Time to Renegotiate Retail Property

ALEXANDRIA, Va. (Blue MauMau) - The MIT Center for Real Estate shows that retail property prices have been falling significantly in America's top ten cities when compared to past years (click chart). Such information has retailers battening down the hatches in preparation of the coming retail storm. Yet retail closures, while mounting, still haven't hit recession levels.

There is a silver-lining in the approaching storm clouds. Experts say that such anticipation of softness in the retail property market makes this a brilliant time for franchisees to negotiate better property deals.

Graph/MIT Center for Real Estate

Dan Rowe, CEO of Fransmart, a franchise development firm whose services include finding prime retail locations, has talked with various commercial landlords across the country. He sums up what they are telling him. "This is a terrible time to be a landlord, but a great time to be a tenant," says Rowe.

Irwin Barkan, a former franchisee for Mail Boxes Etc. and six Dunkin' Donut shops in New England, is a commercial realtor of some 30 years. He agrees that this is a great time to invest in and negotiate property if you have the funds.

“Prices on retail real estate are falling. There is no question about it. And rents are softening,” Barkan declares. “The transaction amount of retail property has plummeted, some say 90% in a year.”

Barkan sees the falling value adjustments in property as showing up in lower rents, both asked and received. He observes, “Owners who do not have to sell realize that they will be holding their assets at reduced values for several years at least.”

Rowe agrees with such an appraisal of the property buying market but thinks that such pressures have implications for franchisees who lease property.

Because of the softened real estate market, Rowe thinks franchisors and franchisees seeking retail property should ask for 25% less and then be satisfied with settling for a 10-20% lower lease.

Dan Rowe. Photo/Fransmart

Rowe passes on inside information based on discussions he recently had with three retail realtors. In regard to what is the easiest thing to negotiate in this current economy, he advises, “Insist that your rent go down proportionately to any vacancy rates in the center after you open your business—if you’re in a 100,000 sq. ft. grocery anchored center and a 50,000 sq. ft. grocer goes out of business, your rent should be reduced 50% or you should have the right to vacate the space.”

Barkan says that as far as retail property, owners are still coming to terms with plummeting property prices. “There is still a wide ‘bid versus ask’ gap in the commercial real estate market,” he observes. He argues that time will provide franchisees with better deals.

For proactive franchise owners who lease, Rowe thinks that now is the time to use bargaining strength. “Get your financing in place so that you show your landlord that you are a quick solution to their problems,” he states. “This will help you stand the best chance of getting the deal you want.”

What to Negotiate

Rowe assesses that lessees need to take into account that a property owner may be especially lenient in negotiating a lease agreement because they are getting ready to dump the property.  He thinks that landlords may offer attractive TI [Tenant Improvement] allowances to entice franchisees to sign a lease as they try to dump their property, rather than hold onto it for several years. He suggests, ”Insist that your contractor agrees to take final payment for the project’s costs from the TI allowances and indemnify you against that amount so that in the case that your landlord doesn’t pay the contractor and your contractor can’t pay the sub-contractors, your project isn’t exposed.”

You should ask for rent rollbacks. Rowe states, “If your rent is currently $10,000 a month, offer your landlord a lower rent in exchange for a longer term, or offer to pay less rent now and add to later year rents.”

A franchise owner of Five Guys Burgers and Fries and franchise development agent for Sandella's Flatbread Cafe, Rowe sees things from a franchisee perspective as well. He thinks fellow franchisees should be asking for marketing money when they negotiate leases. “Since tenants pay rent and CAM’s [Common Area Maintenance], you should be asking for marketing money from the landlord and the CAM dollars,” Rowe observes. “This will cost the landlord nothing as they will just add it to everyone’s CAM the following year.”

That means that the other tenants will help pay for the franchisee's retail marketing.

On the other hand, Barkan thinks that buying property might be a better idea than leasing. He explains that when franchise owners sell their business, it most likely will be to another franchisee who needs the property. Many new owners are more focused on the franchise business and not necessarily on the real estate. Barkan summarizes that a dropping property market is irrelevant when considering the long term. 

"Buy the property now if you have financial ability, regardless of whether the market will drop another 10%," he declares. 

The retail realtor and franchisee explains, "Many franchisees buy sites, build stores, sell the   franchise business and then keep the real estate for rental income from the new franchisee. Their rental prices are usually higher than so-called market rent. Franchisees have become wealthy in just their activity of renting property."

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