don’t sign the guarantee then you have quite a bit of protection because they can’t come after your assets those assets are also owned by someone else. So there’s some protection there. Now, the landlord may ask that both parties sign, but sometimes spouses are not involved in the business, don’t want to be involved in the business, and they’re not going to sign the guarantee under any circumstances. If the landlord wants you as a tenant then they’ll live with it.
Those are the common things we do to minimize the personal guarantee.
Mary: How I wish we had this conversation before I recently signed a 5 year extension to our lease. Because I asked our landlord after Michelle made a comment about this topic before. I asked our landlord “Could we have some sort of provision that if something happens to us, our heirs are not stuck with it?” and they said “No, that would be like doing a month to month lease.”
Craig: No, I disagree. I’ll probably say I’m not an attorney about ten times during this podcast so I’m not giving legal advice but as far as the business points of the lease and what I see all day every day, that is actually pretty unusual. If you’ve already been there a long time, it just seems fair that you should be able to get off the lease completely. That’s what we would have argued for. You know, it’s to their advantage if they can easily convince you that you need to sign. Then they’ll get you to sign it, but you need to know that it’s not necessarily always done by any stretch of the imagination.
Mary: I wish I’d known that sooner.
C: Yeah, sorry you didn’t.
Michelle: Well, if you’re looking to sell your business sometime in the near future, what’s the best lease scenario? Is it better to have a lease in place that’s got pretty good terms or is it better to come to the end of your lease and then let the new people deal with a new lease?
Craig: That’s another excellent question and I’m always shocked by how little preparation business owners might put into that portion of the business equation. Especially being a retailer, we know that your business is location based. We know that the value of your business is multiple of your income and we know that your income is based on what’s left over after expenses. So you definitely want to arrange your lease appropriately to lower the costs as much as possible, and pass that benefit on to the buyer, who can then pay you a higher price for the business!
For instance, I’ve had this happen recently where the doctor said “I’m retiring in 7 years so let’s just do 7 years lease.” And I say “What are you thinking? Wouldn’t you like the buyer to have a place to operate their business?” So he agrees, well yeah that might be a good idea. The point is: if you can estimate when you’re planning to retire, it would be good to run the lease to that distance and then get an option for additional years, which is only to your benefit. Then if you get the option, it’s best if it’s a fixed rate so that you can predict what the expenses will be. What’s beautiful about an option is that it is a one way street. Landlords don’t like to do options since it’s not to their benefit, but they do them all the time anyway because it’s common and they want to have you as a tenant. Most tenants demand it because from your point of view you can’t be putting all this time and trouble into a business and then have it only last to certain length of time. You have to have a long enough time to make all your investment worthwhile.
So you do want to get an option and you do want to get a fixed rate. Many landlords will want to make the option at a market rate and that’s not the worst thing in the world because you could have an appraisal done or just a market study and see what similar spaces are going for, so you should be able to – in a fairly friendly way – determine what a market rate is at that time. But of course it’s your advantage if you got a fixed rate built in and it’s lower than market. Well, good for you, you can exercise the option and stay. If your rent is higher than the market then you can go back to the landlord and say “Well this is no good. I’m not going to stay at these rates. If you want to do something at market rate then I’ll stay.”. It is a unilateral thing and it’s to your advantage if you get an option.
There’s another way to do this also! You could do a longer lease – past your retirement target – and you could build into your lease what we call a Lease Termination Clause (or a Kick Out Clause is the lingo we use) and that would work under certain circumstances and time frame. For example: Let’s say you have a 5 year lease and you’re not sure when you are going to retire. You might say that after 3 years, and if you give the landlord 6 months notice, you can terminate the lease. There is likely a termination penalty but it’s a whole lot less than the remaining lease term. Sometimes it’s based on the amount of money the landlord had to contribute to the deal to get you in there based on perhaps leasing fees and legal fees or especially build-out dollars if the landlord put a lot of money into your space to get it the way you wanted it.
The Kick Out Clause would be the other thing that can get pretty sophisticated. You can tie a lot of strings to it so the landlord is a little more comfortable, and we use the same type of clause based on business growth or business diminishment and different levels and things. Anyway, that would be a clause that you would also want to consider that would help you plan for your retirement more.
Then the third thing that’s very important is your Assignment Clause. You’re going to want to assign your lease to the new buyer and most landlords have a very – and I think artificially strict – Assignment Clause where sometimes at their sole discrepancy they can decide whether they’re going to let you sign a lease or not.
There are reasons the landlords want some control over Assignments because they don’t want a poor operator going in there doing a poor job. They certainly don’t want a change of use. I can see some reasons for that although one of the reasons is “what if the rent you’re paying is now below market and they could get more rent from someone else?”. So they want that profit. They want to get higher rent. So, that’s really one of the biggest reasons that they can make it tough for you to assign the lease.
Then recently – I had never seen this in my career but I’ve seen it a couple times lately and I’m still shocked about it and hopefully it’s just coincidental – but I’ve seen Assignment Clauses that say “If you even request an Assignment, the landlord can cancel your lease.” In both cases we got that waived but if you hadn’t been paying attention to the boiler plate of this lease where this is all found, it could be really bad and that could cut your legs out from under you. What happens to the value of your business then? So, you want a liberal Assignment Clause that covers “If you assign the lease to a business owner that has as much experience or credit worthiness or qualifies in certain ways, then they will allow you to assign it to that person.”
