Good morning and welcome to Episode 62 of The LeaseSmart Commercial Real Estate Podcast, brought to you by LeaseSmart.com. Your host is Craig Melby, the founder of LeaseSmart, whose objective is to find companies the best facilities and get them the best terms, making their business more profitable and less vulnerable to future, unpredictable circumstances.
In today’s episode Natalie interviews Craig about how retailers can find some ways to build financial protection into their leases. He has given presentations and webinars to ASTRA aka the American Specialty Toy Retailing Association teaching retailers how to make smarter deals with landlords.
No one needs to tell toy store owners that brick and mortar stores are experiencing a major business disruption! More than ever, these business owners need to prepare for future uncertainties by reducing their financial exposure and liabilities when they rent space . . . keep those lease obligations flexible so you can roll with the punches that will inevitably occur.
While this new paradigm is more obvious every day, traditional landlord’s business and finance models have not kept up, so lease negotiations can become a bit strained as the opposing parties strive toward different goals. Following are five ways today’s toy store owners should try to minimize their financial exposure:
1. Flexible Lease length
2. Limited Personal Guaranty
3. Lease Termination Clause
4. Expansion Clause
5. Liberal Assignment Clause
Thanks for tuning in and have a fantastic day!
Give Craig a call if you’d like to learn more. He can be reached at 800-962-2419.
Click for a free download of Craig Melby’s presentation to retail store owners Five Vital Clauses You Must Have in Your Lease.
For more information, be sure to visit LeaseSmart.com
Toy Store Owners:
5 Vital Lease Terms For Today’s Times
No one needs to tell toy store owners that brick & mortar stores are experiencing a major business disruption! More than ever, these business owners need to prepare for future uncertainties by reducing their financial exposure and liabilities when they rent space . . . keep those lease obligations flexible so you can roll with the punches that will inevitably occur.
While this new paradigm is more obvious every day, traditional landlord’s business and finance models have not kept up, so lease negotiations can become a bit strained as the opposing parties strive different goals. Following are five ways today’s toy store owners should try to minimize their financial exposure.
Five Vital Lease Terms
“Flexibility is important!”
1 Flexible lease length Today’s retailer can’t be sure what is going to happen in a year, never mind the typical five-year term landlords usually demand. Store owners should value flexibility as a significant asset. Suggestion: Use shorter lease lengths with several lease-renewal options, so you have flexibility and can move more frequently if need be. When possible, store owners should seek spaces they can use pretty much “as-is”, so the landlord doesn’t have to make a large investment into the tenant’s interior improvements. Sure, most landlords are disappointed with shorter leases, and some circumstances make it difficult, but done right, it is still very do-able.
“Store owners should build in an option to walk away from the space and go elsewhere if the situation requires”
2 Lease Termination Clause Another way store owners can protect themselves from an uncertain future is to build-in an option to walk away from the space and go elsewhere if the situation requires. Called a “kick-out” clause by industry insiders, this clause is usually tied to specific occurrences, time frames and penalties so it’s fair to both sides. Example: Assuming a five-year lease, a clause might allow a tenant to terminate the lease under these combined conditions: a) any time after the 30th month, b) if sales do not hit a certain target or decline substantially, c) giving the landlord six months notice, and d) reimbursing the landlord for unamortized expenses including tenant-improvement dollars contributed by Landlord, leasing and legal fees. Another good trigger for a Lease Termination Clause: loss of an anchor tenant!
“Another way today’s businesses build flexibility into their lease is to obtain a right to increase the size of their space if requirements dictate.”
3 Expansion Clause What if future toy stores include an interactive/play component and they need MORE space to accommodate the new business model? Along with a broad “use clause” which would allow this, it is possible to negotiate an expansion option to accommodate the new product/service. This is fairly palatable with many landlords as getting a bigger tenant with an extended term is always a good thing, and it can be practicable too if the overall center is large enough to absorb this type of requirement. Typical expansion clause terms provide that the length of the new lease gets extended beyond the term remaining in the original lease. In some cases, the expansion clause is written with specific (adjacent) space in mind, and a window of time in which the tenant can expand. The landlord then agrees not to rent that space to another tenant for a time period that infringes on your right to expand into it.
“Business owners should be freed from financial obligations that aren’t absolutely necessary.”
4 Limited Personal Guaranty By choosing space where the landlord doesn’t have to invest substantial funds on interior improvements to fit unique specifications, store owners should not have to personally guaranty leases. Or if they DO personally guaranty a lease, the guaranty should expire at some point or have a limit to the financial exposure. We see leases where the personal guaranty – if needed – expires after the second year of a five-year lease, or the maximum dollar amount of guaranty is fixed at the amount of the landlord’s cost of doing the deal (remodeling costs, legal and brokerage fees, etc.) Also common in the industry is an “evergreen lease guaranty”, where the guarantor is always obligated for 12 months of term, which is way better than the full remaining term. By not guaranteeing the lease, Business Owners have far more leverage to negotiate a new deal should future circumstances dictate a change.
5 Liberal Assignment Provisions Another issue to which company owners need to pay attention is the lease assignment provision. Usually buried in the “boiler plate” of leases and often overlooked, lease assignment terms may become vital to business owners who need to keep their options open. Thinking of selling your company or bringing in a partner? Most standard assignment clauses prevent an assignment of the lease without landlord’s approval. Business owners can’t re-partner/sell the business without getting the landlord involved (who may want to renegotiate everything to your buyer’s/investor’s detriment), and you obviously can’t cancel the lease and sell the company either! We’ve seen lease assignment fees as high as $30,000, and perhaps even worse, other lease language that gave the landlord the option to terminate the lease if the tenant even requested an assignment!
Do landlords like doing business these new ways? No, but if given a choice between renting the space or leaving it vacant, they must seriously consider it. Negotiation success also depends on the strength and prestige of the tenant, and the other terms of the lease. Just remember: With all the massive industry disruption going on, the modern world is no longer business as usual: If you need to close shop, pivot, or provide a new service and hire more people, your financial health should not be risked because of unnecessarily harsh or inflexible lease terms.
Note: These lease term suggestions are in addition to the many typical lease terms tenants need to amend or add to a standard landlord lease (i.e. holdover, “as-is”, commencement, CAM charges, etc.).
Questions about YOUR lease? Feel free to contact us for a complementary consultation to decide how we can help your company grow and prosper.
Craig Melby, CCIM, Founder
(800) 640-9141 CraigMelby@LeaseSmart.com
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“Another issue to which company owners need to pay attention is the lease assignment provision.”