negotiating restaurant leases: combining practicality with...

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Presenting a live 90-minute webinar with interactive Q&A

Negotiating Restaurant Leases:

Combining Practicality with Legality Navigating Permitted and Exclusive Uses, Co-Tenancy, Right to go Dark,

Operating Expenses, Termination, Renewal, Lease Economics and More

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, JANUARY 21, 2016

James R. Haslem, Principal, Huntley Mullaney Spargo & Sullivan, Roseville, Calif.

Lewis Gelmon, Lewis Gelmon Enterprises, San Diego

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Creating Value for Companies in the Midst of Change www.hmsinc.net

Negotiating Restaurant Leases -

Combining Practicality with Legality

Presented by

Jim Haslem

Strafford CLE Webinar

January 21, 2016

6 www.hmsinc.net

Some Threshold Issues

1. Whose lease form are you using?

2. Is the brokers’ LOI clear and consistent?

3. Is there a lease guaranty?

4. Other docs involved – Tenant Improvement

Work Agreement, SNDA, Lease Memo and

PTR

But first…

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A Few Suggestions…

Because Negotiations are not a Perfect

Process-

> Meet with the Client and

establish point of contact

> Define Key Objectives

> Set Expectations

8 www.hmsinc.net

Review the lease – “Stem to Stern”

• Issues that relate to leases generally

• Develop a checklist with provisions that have

worked in prior leases

Review Issues such as-

Lease contingencies, delivery of premises, who will

build out tenant improvements and completion risk,

warranty of condition, right to re-measure, maintenance

and repairs, Landlord termination rights,

surrender/restoration

9 www.hmsinc.net

Review the lease – “Stem to Stern”

• Issues that are key for restaurants

Review Issues such as –

Permitted and exclusive uses, co-tenancy, parking,

lease transfer rights, relocation, Landlord security

interest, Tenant’s right to terminate lease

Of paramount importance-

“Right-sizing” the rent, getting adequate

term and options

10 www.hmsinc.net

Adding value for the client

• Rent has a disproportionate impact on success or

failure. In many cases, it determines success or failure

• Pro forma sales and cost projections

• Advise your client to develop metrics for evaluating rent;

not just rely on what’s market rent

• A key question for restaurants is: “What is the right

rent for this restaurant, based on its actual

performance?”

• Get from Landlord the history of Operating Costs

11 www.hmsinc.net

Why is the Rent so important? ALT 1 FY 2014 ALT 2 FY 2014

$ % $ % $ %

Total Net Sales 3,095,641 100.0% 3,095,641 100.0% 3,095,641 100.0%

Total Cost of Sales 770,304 24.9% 770,304 24.9% 770,304 24.9%

Total Income/Net Margin 2,325,337 75.1% 2,325,337 75.1% 2,325,337 75.1%

Controllable Expense

Salaries & Wages - Hrly 775,480 25.1% 775,480 25.1% 775,480 25.1%

Employee Benefits 243,319 7.9% 243,319 7.9% 243,319 7.9%

Operating Expense 114,955 3.7% 114,955 3.7% 114,955 3.7%

Advertising 21,937 0.7% 21,937 0.7% 21,937 0.7%

Utilities 77,970 2.5% 77,970 2.5% 77,970 2.5%

Admin & Gen 140,867 4.6% 140,867 4.6% 140,867 4.6%

Repair/Maintenance 93,479 3.0% 93,479 3.0% 93,479 3.0%

Subtotal Controllable 1,468,007 47.4% 1,468,007 47.4% 1,468,007 47.4%

Operating Income 857,330 27.7% 857,330 27.7% 857,330 27.7%

Management Fees 212,759 6.9% 212,759 6.9% 212,759 6.9%

Profit Before Occupancy 644,571 20.8% 644,571 20.8% 644,778 20.8%

Rent & Occupancy 414,186 13.4% 331,349 10.7% 497,023 16.1%

Depreciation Expense 74,621 2.4% 74,621 2.4% 74,621 2.4%

Interest Expense 0 0 0

Net Income 155,764 5.0% 238,601 7.7% 73,134 2.4%

EBITDA 230,385 7.4% 313,222 10.1% 147,755 4.8%

4Wall EBITDA 443,144 14.3% 525,981 17.0% 360,514 11.6%

RENT CHANGE 100% 80.0% 120.0%

OCCUPANCY % NET SALES 13.4% 10.7% 16.1%

CHANGE IN EBITDA 36.0% -35.9%

LL'S SHARE OF EBITDAR 64.3% 51.4% 77.1%

LL'S SHARE OF 4Wall EBITDAR 48.3% 38.6% 58.0%

FY 2014

RESTAURANT OPERATING STATEMENT

12 www.hmsinc.net

Why is the Rent so Important?

• It’s a fixed cost that is

generally seen as not

controllable by the restaurant

operator.

