In today’s economy, financing is tough to get — even when you’re buying a name-brand franchise — and you want to preserve as much of your capital as possible to operate and market your business once you’re up and running. The positive side of the down economy, however, is that landlords are hungry for tenants, so you may be able to get your landlord to help finance your location. Here are three ways to do so:
- Tenant Improvement Allowances
This is usually the easiest method of getting financing from your landlord — and the most overlooked. Many landlords have already built into their financial projections money that they will use as incentives to attract new tenants. These tenant improvement allowances can range from $5 to $25 per square foot, and are paid to the tenant in cash after they have opened the business and provided the landlord with all the necessary documentation, which usually includes lien waivers from all general and subcontractors, and copies of the Notice of Completion and Occupancy Permit from the city/county. Negotiate this Tenant Improvement Allowance right into your lease.
- Shell Improvements and Landlord’s Work
Landlords want you to take the premises “as is.” That means you not only pay for all your tenant improvements, but also for any work that may be required to the shell — the four walls of your premises. This work can include leveling floors, providing handicapped restrooms, replacing plumbing and HVAC — and more. These improvements can cost thousands of dollars, and the worst part is that you don’t find out exactly what’s needed until you start construction and your friendly building inspector brings it to your attention by red-tagging your project — an ominous term that means you can’t move forward until you submit plans and obtain approval for all the extra work you are now required to do.
Here’s how to get the landlord to pay: You’ll need a Construction Exhibit that outlines the shell criteria you required as a condition of your acceptance of the premises. This will be all the things discussed above, plus major expenses such as the amperage of your electrical power, the number and location of electrical outlets, the distribution of your HVAC, the location of your bathrooms, wall finishes, flooring — and a lot more. The landlord may not agree to do them all, but with a little negotiating, you can get some of them.
- Free Rent
Rent starts when the lease is signed, right? Well, that’s what the landlord wants, and anything else is “free rent” in his or her book. But you need time to draw up and permit your plans and build your store — usually, 120 days or more — and you don’t want to be paying rent during that time. Ask for this: rent to start 120 days after you receive all necessary permits and approvals. This will almost guarantee you will not be paying rent before you open, and may even give you a period of truly free rent with no rent payments for the first 30 to 60 days after you open.
Like a great football coach or military general, in order to be successful you need a game plan before you negotiate your lease, and you probably need professional help. The landlord has done this before, and chances are you haven’t. The landlord is probably also represented by leasing agents, property managers, and attorneys — and chances are you’re not.
My recommendation is that you level the playing field by having a professional site locator and lease negotiator on your side. This doesn’t need to be an attorney, although you will want one to review the final lease documents before you sign them, but can be a professional consultant or commercial real estate broker who specializes in representing tenants and franchisees. Whatever you reasonably spend, chances are you’ll get it back — and more.
Jeff D’Arcy has been Vice President of Real Estate for The Wherehouse, Blockbuster Entertainment, and Quiznos Subs. He started his career with McDonald’s, and has selected hundreds of sites and negotiated as many leases.