10 Questions Franchise Tenants Should Ask Their Landlords
Franchisees have plenty of homework to complete prior to opening up or expanding within a franchise territory. An often-overlooked element in the entire process for franchise tenants is for them to prepare for lease negotiations with their landlord. By asking plenty of educated questions prior to negotiating or signing a formal lease, franchise tenants can better ensure a more equitable rental rate and overall maximize the entire lease deal.
What are these questions? Having consulted with commercial, franchise and retail tenants since 1993, I compiled the following 10 questions that all tenants should ask during the negotiating process either for a new location or a lease renewal. These 10 questions are only the beginning of what a tenant needs to know from his landlord; by asking these questions, the tenant will better protect himself, his interests and his investment.
Considering that 95 percent or more of commercial real estate is listed with an agent, who is working for the landlord and showing the tenant the space, one should pose these questions to that agent. Also remember that the more important the question or answer, the more important it is to get it in writing. Verbal promises made in advance of a tenant signing a lease can easily be forgotten.
Posing questions–especially to an experienced real estate agent, landlord or property manager–may be uncomfortable and, perhaps, even a little intimidating. Be confident asking these questions; these individuals are typically open to providing answers. And before hanging your proverbial shingle, it is always best to be as informed as much as possible.
1. WHO IS THE LANDLORD? Will the franchisee be dealing with a large institution, a professional developer or a small, independent “Mom and Pop” landlord? Different negotiating strategies work better on certain landlord types. Different landlords have different goals and require different tenant mixes. A “Mom and Pop” landlord might be less discerning and only require a tenant who will pay the rent while a professional landlord might be looking for national tenants.
2. WHERE IS THE LANDLORD PHYSICALLY LOCATED? A local landlord is often more accessible, thus making any dealings prior to and following signing the formal lease easier. When a landlord is absent, personal meetings become more difficult to schedule.
3. IS THE PERSON IN CHARGE OF PROPERTY MANAGEMENT ONSITE? Similar to the preceding point regarding absentee landlords, ensure that your property manager is readily available to deal with any concerns. Property managers may look after multiple sites (not always in the same city or town) and often cannot remain at one location on a full-time basis. Look around. Is your property in the landlord’s crown jewel of a property (where the property manager is onsite) or is the property located 200 miles away in a smaller plaza in one of the other holdings?
4. WHO WERE THE TWO MOST RECENT TENANTS TO MOVE IN AND WHEN? Approach these tenants, identify yourself as a potential new neighbour and ask them how their lease negotiations went. If the leasing agent claims he has only recently acquired the listing and does not know, push for the details.
5. WHO WERE THE LAST TWO TENANTS TO MOVE OUT? Ask when and why did these former tenants move out? Did they move across the street or did they close? When speaking to these former tenants, ask for more details about their reasoning for leaving, as well as their opinions of the landlord, property manager and the property itself.
6. HOW LONG HAS THE LANDLORD OWNED THE PROPERTY? Long-time landlords are knowledgeable about the property, will retain interest in continued ownership and have more realistic rent expectations. A new landlord may have a high mortgage and charge tenants higher rents to cover the cost.
7. WHAT IS THE BUILDING’S HISTORY? An older building may require further upkeep and maintenance, which tenants pay for in Common Area Maintenance charges. If there has been a high turnover of tenants in the past, for any reason, this should raise a red flag. Also, has a similar-use tenant previously leased space within the property and either closed the business or moved elsewhere within the past 10-20 years? The plaza that was built 18 years ago near my home is a good example of what I mean. Some of the units have had a new tenant every four or five years.
8. WHO IS DOING THE PROPERTY LEASING? Knowing who the tenant is dealing with will help him better prepare for negotiations. Is this a big leasing brokerage, a property manager or the landlord’s son? Real estate agents must follow a code of conduct; however, they often can only share what the landlord has told them. A less than reputable landlord doing his own leasing may tell someone anything to get that person to sign.
9. WHO IS THE PROPERTY’S BIGGEST TENANT (THE ANCHOR TENANT)? How secure is this anchor’s tenancy? The anchor tenant typically attracts the most traffic to a property so an incoming tenant will want to confirm that the anchor tenant will be staying. Tenants in my neighborhood’s strip mall were caught unawares when Safeway, the anchor tenant, moved out. Despite having a long-term lease, a grocery anchor can often move its store, but continue to pay the rent, thus disallowing any competitor from moving in. As a result, the remaining 12 tenants in the plaza paid the price as the landlord did not, subsequently, lowering their rents, but dramatically decreasing their sales.
10. IS THE BUILDING FOR SALE? Building owners looking to sell their building will have different motivations with prospective tenants. Also, consider that it is possible to like the current landlord, but dislike the new landlord. Tenants who are aware that a building is for sale will often mistakenly wait for the new landlord to buy the building (so as to negotiate a new lease or a lease renewal), which usually works against them. Typically, the new landlord wants higher rates.
Dale Willerton is The Lease Coach and a lease consultant who works exclusively for commercial tenants. He can be reached at 1-800-738-9202 or email@example.com.