Commercial Leases – Identifying Your Asset(s)

After the acquisition of our medical software company, we opened 2self-serve yogurt stores along with a few business partners. The first was located in Pigeon Forge and the other in Athens, Tennessee. The Athens store was chosen because there was a good-sized family restaurant which served as an anchor. During our conversations with the landlord, he was aware that we picked this location because of the anchor restaurant.

We executed a 3-year triple net lease and opened the end of January. After we signed, we learned that the restaurant was moving out effective March 1, only five weeks after we opened. They had been in the process of building their own building for some time. Even though the landlord was aware of this fact, they never said anything to us about it.

The 1st quarter went well, but as time went on we saw the sales decline. We attributed it to the stabilization period but in the 2nd quarter, we realized things were not improving. We shut the doors to our Athens location in August, 20 months into our lease. We still had approximately 16 months remaining on our lease.

We learned a lot during that experience and identified some mistakes in our lease that could have made a bad situation a little bit easier. The lease issues are the topic of this blog. We hope it will help you.

Prior to signing a lease, ask yourself:

What is/are the asset(s) for this location? An anchor store? Street location? Parking? Outside space (seating)?

In our situation, the anchor store was the #1 asset. Yet we did not think to have anything in the lease that protected that asset. In hindsight, these are some of the options we wish we would have included in the negotiations. Here are some options that can be modified, use independently, added to or combined based on your situation:

  1. Ask the landlord about the asset. For us, it was the anchor store.

  2. Add a stipulation to the lease stating that if the anchor store leaves, the landlord has a set time (3-6 months) to replace them with the same type of business.

  3. If they fail to replace the anchor, you should have the option to terminate your lease or adjust your lease rate.

  4. Or – If the anchor moves, your lease payment will adjust according to based on a percent of your loss of business. For example, if your business suffered a 20% decline in sales, your payment would also decrease by 20% (or some multiplier, proven by financials).

  5. Or – If anchor moves, a discount is applied to your lease starting from the time the anchor left until they are replaced. (consider an accelerated discount over time).

There are several options to accomplish the objective or protecting your asset. There is no doubt, you will have more ideas than the few I listed above. The point is, put something in the lease that protects the asset which you considered while choosing this location, to begin with.

If the landlord is not willing to offer any concessions, walk away. It may not be the asset you thought it was.

In our case, I should have paid a visit to the owner of the restaurant and spent a few minutes discussing our plans to move in there, ask them how they like it etc. More than likely, he or she would have divulged that fact that they were in the process of leaving.

One other point. Don’trely on the lawyers to review your lease in hopes that they would think for you. They examine the contract from a legal perspective. They make sure the T’s are crossed and I’s are dotted. The lawyers don’t know your business, whether it’s a hair salon, restaurant, fitness center etc. ONLY you know what will be an ally to your business so it is incumbent upon you to protect your own interests.

There is so much more to consider with commercial leases. However, this was a big oversight on our part and I suspect possibly many others.For those who wish to know, we identified 3 reasons for the failed yogurt store: the price of the product (avg $5 per person), the population of the town (approx. 30k) and the loss of the anchor store.

Note: The lease wasn’t the cause our failed business however if we had taken the steps mentioned above, we could have been out of the lease much sooner.

Hopefully, this BLOG may help someone else in the future.

PropertyZar is a web-based Property Management Software designed for portfolios of all sizes.

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