Lease Negotiation Strategies: How To Secure a Favorable Lease Structure for Long-Term Success

For franchise businesses, the lease is more than just a contract—it’s the foundation of your operation, and it has to be strong enough to support your growth. From understanding the implications of tenant improvement allowances to negotiating optimal exit clauses, the way you structure your lease can significantly affect your long-term success.

The lease negotiation journey might seem daunting, but when approached with a methodical strategy and a well-informed mindset, it can lead to a deal that bolsters your franchise’s longevity and success. It’s more than just signing on the dotted line—it’s a blend of art and strategy, where every step has profound implications for your business’s future.

A successful negotiation begins with comprehensive market knowledge. Start by gaining an intimate understanding of the local real estate landscape. What are the prevailing rental prices? What terms are common in lease contracts? Which are the bustling business districts, and which are the quieter ones? This knowledge is your first tool of negotiation, enabling you to assess proposals with a critical eye and propose counteroffers that are grounded in market realities.

Couple this with the power of your brand. A reputable, proven brand can significantly enhance your bargaining position, offering the landlord assurance of a reliable tenant and potential customer draw. Use this to your advantage. Discuss your successes, share data on footfall and customer loyalty, and show why your business is a great addition to their property.

In the dance of negotiation, it’s not just about what you bring to the table, but how you present it. Relationship-building is a key undercurrent in any successful negotiation. Establish a positive rapport with your landlord. Open and maintain clear lines of communication, show understanding toward their interests, and demonstrate your commitment as a reliable, long-term tenant. This relationship can pave the way for more favorable lease terms and make future renegotiations smoother.

Bring in the expertise of a real estate advisor or broker. Their industry experience, negotiation acumen, and existing relationships with landlords can be invaluable. They can provide insight into aspects of the lease that you may overlook, negotiate terms that align with your business needs, and ensure that your lease is free from potential pitfalls.

In the end, remember that there’s no one-size-fits-all approach. Lease negotiation is an art, not a science. Every negotiation will be unique, influenced by a host of factors such as the property type, location, market conditions, and the personalities involved. Yet, with a deep understanding of your market, flexibility in your approach, leveraging your brand power, and ensuring robust protection of your interests through well-negotiated lease provisions, you’re well on your way to securing a lease that lays a solid foundation for your franchise’s long-term success.

Negotiating favorable rent rates, escalations, and lease durations

When stepping into the world of franchising, the first task franchisees face is to secure a lease that supports their business plan. For example, many franchisees aim to have their rent at or under 8.5% of their gross revenue. Every business and location may have vastly different overhead, so it’s crucial to negotiate a base rent that aligns with your expected revenue as it relates to your expected overhead.

A common, and often effective, negotiation strategy is to offer to sign a longer lease term in exchange for a lower initial rent. This provides a landlord with the comfort of predictable income, but decreases your flexibility to leave the location should things go sideways in the future.

Another strategy to secure favorable lease terms is to offer to tie rent escalations—which vary drastically between different businesses and markets—to performance metrics or the Consumer Price Index (CPI). Remember, landlords usually own real estate to hedge against market factors such as inflation, so if you can help them achieve their goals they’re much more likely to return the favor.

Next issue: Tenant improvement allowances, the power of strategic exit clauses and renewal options, and a glossary of 20 essential lease terms for franchisees.

Jason Fefer is an Associate Director of Marcus & Millichap’s Net Leased Property Group on a large team alongside his partners Robert Narchi and Tyler Bindi. They structure sale-leasebacks and negotiate leases on behalf of some of the largest franchisees across all sectors including the restaurant, automotive, and retail space. He can be reached at 818-669-2388 or jason.fefer@marcusmillichap.com.