Then there may be other legal things that you want to talk to your attorney about. That would be your legal entity and how that’s covered in the strict landlord assignment. Sometimes the lease could stay in place but the actual ownership of the stock of that company could transfer. Or in an LLC, maybe the membership interests can transfer, so to the landlord, it maybe practically none of their business since it’s still the XYZ LLC operating. It’s just new people that own it. But that’s something you’d want to talk to your attorney about and negotiate a much more liberal Assignment Clause than is found in most leases.
Mary: That’s some great information. I wish I had it many years ago when I was looking to sign a lot of leases.
Michelle: Me too.
Mary: One thing I got stuck in one time is a 5 year lease. We were losing money and at the 3 year point – we have several stores at this point – but we finally had to close that location because we figured that we would actually lose more in the time being open, even if we had to pay out the lease. Of course we didn’t want to pay out the remaining 2 full years so I ended up going back negotiating with the landlord. I was just wondering if you have any advice on what to do in that situation.
C: Actually I have enormous advice on that. The first thing is: you should go communicate with the landlord. We’ll go to the landlord and say “No fault of ours or yours but the business model isn’t working in this location. We know we owe you the money. But we don’t have it. What can we work out?” Of course, you have multiple locations and higher credit worthiness and assets so that changes things, but many times it’s the only business: this location. I don’t know if you have separate LLCs for each one or not but it would have been good, and I hope you didn’t guarantee the lease personally on that one, which would have been bad, so you maybe made it harder for yourself in a few different ways that you necessarily had to.
I would have recommended forming an LLC for each different location and then doing a limited guarantee on those locations too. Anyway, communicating with the landlord is the best thing and maybe you working together to find another tenant for this space. I know there’s some states where the landlord is obligated to try to find a new tenant for your space. When they do, they have to apply the new rent they’re getting to what you owe which is really pretty good. A lot of people aren’t aware of that. So now this is in Florida. I’d go to the landlord in Florida and say “Look, you’ll probably find a new tenant for this space easily within 3 to 4 months. We’ll give you 6 months of rent and terminate the lease and this is like a bonus to you. You got 6 months of rent now and you’re going to get more rent during that time from someone new. This is good news for you. You’ll get extra money.” And we’ve been successful doing that a few times. But it’s all about negotiating. And part of it is does the landlord have anything to do with this. Did they fulfill all their promises, or cause you any problems, because then you could put some of the blame on them and say “Look, in order to avoid a nasty lawsuit can’t we just come to an agreement and part ways.” Or if it was your only store and you did personally guarantee it and you’re on the hook, what are your assets? The landlord does not want to spend time chasing you down if you’re non-collectible, and an outside attorney on contingent fee won’t take the case. If you just say “Hey, I will have no choice. I will have to go bankrupt” they might want to negotiate something with you. They’d really don’t want to spend time and money to chase you down.
Also, just so you’re aware, I had a call one time from a shopping center owner and he was upset (not with me – we were just chatting). He said “You know that tenant that was down there they just left in the middle of the night and left their keys on the table. I wish they had call me. I would have let them stay there for FREE while we find a new tenant. If they’d just let me know. But they just left in the middle of the night.” The reason is, shopping centers with empty spaces will look really bad. Just be right upfront and say “Look, I’d love to pay you. No one would be happier than me to have a booming business and pay my rent but it’s not happening, so what would you like to do?”. Talk to your attorney about this also in case he tells you differently, but I had this happen recently. Someone came to me with a similar situation and he says “You know the landlord really ought to work with us because we’ve always been right on time with our rent. We pay the full thing right on time so we’re a good tenant and they should work with us in terminating this lease and getting out, because we’re losing money.” I said “No, landlord has his head in the sand right now. All he knows is, he’s getting his money.” He thinks you’ll get it from family, friends, borrow it, or maybe your faking and you just don’t WANT to stay in this space. Personally, from a business standpoint, and double check with your attorney, but if I could see darkness at the end of the tunnel and was not making it, I wouldn’t keep paying all the rent. Why wait until you run out of money and then talk to the landlord. I would start making partial payments or being late, whatever. I’d start sending a signal to the landlord that there’s a problem here. I heard one time long ago that if you owe the bank a little bit of money, you’re in trouble. If you owe the bank a lot of money, they’re in trouble. So it almost gives you some leverage and say “Yeah, look I’m 4 months behind here. How about I pay you back 2 of them and you let me out of the lease?” If you paid all your money and NOW you’re starting with “how much do I owe you”, it’s a different story.
MA/MI: Again, I wish I had talked to you because I’m always on time and I did exactly what you said not to do.
C: That’s alright. It’s human nature and part of it is we don’t negotiate for ourselves very well. I know I don’t. When I’m negotiating for you then I’m doing it on a professional basis and it’s my goal to get you the best possible deal. When I’m negotiating for myself, I feel like a cheapskate arguing about money.
