Is It Better To Own Or Lease Your Store Real Estate?

Big decision… own as opposed to lease your store real estate. To purchase and develop the real estate, the capital required, and the ongoing expenses are enormous.

Alternatively, you can find suitable real estate and simply lease it for ten or twenty years. But after twenty years you may lose your lease or face massive rent increases. What’s a retailer to do?

If you have limited cash to invest in real estate, you will likely choose to lease your store space. But landlords can be tough to live with and the lease language is generally written to minimize the landlord’s risk while heaping copious lease restrictions on you. That’s the problem, now how to protect yourself from onerous lease language?

You may know about fishing and retailing, but they know leasing. They have knowledge, and experience on their side. Thus, you need your own advocates when it comes to lease negotiations. The deal you strike from day one will help you or hurt you for the duration.

In order to level the playing field, you need counsel from your attorney, accountant, and business advisor. Your attorney and accountant should address both legal and accounting issues, but you should give particular attention to the entire lease with focus on the economic and general provisions.

The Landlord’s lease is written for his benefit and protection, not yours, and therefore the lease will be absent language that protects your interests. Expect to make significant changes to the Landlord’s lease along with adding specific lease addenda that protects your interests.

Similarly, the lease will contain a great deal about the Tenant’s obligations under the lease and almost nothing about the Landlord’s obligations. Correct this by clearly stating Landlord’s obligations, such as the obligation to rebuild after a casualty and to carry sufficient insurance. Also be sure the Landlord is responsible for the structural integrity of the building including the roof and roof leakage, etc.

Most every aspect of a lease is negotiable, regardless of what the Landlord says. If you don’t like certain language, just say “delete it” or offer replacement language. Let the Landlord defend his position versus you justifying your position.

A good lease results when you know your walk points (the point at which you leave the negotiations) and be willing to end the negotiations if a reasonable compromise cannot be reached. Guard against falling in love with any given location. If possible, negotiate on several locations at once, wherein you can compare deals and opportunities.

Regarding rents, do some comparison shopping. Rent is a function of demand along with factors such as the health of the economy, vacancy rates, size and age of the space and amount of build out required.

Regardless of location, there are lease provisions that should be demanded in every lease for the protection of the retailer.

Rent abatement: Include a rent abatement provision that if certain circumstances exist, then all rent and other charges will abate proportion to the time you cannot operate normally such as with fire or other casualty, Landlords repairs to the premises, interruption of utilities or other negotiated trigger actions.

Other Charges: Usually there are a variety of other charges due in addition to the base rental. These other costs include such items as Common Area Maintenance, insurance, management expenses and a host of other miscellaneous fees. Scrutinize these charges thoroughly and make sure you have an audit provision and request percentage increase caps.

Build Out: The completion or renovation of the leased premises is usually performed by the Landlord. Who pays for this work is totally negotiable. Most Landlord’s include a building allowance within their cost structure, therefore be sure to demand all or part of the construction allowance. At the very least, ask for free rent to cover these costs. Also, be very specific about build out details.

Tenant’s and Landlord’s defaults: Here again the lease will contain pages of remedies in the event of a Tenant default and nothing about defaults on the Landlord’s part. Your attorney should provide such protective language.

Personal Guaranty’s: The Landlord may want your personal guaranty on the lease. In short, don’t do it!

Out clauses: Negotiate an “out clause” which will allow you to vacate the lease if certain conditions exist such as loss of an anchor store, the center’s occupancy drops below a certain percentage or after two years of occupancy upon 90 days notice.

In summary, if you can’t negotiate a fair lease with appropriate Tenant protections and with economics that fit your business model… then don’t do it! Locations are somewhat like buses, if you miss one, another will come by shortly.