Lease negotiations within the restaurant space.

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May 27, 2024

by a searcher from Montclair State University - School of Business in Madison, WI, USA

What is your experience with negotiating leasing terms? I ran into a deal with a 3% increase every year. I believe, eventually this will eat away are the profits of the company. The business I'm looking at is a restaurant and I don't think the sales can have the same growth YoY. Also, has anyone had a luck removing personal guarantees from leases? Are they just the standard when leasing?

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Reply by a searcher
from Emory University in Tucson, AZ, USA
A 3% step increase in annual rent is not uncommon in commercial leasing. You will also want to take into account the prorata share of property expenses for the lease including building insurance, property taxes and common area maintenance. And, if the lease has a percentage rent override for sales volume exceeding an amount defined in the lease.

It’s common to have a personal guarantee and rarely will a sophisticated landlord accept a lease without a guarantee - especially for quality locations and especially for restaurants - unless the operator has a significant track record. And often leases require landlord approval for a transfer of ownership.
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Reply by a searcher
from University of Florida in Melbourne, FL, USA
As DyShaun said above, yearly increases and PG’s are common in commercial leases. Not much you can do about a PG unless you can provide enough evidence to show that it’s not warranted. Sometimes you can negotiate the PG to fall off after a few years of on time payments. I would encourage you to push back on the increases a bit. Get creative and keep in mind that the landlord is just trying to hedge against his rising costs.
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