You’re under the gun and maybe you’re not thinking clearly with all these stresses and strains, so it’s normal. Part of my job is therapy! We chat about it and I remind you that you’re not the only one. This happens all the time. Businesses are failing all the time. Landlords have had plenty businesses fail in their centers. So let’s just communicate about it and most landlords are kind, smart, nice people. You know, we can work with them.
MA/MI: Right. Some advice I got from another ASTRA member was to run the lease by another or kind of a neutral party a professional realtor/commercial realtor. So I did that and it was really helpful. I went in thinking “I can’t sign this”, and when I came out I felt much better about it because these are good terms. There’s nothing in here that raises any flags.
C: Yes. You’re talking about any commercial realtor can help you in that way and then there are specialists that are tenant reps.
What a lot of people don’t realize is that when you go to find a new space and you look at a sign on a window of a vacant space and you talk to the nice person that picks up the phone or meet them down there: that is the landlord’s representative. And as nice as wonderful and honest as they are – and they usually are – all 3 of those, it’s their job to work for the landlord and get the landlord the best deal. They would be dishonest if they start giving you less of a deal than they were able to achieve for the landlord. So even if that person is really nice, they are not your friend really. You’re on your own.
You can go to an attorney which I recommend people do, and attorneys will review the legal aspect of your lease but I think most attorneys will say “Look, I’m not advising you about the business points. I’m not keeping up with the market. I don’t know if this is normal in the market and if you’re getting what you should get or not. So really you should use a commercial broker or tenant rep. That’s what I actually do all day every day.
You know the typical landlord pays a fee to the leasing agent and I share in that so I usually don’t even charge my clients money unless they just want straight advice. But you’re talking about instances where you’re doing this by yourself and I don’t know. I don’t think you’ve probably drawn up all your legal documents yourself, you’re not doing operations on yourself. Some of my clients are the smartest people around, but when it comes to Commercial Real Estate Leasing, they don’t know. They ask me the most simple questions since it’s not their specialty. The don’t do it all the time. So if you don’t know the difference right off the top of your head between a Gross Lease and Net Lease, Full Service Lease and Tenant Improvement and much more, you’re leaving yourself exposed for no reason. You can get plenty of free advice or very inexpensive advice from someone who does this all the time. Anyway, I don’t mean this to be advertisement. What’s the next question?
MA/MI: As a little business owner, I think a lot of times we are pretty used to the “I can figure this out myself kind of thing”, but I don’t know. I mean one time I had to sign a 40 page lease and let me tell you that was extremely intimidating and we bit the bullet and went to an attorney but I was wondering if you had any other suggestions.
C: This probably happens 10 thousand times a day when you think about the whole size of the country and all the different office and retail spaces and people doing it themselves. They think everything is fine and easy until they get this 40 page lease and then it’s like “Oooh! I don’t know if I can physically read this without getting a migraine headache. I won’t know what it means anyway. What do I do?” We do recommend people bring it to an attorney, but first we look at it and we negotiate all the business points so that you’re not spending thousands of dollars and weeks of time with the attorney. It’s nice when the deal points are hammered out first. The final thing is to bring it to the attorney and say “Okay, we’ve done the deal points, is there anything in here I should be worried about?”. Then the attorney can go thru it with a fine tooth comb and go “Well, you know it says if this, then that. But what if you don’t do that? Then what happens? What’s the penalty?” and on and on. So they typically can add some things in there that could be important. But yeah, you should get expertise first and I can tell you that we run into leases or situations where the landlord will say “This is our standard lease. No changes. Everyone signs this lease so here you go.” They may say that, but I’ve never experienced it to be true. In fact, there was a group of doctors moving into the same brand new medical building and 1 of the 4 was my client. They were all told “This is the standard lease. You can’t make any changes.”. The 3 doctors did it all by their selves and signed the lease as is. Then when they were at the cocktail party months later chatting about the space and the lease and this and that, they discovered my client had made a dozen changes to this “non-changeable” lease. So they felt a little embarrassed about that I guess. The point would be: When a landlord says to me, “Look, this is our standard lease, we don’t make changes”, I say “Alright fine, I hear you. Let me ask you question: Paragraph 32 about the blah blah blah. If such and such was to happen, then do you mean XYZ is going to happen? Or how is that handled?” Well, the landlord responds, and I say, well, it doesn’t say that. Or we could construe it to this or that or whatever. Wouldn’t it be better to be clear on this issue? And a change gets made.
One example of this: Let’s say your building was damaged by fire and you can’t operate. How long does the landlord have to DECIDE to rebuild, and finish the rebuild before you have an opportunity to cancel the lease and go elsewhere? They might have literally an unlimited amount of time to finish out the space and when they do you have to come back for the remaining term of your lease. So now, you can’t rent space elsewhere in that time because now you’re going to end up with 2 stores or offices! So that would be a typical one of many clauses that need to be changed. I brought it up because that’s one of the ones where I’ll go to the landlord and give them that scenario. “That doesn’t seem right that you could take as much time as you want to tell us your decision, and then as much time as you want to do the work. Shouldn’t there be a limit on that?” So without much effort at all, that unchangeable lease becomes changed.
