FAQ: Lease Agreements for Franchise Operations

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By: Tiffany Toliver, P.E., LEED AP

I thought I’d take a few minutes and answer some of the frequently asked questions that I get regarding lease agreements for franchised operations.

Q: How long should my initial lease term last?

A: Typically, 10 years; though this answer is not in a vacuum. Consider your ROI, the amount of Tenant Improvement Allowance you are receiving, and finally the length of term in your Franchise Agreement.

Q: Is this a good rent rate?

A: This is also a question that begs several other questions. What is included in that rent number? Are you getting your full work letter for example? Are there rent increases? Are you getting any money for Tenant Improvement Allowance? What is the market rate? What is your ceiling? (based on your projected EBITDA). Having the answers to these questions will help you determine whether your rent rate is appropriate for the trade area and for your operation.

Q: Who should pay the brokers commission?

A: Typically, this is paid in full by the Landlord. However, look for it to be baked into the rent number in some way. Don’t let this concept diminish the role of the broker. A good broker will be able to get you a lower rent rate than if you were to go it alone. They also have their ear to the ground about upcoming projects that aren’t on the market yet.

Q: My building permit is going to cost me in excess of $5K. Can I get the Landlord to pay for this?

A: No. Unless you’ve worked out a ‘turn-key’ deal in the LOI stage.

Q: Do I really need a Real Estate Attorney to review my lease?

A: In my opinion, Yes. Remember that you are signing a contract for a span of 10-years. The money spent on a Real Estate Attorney to review the lease, is money well spent.

Q: Can I just wait and negotiate renewal terms when my lease expires?

A: Technically yes, but you run the risk of the Landlord increasing your rent at a rate that compromises your ROI. Worst case, the Landlord can choose not to renew your lease at all.

Q: Am I bound by an executed Letter of Intent (LOI)?

A: No. An LOI is a ‘Gentlemen’s Agreement’. You cannot be taken to court for backing out of an LOI. You can, however be taken to court for breach of an executed (contractual) Lease Agreement.

Q: I found out the business owner next to me (same center) has a better rent rate. What can I do?

A: Check your lease. Make sure that you are paying the correct rent rates, CAM, Insurance rates, etc. If a meaningful discrepancy in rent rates exists between you and your neighbor, go and talk with the Landlord. Keep an open line of communication and try to come to a compromise.

 

Do you have a question regarding franchising that we can help you answer? Please ask us here and we’ll get back to you!

 

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One Reply to “FAQ: Lease Agreements for Franchise Operations”

  1. This is an excellent forum of information on the lease. New franchisee’s in most cases when entering the business of franchising don’t understand the value of the lease. It’s the largest and most important asset they have in their portfolio. Many look at it as a liability that they pay each month. If you take and put the time and resources necessary to select and negotiate the proper lease it will be an asset in your portfolio and pay you dividends in the years to come.

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