Real Estate

Hopefully, you are adopting a standardized real estate process that encompasses a clearly defined all-in-one strategy for site selection, lease negotiation, and legal review. I realize that, as a franchise executive, you may not have the time, resources, or capabilities to put this process in place. This four-part series highlights 11 key points for standardizing your real estate process.

Introduction: A Reality Check for Real Estate Services

If CEOs visited and audited each location in their system, they would discover that there is up to a 30% error factor in visibility, convenience, tenant mix, economics, and lease terms. This is the single largest contributor to a franchisor's annual turnover rate.

Real estate plays a central role in the overall success of a franchise system...

Franchising can be a tough business. Franchise growth and expansion can be even tougher. More and more brands - and franchisees - are fighting for space and market share today and certain markets are saturated with operators. Throw in the continuing difficulty to access capital for expansion, and adding franchise units to your portfolio can be difficult. But they say that necessity is the mother of invention and some brands and franchisees are turning to non-traditional locations in an effort to continue building their businesses.
Franchises are showing up more and more in place like airports, college campuses, sporting events, concerts, stadiums, hospitals, military bases, government offices, convention centers, highway rest stops and turnpike plazas, even large companies - anywhere large numbers of people congregate, pass through, or live...

When Greg Thomas decides whether to fix or ditch a financially troubled store, he typically thinks big. "I don't pay attention to pennies, nickels, and dimes," says Thomas, franchisee of more than 30 Great Clips salons in the Southeast. "When something is distressed, saving a few nickels, dimes, and pennies doesn't do anything. You have to increase sales 25 to 50 percent overnight."
Not everyone has his constitution--nor his experience turning distressed franchise units into profit-makers. Thomas, president of Parkside Ventures in Duluth, Ga., has made it his business to know whether a store has profit potential or will continue to bleed red (for an in-depth profile of Thomas, see www.franchiseupdate-digital.com/franchisee/2011iss3)...

One of my greatest concerns is agents who are supposedly working for the tenant while accepting a commission from the landlord. I have hesitated writing this article for months lest it be considered an attack on real estate salespeople or agents. Nothing could be further from the truth. If it weren't for real estate agents and brokers, landlords would have half-empty buildings. My purpose here is to enlighten franchise tenants, open some eyes, and let you decide for yourself about this important issue.

Before 1993, I was a shopping mall manager and before that a typical leasing agent, so I know what I'm talking about. Real estate agents are deal-driven, not detail-driven. Whether you pay rent at $24 or $26 per square foot matters less to many agents than whether the deal actually gets done...

The Financial Accounting Standards Board (FASB) and its international affiliate, the International Accounting Standards Board (IASB), are currently reviewing proposed new lease accounting rules that, if approved, will significantly affect the retail and restaurant industries.

The upside of the changes is that under the new rules, rent will no longer appear on the income statement. The downside is that it will be replaced by amortization and interest charges. These are typically higher in the first years of a lease and lower in the latter years, so the first-year costs of some long-term leases will show as twice the amount of current rent based on Generally Accepted Accounting Principles (GAAP). In addition, after the changes, the relatively benign footnote that now details future lease obligations will be replaced by asset and liability accounts on the balance sheet...

Restaurant franchisees gathered in New York last month for the International Restaurant & Foodservice Show. The event typically attracts restaurant owners and partners (34% of attendees last year were from the restaurant industry and 40% of these individuals were managers and key decision makers) who come to bone up on the latest strategies, techniques, and technology. There's always plenty to see and do at the event.

Dale Willerton - The Lease Coach - was one of the speakers at this year's meeting. He led two sessions, "13 Costly Mistakes Restaurant Tenants Make Negotiating a Commercial Lease or Renewal" and "101 Leasing Tips for Restaurant Tenants."

I had a chance to visit with Willerton at the show - and in between sessions - and ask him a few questions...

Measure twice so you only pay once.
I have found that some landlords are over-charging multi-unit franchisees for more square footage than the actual available space. Are you paying too much?
Unfortunately, incorrect square footage figures are a common oversight in commercial leasing. Multi-unit franchisee tenants often trust the reported square footage of their leased premises. However, the amount of reported square footage can easily be wrong--whether this figure was accidently reported by the landlord or reported by a property owner who has never even seen the site. The result is that multi-unit franchisee tenants could be needlessly paying an increased rent.
I was having dinner one evening with the chief operating officer of a large franchise organization...