Also, just to be extremely clear, I have never run into a landlord lease that HAD all the clauses in it that you want in there. And I’ve never run across one that didn’t have something in there that you needed to have changed. Just to be safe. Some things, in a perfect world, may never matter. But maybe five or ten years later, something might happen and it would be good to be protected for the “ifs” and “what’s” of all the different things that could happen.
MA/MI: Great point. They are great points.
C: Thank you.
MA/MI: I was speaking with a toy store owner friend who’s lease is coming due pretty soon and she doesn’t have any intention of moving, but she was wondering what kind of homework she should do in order to get the best deal. She’s noticed a lot of vacancies in their area. She wants to have a little power there.
C: Okay. It’s a great question and it goes back to what we were talking about a few minutes ago. What she needs to do is get someone on her side. You’re not going to go into court and not have your own attorney representing you. This could be even more serious than that! You’re talking about real money with real terms and conditions. She needs to get a commercial broker working for her. The broker could either charge her some money for his or her time. Or I do renewals all the time and I get the landlord to pay me a commission. Now it’s a reduced commission than if the tenant was brand new, but they still pay something. Either way, they just need someone to help them out.
Here’s the magic. I had a client last year with a renewal coming up very soon. The landlord was hammering them, absolutely hammering them, because there was almost no time left on the existing lease and the landlord knew that they couldn’t move. “You don’t have time to move. There’s too much hassle. You’re basically going to have to take whatever we offer you” is what the Landlord was thinking. Tenant was already paying above market and the landlord wanted even more money because that’s what landlords do. Rightfully so, they’re owning the real estate not for the fun of it but for the money. Tenant was in a real quandary doing this on his own. This was actually an old friend of mine was lived in a distant city and had forgotten what I did for a living! So here is what happened: Just the mere fact of me getting involved and calling the landlord saying “Hey, Craig Melby here, I’m representing such and such company. They asked me to step in and check the market and see what we’re doing. I’ll get back to you in a week or so but I have to check the market and see what space is going for and this and that.”. Well, that changes everything right there when the Landlord knows you have a professional who is checking the market. That might include Asking Rents and then there’s Taking Rents. Sometimes you call the other landlord and say “Yeah, I see you’re asking XYZ a foot. How flexible is that?” “Well we could do a lot less.” And they tell me. Maybe it’s “honor among thieves” but many times they’ll tell us brokers what the real deal is. Pretty quickly you know what’s going on out there. The way this story proceeded was when I told the Landlord “Look, you know and we agree with you, it will be a real pain in the rear end to move. We’ll maybe have to work out of our house for awhile, but we CAN and we WILL because some day this business is going be for sale and that extra rent we’re paying is going to affect the value of the business in a huge way. Just so you’re aware, we think your rent is way high and here’s what we’d be willing to pay and if not, you know I agree it’s going to be a pain but we can and we will and we are going to move. Long story sort: Instead of the rent going up quite a bit, it went down quite a bit and then we got a bunch of incentives too. That air conditioner is making a lot of noise, it’s about 8 years old, we want a new one. You just need some professional help. It’s out there and it’s easy to find. So that’s my answer. I hope I didn’t go on too long about it.
MA/MI: I’m curious. Have you ever have told a client the best thing to do would be to walk away on a lease?
C: Well, yeah. It doesn’t happen too often really but definitely there are times when you just can’t do that deal. I had one yesterday where the guy was going to put a ton of money into the space and the landlord said “You know some day we might just knock that building down and put up a parking garage or expand a big anchor tenant. We’ll have to have a lease termination clause in there.” Well, we can’t go there. That’s a deal killer. We can’t put a pile of money into this space, try to build up a business and then one day Landlord says “Okay, it’s over. Six months from now you have to be someplace else.” So there are times when there are deal killers, and many times terms just don’t work. Maybe the space is worth more money, but not to OUR business model. We can only afford X dollars. You don’t want to go thru all this time and trouble just to lose money or to break even.
There are times when you just have to walk away from the deal. You know the best deal is the one you didn’t do. You can always talk to people who regret the deals they’re in and wish they could hit the do over button and do something else. So yeah, that definitely happens.
MA/MI: Great. What about someone thinking of a new store. Do you have any recommendations on that? Obviously they need to do their homework and such but what else would you tell them that they need to do when they’re researching the possible places to lease.
C: Okay so you’re talking maybe brand new retailer going into business for the first time looking at spaces?
C: Okay, I think they’re crazy to do it themselves. I really do but I’ll tell you how you could do it yourself.