• If the rent is too high, it tends

to stay too high – growing

sales or cutting costs to keep

up with rent and rent increases

is not a winning strategy

over the long-term.

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Types of Rent

• Base Rent

• “Free rent”

• Percentage Rent

• Additional Rent

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Rent increases

Annual rent increases

Fixed, CPI, FMR,

Min/Max, Floor

Percentage Rent

increases

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Get Adequate Term & Options to Renew

• The lease term and option periods are the

lifeline for the restaurant

• Without an option to renew, the Landlord can

close down the restaurant or hold it hostage for

a big rent increase

• Pick up as many 5-year options as possible

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Common Area Maintenance Expenses (CAM)

& Real Property Taxes

• Inclusions

• Exclusions

• Base Years and Caps

• Audits

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Tenant Right of Early Termination – Escape

Hatch

• Terminate at end of Year 5 of 10 Year

term

• Terminate if TTM sales are below a

threshold

• Co-Tenancy

• Other Material Reason

• Termination Fee – amortized costs,

broker commission and base rent

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A few Quick Tips Such as-

Insurance – Mutual Waivers of Subrogation

Lease Transfer Rights

Landlord Rights to Terminate

Tenant Rights to Terminate – Go Dark

Tenant Defaults

Landlord Default

Estoppels

19 www.hmsinc.net

Negotiate Effectively

• The L’s of Negotiation

• If you have a problem with the

lease, engaging the Landlord in a

dialog to renegotiate the Lease may

be useful or necessary

20 www.hmsinc.net

Jim Haslem

Huntley Mullaney, Spargo & Sullivan,

Inc.

Santa Barbara, CA

(805) 452-7474

[email protected]

Contact info

The Best Ways to Reduce

Real Estate Costs and

Gain a Competitive Advantage

You Should Leave Here With

• A different mindset

• Knowledge

• Actionable steps KFC can take tomorrow

© 2013 Lewis Gelmon Enterprises, Inc.

22

Don’t Blindly Exercise Renewals


• Much has changed since the lease was first signed

• This is the best time to recognize the value of a restaurant is directly related to the lease

• Understand the Tenant Lease Cycle

23


Option to Renew

Provided that ABC Ltd. shall remain as the Tenant and if the Tenant duly and has regularly paid its rent and has performed its covenants and obligations under this Lease and has not been in Default, it shall have the option to renew this Lease for a further term of five years exercisable by written notice to the Landlord no less than nine (9) months prior to the end of Term. Any such renewal shall be on the Landlord’s then current standard form lease at a minimum rent to be determined between Landlord and Tenant, but in no event shall it be less than the rent paid in the last year of the original Term. If the Landlord and Tenant are unable to agree on the market rent within sixty days of the exercise by the Tenant of its option to renew, the Rent shall then be determined by arbitration based on the market rent for renewing tenants in the building

24

The Tenant Lease Cycle


25


Sale of Business (Assignment)

If the Tenant should wish to assign or sublet the Leased Premises, it shall first have received the consent of the Landlord. Any request for such consent shall be in writing. Within fifteen (15) days after the receipt by the Landlord of such request for consent, the Landlord shall have the option to either terminate the lease or to revise the Minimum Rent to be paid during the remainder of the Term to the greater of the then current market rent for the Leased Premises or fifteen percent (15%) greater than the then current rent. Notwithstanding the Landlord’s consent to any assignment or subletting, the Tenant and the Guarantor (s) shall not be released from its obligations under the Lease and shall remain liable for any failure of the Tenant or its assignees or subtenants to observe each and every covenant of the Lease.

26


Sale, Demolition, Re-Development

• The Lessee acknowledges that if during the term of the Lease, the Lessor: • a) Makes a bona fide sale or otherwise disposes of the building or

any part of the Lessor's interest therein; • b) Wishes to remodel or renovate the building or any part thereof; • c) Wishes to take down or demolish the building;

• The Lessor shall have the right notwithstanding anything in the Lease

herein contained, to terminate the Lease upon giving to the Lessee six

(6) month's notice in writing of Its Intention to terminate the same and

upon the expiration of the period of such notice, the term shall stand determined and at an end, and the Lessee shall forthwith deliver to

the Lessor, or its nominee, quiet and peaceful possession of the demised premises in accordance with the provisions of Article 6.08.

27

Inflation is Coming!

• Inflation is a significant risk with the NNN Lease

• Hedge your leases against inflation

• You don’t have to outrun the tiger… just the person next to you


28

Create a New Profit Center


• Do your own site selection • Put A people in A positions

• Earn Tenant Placement Fees

29

Commit to Becoming a

Real Estate Driven Franchise Company


• Starts from the top down

• Policy is what connects real estate activities to the goals of management

• Educate everyone on the team

• Give Franchisees the right information consistently

30

The Tenant Lease Cycle


31

Don’t Reinvent the Wheel


Presented by

Lewis Gelmon

[email protected]

760-479-9704

32

mailto:[email protected]

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