For 15 years, C.J. Engelsher has dreamed of opening Meltz, a fast casual that will offer premium sandwiches.
Right now, Meltz only exists on paper. Engelsher, a Le Cordon Bleu chef and former Carlson’s Restaurants Worldwide general manager, has been searching for the right location. He wants a 2,000-square-foot end cap smack in the middle of an Orlando, Florida, business district or shopping center.
When he found the perfect spot, he was ready to start making sandwiches. However, Engelsher and his partner made no hasty business decisions.
“A lot of people will just find the location, be happy with it, and sign the lease,” Engelsher says. “You can’t do that. There are so many hidden things to your detriment that you need a lawyer to look the lease over.”
After his lawyers read the Meltz lease, Engelsher learned the common area maintenance and tenant improvement allowances were too steep for the proposed rent—mid $20s per square foot. But the deal breaker was the open date. The landlord wanted December, Engelsher requested May.
“Anytime you settle on a site and it falls through, you feel…a little disappointed,” Engelsher says.
Although disappointed, Engelsher at least investigated the contract. Only 50 percent of independent operators invest in brokers or real estate attorneys, says Marty Kotis, president of the Council of International Restaurant Real Estate Brokers. With 52.7 percent of limited-service operators leasing land and building (NRA 2004), Kotis says there’s plenty of help available for franchisees.
Most franchisors offer real estate and lease support, he says. “The only ones who don’t are the franchisors who don’t care about the building or the franchisee’s lease…They just want to sell franchise agreements.”
Even independent operators have free consultation available, Kotis says, through commissioned brokers. But Engelsher says some brokers don’t have the operator’s interests at heart.
“We worked with a broker who obviously only cared about his commission check,” Engelsher says. “When we challenged some fees, the broker said, ‘the key is to get in there before somebody else gets it. Don’t worry about this other stuff.’ It was obvious where his loyalties were.”
Nonetheless, Kotis warns operators not to tackle lease negotiations themselves or to hire general commercial real estate consultants.
Non-restaurant brokers and real estate attorneys “tend to over-butcher a lease,” Kotis says, and “cut out critical points.”
There’s more to a lease than rent fees, says Marc Frankel, managing director of Newmark Knight Frank Retail. As an expert lease negotiator, Frankel has represented Chipotle Mexican Grill, McDonald’s, and California Pizza Kitchen, as well as Rite Aid, Marriot Corporation, and several landlord companies. Whether his clients are developers or tenants, they sign a letter of intent before pursuing negotiations.
“A letter of intent is not a binding document, but it gives you something to work with,” Frankel says. Typically included in this letter are base rent (industry average is 8 percent of total sales, he says), maintenance, rent commencement, utilities, and renewal options. These points serve as the process’ foundation. “Negotiating a letter of intent will save a lot of pitfalls and might save $30,000 in attorney fees during actual lease negotiations.”