The problem is there are properties out there that are off the market. So if you just drive the streets and look for retail stores with signs in the window, you’re not seeing everything. So when you’re calling the spaces yourself, now you’re dealing with the landlord again and unless you’re some sort of major wizard, you’re not going to negotiate as good as you would otherwise be able to but anyway if you’re going to do it yourself for whatever reason, the way I do it is to look a bunch of spaces. Get all the information you can about all of them and when you approach the landlord, let them know that you’re looking at some spaces even if there’s one that you like way better than the rest. It’s kind of like doing your taxes. You have to pay what you owe but you’re allowed to arrange things so you owe as little as possible. There’s no law that says you have to tell the landlord everything you’re thinking. What I say is “We like this space and it could be at the top of our list under the right terms, and here’s what we’d like to do” Or sometimes I ask what’s the last 3 deals you did? You know the people that just went in. Most of them if you ask them a point-blank question, I don’t think they’re going to lie. That would be very unusual. They may not say everything. They don’t have to put themselves in the worst position either. So they may talk about the free rent they’d have to give, or the other incentives or whatever but it basically just comes down to research. Also, what seems common sense isn’t necessarily so common, and you really check into things like exposure to traffic, the signage. Pedestrian traffic is even better. Then ingress and egress. It’s got to be easy to get in and out and to come to the store. There’s just so many things, and then demographics. It’s always nice to have, and you could use this for negotiating too if you needed to, but you could have someone pull the demographics on a few different locations you’re looking at and look at drive times or radiuses or both. What kind of population density do you have within your trade area? Whether it’s 1 mile, 15 mile or a mix of those and you can even get detailed reports that will tell you about the various groups, maybe income levels. Even numbers like how many toys are being bought in that market right now and how many places are supplying toys. Is there a gap? We actually call it a gap analysis where there’s a number there and it will tell you “We have an over-supply in this market or we have an under-supply.” It’s amazing how they extrapolate all this information from sales taxes on products and reporting, and SIC codes. It’s all magic to me but it’s all there and it’s interesting to compare.
Also, you don’t want to go into a cheaper location just for the rent if you’re not going to be successful there. Unfortunately, I have seen that time and again, “we can ‘t go to that great location, we can’t afford the rent”. So you go into a bad location where your business fails. Why do it at all? Everything’s got to be right or don’t do it at all.
MA/MI: Right. So, looking at all this, I mean, what kind of prep time do you have to give yourself? I agree totally that you need help because I’ve done it too many times in my life and got into trouble and it hurt me, and I definitely wouldn’t do it again without help. But what kind of prep time do you need to give yourself to plan ahead? Both for new and existing stores.
C: You all are asking such great questions! It really feels good to know that the stuff I’ve been preaching on is still exactly what people need to hear about!
Most people don’t give themselves enough time. That’s actually the number 1 mistake that tenants make when they’re looking for commercial space. You need to realize that if the space isn’t exactly the way you want it, then you’re going to have to do some construction. To do construction you need permits. To get permits you need an architectural or engineering plan. Each of those things can take months. So it add up. Then many landlords can’t sign that lease right away. They must send it to some committee, goes to attorneys, goes back and forth. People aren’t in town, people have other priorities.
We see lease negotiations all the time that last for months. Sometimes they’ll sign it next week if it’s a local landlord and if it’s his money, but a lot of times it’s a big owner. That little space that you want is hardly a blip on their radar screen. This offer will go from the leasing agent up to some ivory tower and once a week or once every two weeks the leasing committee meets and they go over all the leases that are brought to them. There may be 50 to 60 of them and yours is just one little thing. If there’s questions, then it gets kicked back. Now, you have to answer more questions, it’s another couple of weeks, and it’s a nightmare.
So the answer to your question: 6 months is good. Sometimes if it’s a bigger more complicated deal, 9 months or longer. Landlords don’t mind that. Sometimes there will be a space coming up for lease and they would handle that space differently if they knew they had someone that wanted it. Of course if it’s TOO far in advance, then the landlord doesn’t want to wait that long for you.
It also depends if it’s a wide open retail space and “second generation” so to speak: someone’s already been there and it’s already got the bathrooms and HVAC and everything, then it can be done quicker, but still a good solid 2 months I would think. It depends on circumstances. It could easily be longer than that.
MA/MI: Good advice. Is that for new or if you’re renegotiating? If you’re already in the space and you want stay there, how soon?
C: That’s another really good question because if you leave yourself to close to the end, then the landlord knows you have no leverage anymore. The landlord knows you’re going to stay.
I do it a year out. If my client’s lease expires one year from today, that’s when we call the landlord and say “Hey! You see we’re expiring in a year. We’re beginning to decide what we’re going to do, whether we need a little more space or little less space you know, demographics change, maybe something closer to our customers or where we, etc. So we need to talk to you early. In case we move we need time to do that.”.
That sends chills up their spine – the fact that we’re thinking we might not stay. They didn’t realize that. We might 99% want to stay but we’re not obligated to say that to them. When I talk I’m going to say “Staying is an option, moving is another, or building our own building. We’re figuring out what we want to do. We don’t know what you’re going to do and that will help determine what WE’RE going to do. In a year from now, what kind of rent are you thinking about, and incentives?”
And tenant needs to think: do I need some new paint? Some new carpet? In order to get you to stay, now’s the time to ask. If you don’t ask for it, you ‘re not going to get it. We get stuff all the time for staying. All the time. Especially if it’s way in advance and a year is probably plenty fine. Six months? Now you’re getting to the point where they’re thinking you can’t leave. It takes too much time, you’re just playing. You’re pretending. But if it’s 9 months out, they are taking you seriously.
MA/MI: We just got all new LED lights in exchange for extending our lease 5 years.
C: Yeah good.
MA/MI: But we still have 2 years left on it and we thought “Oh my gosh! They’re making us decide our exit strategy immediately.” I wondered what the pressure was. It turns out the landlord has a program to choose somebody they want to give it to every year, and they chose us this year. Once we knew that, it made sense. You know, because if we said no, they’d want to give it to somebody else.