Among the many costs associated with running a successful franchise are staff wages, marketing campaigns, and product costs (with regard to ordering and maintaining an inventory). One of the biggest expenses, without question, has to be your commercial rent. Higher income from rent-paying tenants, like you, will make a landlord happier. However, this remains as money out of your pocket. By decreasing your monthly rent, your profits will increase. Doing this is not impossible. Know that the amount of rent that you agreed to pay at the beginning of your lease term is not necessarily the amount of rent you will pay on your renewal. I have been quite successful in negotiating midterm rent breaks and lease renewal rent reductions for many clients - both independent business owners and franchisees...

A great franchise in a poor location will become a poor business. When it comes to site selection, one difference between an independent tenant and a franchisee is that, presumably, the franchisee will be getting real estate help and support from the franchisor. Whichever side of the coin you're on, here are some site selection tips for leasing commercial and retail space:

Should a franchisor sign the head lease and sublease the space to a franchisee or allow the franchisee to enter into his or her own lease agreement with the landlord? Both options are viable, but which is more practical and better for you?

With the first choice, the franchisor maintains much more control, but conversely is exposed to much more risk. To some degree, the franchisor may also choose to allot more management time - specifically, if that means collecting the rent from the franchisee to pay to the landlord or in handling reported concerns. A franchisee on a head lease will usually find fault with leasing issues directly to the landlord. A subtenant, on the other hand, will often complain directly to the franchisor that holds the head lease...

As a franchisee, you may have found it quite easy to secure a lease with a commercial landlord; however, you may face many roadblocks if, or when, you need to terminate your lease prior to the end of the term.
With franchisor support, better name recognition and industry history behind them, franchise tenants are typically more desirable to a commercial landlord than independent business operators. Even though you may have had the advantage in negotiating your initial lease with your landlord, you will not have this same advantage when terminating your lease.
As The Lease Coach, I have been coaching and consulting with independent and franchise tenants since 1993. Over the years, how to terminate a lease has proved to be a common question and rightfully so...

Often when I speak at franchise shows and conventions a tenant will ask me, "What is the best lease length?" The term, or length, of your commercial lease is an important part of your franchise business plan and ensuing lease negotiations. However, most franchise tenants do not take enough time to consider that one day they will eventually want to sell the franchise. Alternatively, they may want to expand/downsize, relocate, or close and so do not give the term of the lease the attention and consideration it truly deserves.

The industry standard lease term for a franchise tenant can be five, seven, or 10 years (but not shorter). For many of the more expensive franchise systems a 10-year amortization period is normally required on the initial term to justify that initial capital investment cost...

Whether you purchase or lease commercial space is one question. Whether you can find good commercial space to purchase is another matter unto itself. Although commercial property purchasing options exist across the country, they are less abundant than leasing opportunities. It is my opinion that, the better the location you need for your own business, the less likely you will be able to find a suitable space for purchase.

I remember one client tenant who had just moved and wanted to lease commercial space. He was contemplating whether to lease commercial space or buy a location outright. We went through our standard site selection process and produced a number of excellent locations both for lease and for sale. The end result was the purchase of a three-story business condo...

As a franchisee, you may have found it quite easy to secure a lease with a commercial landlord; however, you may face many roadblocks if, or when, you need to terminate your lease.

With franchisor support, better name recognition, and industry history behind them, franchisees are typically more desirable to a commercial landlord as tenants than independent business operators. Even though you may have had the advantage in negotiating your initial lease with your landlord, you may not necessarily have this same advantage.

I have been coaching and consulting with independent and franchise tenants since 1993. Over the years, how to terminate a lease has proved to be a common question and rightfully so. Should the tenant continue to lose money? No...

Franchise tenants need to understand who the broker is working for

As "The Lease Coach," I am a magnet for leasing questions. In fact, I receive hundreds of questions from independent and franchisee tenants each year; I am approached after my seminars, e-mailed, and called. One telephone call that I received was from a woman who had recently purchased a franchise. She started by telling me that her franchisor had offered to do her site selection and real estate work for an extra $3,500. Not knowing much about commercial real estate, she had thought that was a great deal and had accepted the franchisor's proposal for help. According to the franchisee, she was to meet and spend the day with a local real estate agent looking at sites, which she did...

Whenever I speak at a franchise convention, I inevitably meet many struggling franchisees leasing commercial or retail space. These tenants desperately need a rent reduction ... right now. The recession is taking its toll on all industries including franchising; sales are down, business expenses are rising, and the high cost of leasing space is closing in on tenants. Your monthly rental payment to the landlord can be one of your biggest monthly expenses. Therefore, reducing this monthly lease payment is imperative for businesses like yours to stay viable.

If one, or more, of your franchise locations were at the end of its lease term there would be hope for a rent reduction on the lease renewal. Unfortunately, many franchisees find themselves in trouble somewhere mid-term into a five-year lease agreement...