C: Well, it’s still not making sense to me. I’ve never heard of this before and I’ve been doing this 34 years. So what you’re saying is you had 2 years left in your lease and they said “Hey, if you extend your lease, we’ll give you LED lighting.”.
C: So then you signed your extension. Then you were now there for another 7 years? Or a new 5 year at that point?
MA/MI: No we’re here for 7 unless we sell it and retire.
C: And that’s all they did was LED lighting?
C: Okay, well that’s interesting. I mean possibly you could have gotten more. There were many other terms that I would have wanted to talk about. Do you pay for the electricity? For the energy use?
C: Okay at least that makes sense. The cost of LED bulbs has come way down and they might buy them by the case load, and I recommend everybody use LEDs.
From their point of view, when the economy is bad – and I’ve been around long enough that I’ve seen it landlord markets and tenant markets time and time again flip flop – having you, you’re obviously a good tenant – they want to keep good synergy, good draw and all that stuff. They might have used the LED bulbs just as a hook to get you to extend now because somebody is a hero for getting you extend early. It helps their financing. It helps for selling the property when they tell a buyer that they got a 7 year lease here instead of a 2 year lease. That’s good. So there’s lot of reasons that you may never be aware of that motivated the landlord to do that. But as long as you’re happy and they’re happy and everybody’s happy then that’s fine. But then that’s interesting. I’ve never ran across that one.
MA/MI: Hmmm that’s interesting. The electrician kept saying “Somebody sure likes you.”.
C: Well they like you but they probably like the extended lease term for some reason. How long ago did this happen?
MA/MI: Just within the last couple of months.
C: Well, we’ll see, if relatively soon, the building doesn’t sell or gets refinanced. Then you’re going to say “Aha, that’s why.”
MA/MI: I have a question. One time a tenant next to me had a shop. Moved into their space and they found out the air conditioning went bad within a month or two. It’s ridiculous but under the lease they were obligated to pay for a brand new air conditioning unit which was ridiculously expensive. Just wondering what you might want to do in that situation.
C: Well we run across this all the time. They made a few mistakes. One, many, many landlord leases say “Okay, you the tenant hereby acknowledge that you’ve examined the premises and found them to your satisfaction and you’re taking them as is.” We’d never want to sign that! Did you really have these things inspected? What about hidden defects that even the landlord doesn’t know about? Or changes in zoning or building or fire codes. Even though the space was previously used, it may be no longer up to code. Are you going to pay for that as the tenant? There’s all kinds of stuff. Then especially in the southern states, an old air conditioner is a problem waiting to happen and they should have negotiated that right away. Something to the effect of “Okay fine, I’ll do the maintenance of it up to X dollars per year but if it needs replacement, the landlord has to do that.”
We have a lot of instances where the landlord guarantees the units are in good operating condition for a year or 18 months from lease commencement or something.
There’s many ways to handle that and they just didn’t think of it. Probably it was one of those, “If they’d asked for it, they would have gotten it.”. We get it all the time. That’s too bad they didn’t think about it and they suffered the consequences.
MA/MI: So the key takeaway is you have to do this in your lease before you sign the lease. Before you get in trouble.
C: Yeah. It’s a serious thing. When you’re negotiating the deal is when the landlord wants to have you and will give you stuff. After it’s signed, there’s no reason. I mean some of them – even if it’s a really wonderful hearted person managing the center – they can’t say “We don’t have to do this but I’ll pay that $5,000 bill.” You’d think they’re going be there long when their boss hears about that? Somebody up in the chain of command is going to say “No”. We do what we have to do. We’re not giving away money here. A deal is a deal. It broke. You pay for it.
What’s even stranger too, if you’re four and a half years or maybe 4 years and 9 months of a 5 year lease then it breaks and you have to pay to replace it. That’s no fun either. Now you’re putting in new HVAC for the next person.
All these things happen and they just need to be addressed. Nobody can be expert on everything. I even thought many years ago that I could be. But the older I get the more I realize I need experts in so many different areas to keep me from making mistakes. They just made a bad mistake that’s all.
MA/MI: When we did our original lease in this space, my husband wanted something in there saying “The heating system was working or in good working condition.” and it went out on a sub-freezing day, we went back to that lease and pointed it out and they replaced it.
C: Right. Exactly!
MA/MI: They wouldn’t fix the air conditioning of the tenant next door who has been there for 28 years so he moved.
C: Because it wasn’t in the lease.
C: They have to do what they have to do and they know it’s a losing battle if you have a legal document that says “They’re going to do something.” They have to do it.
It’s that or they’re going to be paying legal fees or your legal fees when you sue them. You’ve given our listeners the best example of all. You just have to have it in there.
Give me some harder questions. My listeners might think that I paid you to ask these questions with all this soft-ball stuff!.
MA/MI: I have a question. We are in the middle of the lease. I have a great landlord. He’s invested in the community. He feels that our store is a very strong contributor to the community. He’s a great guy but I worry more about the succession. What happens after him? I’m just wondering, can you go back in the middle of the lease and renegotiate?
C: Yes you can. I’m glad you brought this up. To think about his succession planning and who’s going to take over is very important. We see examples all the time where the past landlord wouldn’t have done this but the new landlord is a total different deal and they’re not your friend. They can only go by what the documents say and what brings in the most cash flow and it may not be his building and it might be his boss’s building and how long does he want to keep his job etcetera so you do need to think about that.
So, you can negotiate, it’s a mutual negotiation, so at any time you could go to your landlord and ask “Can we extend our lease? Can we change things and this and that?” You can renegotiate and do a new lease at any time. It’s amazing that people don’t know that don’t know that. They think “Oh, I’m stuck here for 5 years and I just have to wait.” Maybe, but maybe not!
Well, if you need more space, less space, if you want to relocate, if something is changing in your world, you can go to your landlord and say “Things have changed. Can we redo our lease? How could it be to your advantage, Mr. Landlord, to make some changes?” It’s totally open and many times it gets done. It could be to the landlord’s advantage like we’ve already heard earlier today. Extending the lease making it even longer is a great thing and getting some good options and maybe changing some of these clauses that we spoke about and getting you off the personal guarantee. All kinds of things can be done. The market effects things too. Landlords have been around awhile they maybe start getting nervous about and of course right now the economy is booming but it might not be tomorrow and they’d like to have a tenant that’s going to be there awhile and locked in during the bad times too.
The point is, there’s nothing to prevent you from asking a landlord to redo a lease at any time. In fact, a lot of times, you don’t even need a new lease, just a Lease Amendment. It’s a simple document that may be 1 page literally and you add it to the lease.
MA/MI: One of our colleagues in San Diego said that she’s worked with landlords who would not allow her to use a lease negotiator.
C: They don’t want you to. They’d rather you have no one advising you – just do it the way they want you to! I run across this all the time. Normally, when I’m already representing a client from the initial stage, the landlord treats me like gold. They roll out the red carpet for me because I am bringing them a tenant. But if they get to you first, many times they’ll tell you: “If you use a broker, we’re going to have to charge you more because we’re going to pay them a commission. Guess what, I’ve NEVER seen it happen. We always save our clients more than they would have paid originally.
You don’t want to fall for that. I’ve never seen it in actuality where the landlord would say “Ooops, sorry, can’t lease to you because you have a broker working with you. Never heard of it. Ever.
MA/MI: Two landlords would not have proceeded if she used a negotiator.
C: That’s shocking to me. What city is that in? What kind of property is it?
MA/MI: San Diego. I believe she’s in malls.
C: Okay. Malls can be different. They’re a whole world unto themselves. If there is ever going to be a time that’s true, it would be in San Diego. In a booming economy. In a mall. So that could happen.
But here’s the other thing. It’s like saying “You can’t hire an attorney to take a look at this legal document I’m giving you.” What do you mean I can’t? Of course I can. So your friend might need to pay their lease consultant directly. Wouldn’t be the worst thing in the world, and should save them MUCH more than the cost. So it would have been money well spent to have someone look over the lease and sometimes negotiate from afar. For instance, I don’t need to talk to the landlord. I can tell you what to say to the landlord and give you advice, OR I can call and say “Hey landlord, they asked me to clarify some things here and you don’t have to pay me. I’m not asking for a commission. Don’t worry about that.” That type of thing.
On to another subject. The actual facility itself, and some issues I have seen lately.
I’ve seen a lot of retail stores that were maybe intended to be office fronts, or the owner is worried about sunlight coming in and overheating the place, but if you tint your windows dark and people passing by can’t tell if you’re open, see what you are selling, you need to take off the tint or replace the windows. It may cause more in utility bills but you’re going to make a whole lot more in sales and I’ve seen that happen.
Also, natural light. If you go into, I think Walmart was the first one to experiment with it, they’d put in sky lights, daylighting. The study seems to show that in the sections of the store with natural daylight coming in, people spent more time there and they bought more things.
MA/MI: That’s a good point. There’s a new popcorn store across the parking lot from us and they’ve added tinting to the windows because of the sun coming in because they face south but except for their open sign, you can never tell that they’re open.
C: Yeah, they’re crazy. For the sun, they need to put on some external or maybe internal blinds that you can roll up and roll down. But at night you want people to see in there really good and other times of the day and times of the year. If you are facing south, you should be able to put in overhang of the right dimension that will allow the winter sun to come in and warm up the place. You want that, but prevent the summer sun from coming in over and overheating it. I would look into that. I would change that for sure.
There’s also one other thing I wanted to mention then I’ll be done with my pet peeves. That is when you rent first generation space. Especially in mixed use projects where it’s retail, office, residential, everything all combined – which I love by the way. I love visiting them. I love living in them. They’re great. But when they’re brand new, the developer needs some retailers in there as an amenity. It helps them sell all the residential units and fill everything else up. So they desperately need the coffee shop and the pub and this and that. The problem is if they don’t sell a bunch of their units really really fast, there might not be enough population there to support that store. I feel sorry for the store owner that is paying top dollar to be there, with no customers. I’m sure you’ve seen it yourselves, that tenant fails and then another tenant goes in and they might even fail because there’s still not enough people until the project has matured and there are a lot of people there. NOW we’re talking about successful businesses. You don’t want to be one of the earlier ones and that’s the problem. If you are going to be an early tenant, tell the landlord “Hey, you’re making me promises based on the amount of traffic we’ll have here, and how successful I’ll be.” So you could build a Kick Out Clause into the deal. Which is still expensive if you don’t want to build out a place and just to leave if you fail. Perhaps your rent could be based on a percentage of sales, or percentage of project sell out. You need to tie what you have to pay into the success of the project. You need to realize that you’re an amenity.
Even that is scary because even if you’re paying NO rent, you’re having to pay utilities, employees, managers and stock a place, you’re still not going to be profitable. Just don’t rent a place based on a pretty picture and renderings and facilities and promises of how it’s going to boom, especially if the economy slows down, you could be there for years before you’re making the type of money that you’re expected to make.
MA/MI: We could have used that advice when we first signed our first lease in our original place. It was a brand new building, full of promise, indoor farmer’s market and apartments upstairs that part of them went to the housing authority. Well the farmer’s market didn’t make it so that went away. The housing authority decided that nobody could smoke inside the apartment so they all smoked outside the toy store. We ended up leaving when our lease was up.
C: Right and that’s such a disaster. Those are the type of clauses that I mentioned earlier. Maybe it will never matter, maybe it will matter a lot. You could have a Kick Out Clause in there based on the promises the landlord has made. If all these things occur, “Hey! We’re going to stay here!” but if they don’t occur, “We have the right to cancel this lease early.” and that’s bad enough. You’re still losing a lot of money but at least not terrible. If you go into an anchored shopping center, I think you have every right to have a Kick Out Clause that says “If the anchor tenant leaves, then we can leave too because you’re there for that anchor. You can get that many times just by asking.
Again, it depends on who you are because a toy store can be a really great amenity. You attract a nice demographic. You’re fun. You’re a real synergistic asset to a shopping area. So you should get incentives like that and be able to negotiate fairly tough terms. Especially you have multiple stores. You’ve been in the business for a long time and they know you’re going to make it. By the way, the biggest single fear of the landlord has is that you’re not going to make it. You’re not going to pay the rent. But if you could prove to them it’s very likely you’re going to be successful, then they should roll out the red carpet for you and give you a lot of incentives.
MA/MI: Mary mentioned the cigarette smoking in front of her space. In one of my spaces there was a print shop below and it never occurred to us the kind of chemical smells you get into with that. My question is really more about, what about these really crazy unforeseen things like scents and stuff.
C: Most leases that I see have a set of rules and restrictions against obnoxious sounds, smells, vibrations and things like that.
MA/MI: Well in my case, the landlord owned the print shop below ours.
C: Were they there before you rented the space?
C: You should have known better I guess. It is also good to go to a space morning, afternoon, evening, weekend, weekday, see the traffic patterns. You know that type of thing and make sure because a lot can change.
MA/MI: I sure wish I’d heard all this before.
C: We’re going to try to let all the other ASTRA members hear it and there will be a whole lot less mistakes made huh.
MA/MI: That would be great. I mean I personally feel like this is kind of a make or break moment. I mean if you’re going to splurge a little, spend a little money getting the right people help you on the lease. This is coming from someone who signed six leases and made a bunch of mistakes. Yeah, definitely good advice.
C: Let me tell you one more story just to make sure that the nail is hammered in all the way.
Couple of doctors went to an attorney friend of mine and they’re talking about “Oh yeah, we’re just opening up a new medical space right there across the street”. Attorney says “Oh! That’s great. Nice building. Did you use a tenant rep or did you have somebody look at this deal?”, “Oh no! We met the landlord. It’s a fine deal. Nice space. We’re pretty excited about it.” The attorney said “Well you know, I know you guys are real smart and I am sure it’s great space, but you really ought to have someone look at the deal just to make sure.” So for whatever reason he convinced them and they called me and they said “Hey, would you look at our deal? Our attorney says we should have you look at it.”. Okay fine. So I called the landlord and I say “Hey, no fault of mine. I’m not chasing down your people or anything but they came to me and they asked me if I would look at the deal and compare it to the market. Just hold off on the lease for now. It will take me a week or so. I need to see what all the spaces are going for, typical terms, and this and that. I’m not saying we’re not going to proceed, but they asked me to do my job and I said okay fine, so I’ll get back to you shortly.” So wouldn’t you know! Within 48 hours we get an email from the landlord that says “Hey, we sharpened our pencil and we just figured out how we can save you $50 000 over the term of the lease. So if you just want to go and let’s proceed right away, here are the new terms and look right here.” They actually did the calculations in the email! We saved $50,000 over the previous deal they had been ready to accept!
C: That’s what happens when you get an expert in. Someone on your side. It’s true and it’s human nature.
MA/MI: Not using someone could cost you so much money and it’s crazy.
C: Well, time is running out. It’s been real pleasure talking to you both. I enjoyed it and your questions. If you think of any questions for future sessions, I’d love to do this again. Or you can email me and ask me. I’ll answer for you right away. No reason to wait for one of these.
MA/MI: Thank you so much. This has been great. It’s very informative.
C: I’m really happy to hear that. Will talk to you again sometime. Thanks a lot. Bye.