To negotiate a retail lease successfully, you need to understand the give and take between your needs and your landlords.
Talk to a few salon owners and you’ll soon learn that there’s no such thing as a “standard lease.” Obviously, the rent per square foot for salon space varies from location to location. But beyond that, there are a number of questions that must be asked to get a picture of the true cost of renting a salon. How is rent computed? What operating costs, if any, are passed on to the tenant? How are rent increases determined? The term of the lease can have a big impact on other negotiable items such as landlord concessions (landlords may be more inclined to provide attractive lease options to a long-term tenant).
The single hard-and-fast rule is that everything is negotiable.
Why these differences? Customary practices vary greatly from region to region. A salon’s location — usually a strip center, shopping center, or indoor mall — affect lease terms, as do market conditions. In a weaker market, a tenant can make more demands. The salon owner’s track record also influences the deal. The stronger your balance sheet, the greater your ability to bargain because the landlord is confident you’ll honour the agreement.
In any negotiation, both parties have areas in which they are willing to compromise and a point at which they won’t budge. To negotiate successfully, the salon owner must understand the landlord’s perspective. If you’re sensitive to the give and take of the situation, you can negotiate creatively, fairly, and effectively.
There’s no question that a lease can be a daunting document — a basic pre-printed form generally runs 10 pages or more (some even come with an index). It’s hard not to cringe when faced with a pile of single-spaced, legal-size pages filled with indecipherable phrases like “certificate of estoppel” and “right of subrogation.” Don’t be intimidated. Before a lease is signed it is merely a proposal, and all of it is subject to negotiation.
Some concepts you should understand before undertaking to negotiate a lease are rents and how they are calculated, concessions and lease term you may request from the landlord. You should also be aware of issues specific to the nail industry.
Rents typically take one of three basic forms: a flat rate, expressed as a dollar amount per square foot; a flat rate plus a share of the landlords operating costs; or a base rate plus a percentage of gross sales after the tenant reaches a given level of volume (called a “percentage rent”).
The lease should identify which party has the responsibility to pay for building operating expenses such as property taxes, insurance, utilities, and maintenance. Under a flat rate setup, all operation expenses are paid by the landlord. This lease is sometimes referred to as a “gross lease.” If all operating expenses (with the possible exception of management fees) are paid by the tenant, the lease is usually called a “net” or “triple net” lease.
Ira Bloom, owner of Nails Now! in Dallas, Texas, has special insight into the leasing process as the former owner of a Dallas-based commercial brokerage company. “Every lease that I’ve ever done contains triple net charges. Overall, insurance, landscaping, maintenance, taxes, and operating expenses can run from $2.50 to $6 per foot [per year], and in malls it’s even higher,” says Bloom. In order to ensure that no unfair charges are passed along to him, Bloom adds a clause to his leases requiring the landlord to use his best efforts to challenge any tax assessments that are higher than similar properties in the area.
As president of Volpe Nails Inc., which owns 60 East Coast franchises, Maureen Volpe has negotiated countless leases, none of them with triple net charges. “I don’t like triple net leases,” says Volpe. “I just get an estimate of what costs are and incorporate it into the [rent] price.” Volpe understands the landlord’s need to adjust the rent to cover increases in his operating costs, and agrees to periodic increases.
Responsibilities for operating expenses can be divided between tenant and landlord any number of ways. One option requires the landlord to pay operating expenses up to a specified amount, referred to as an “expense stop.” The expense stop is usually based on the level of expenses at the time the lease is signed. If expenses increase above the stop during the term of the lease, some or all of the increase is passed on to the tenant.
With a percentage rent deal, the lease includes a provision for rent to be partially based on the tenant’s business volume. In this case, there is usually a minimum rent that must be paid regardless of the tenant’s sales level. Then, if the tenant’s sales volume exceeds a specified minimum amount, additional rent is calculated as a percentage of gross sales. According to Bloom, a rule of thumb for the industry is a maximum of 6%-7% of gross volume.
Bloom explains the landlord’s rationale: “The landlord is thinking, if I’m going to build a great shopping center, take all this risk, and make you a lot of money, I want to share in your success. Also, being able to share in your profits increases the value of my shopping center, since shopping centers are valued as a multiple of gross rents received” Bloom also points out that percentage deals give the landlord the right to look at your books and get your sales figures on a monthly basis. This way, he can evaluate your financial health (and start looking for a replacement if you’re consistently down).
For many entrepreneurs, percentage rent goes contrary to gut feeling, “It’s my business, my sweat, why should a stranger participate in my profits?” One salon owner describes it simply as “aggravating”
In fact, there are a number of reasons percentage rent can work in the tenant’s best interest. First, giving your landlord a stake in your business provides him an incentive to keep your business running well In order for his business to prosper, he must keep up the common areas, landscape, provide good signage, and make sure there’s adequate parking and security for customers. If he’s smart, he will also do his best to create a mix of stores within the mall or shopping center designed to attract the most business. He will rent to complementary, rather than competing, tenants.
An additional benefit of percentage rent to the tenant is that the landlord assumes some of the burden in hard times. Your base rent is lower, so while you’re building your business, you’re paying a more affordable rent.
Periodic rent increases are included in the lease. One way of calculating increases is to adjust the rent according to a specified index. The consumer price index (CPI) is commonly used for this purpose. That is, the rental rate is adjusted periodically according to the change in the CPI. Consistent with the give-and-take nature of these agreements, you would expect the landlord to accept a lower base rent than would be the case if no adjustments were allowed. Bloom prefers to tie his rent to the going market rate. If landlord and tenant disagree on the current market rate, Bloom provides for a non-biased third party to decide.
Landlord concessions such as an improvement allowance or free rent can be invaluable to a new tenant, providing an infusion of cash and some breathing room at the beginning of the lease term, when they are most needed.
In order to customize the space for your particular business, the landlord will offer an improvement allowance (sometimes called a “finish-out” or “lease-hold allowance”) to help defray the expense. The landlord will typically offer you a figure, say $15 per square foot, to improve the premises. As an alternative, he may offer to finish the property himself, furnishing the basics. Keep in mind, however, that basic air conditioning and electricity a landlord might offer as improvements may not be sufficient for a nail salon. You may prefer to negotiate for cash and have the work done to your particular specifications.
Tenant improvement deals lend themselves to creative bartering. Bloom recalls a deal where he needed an especially large improvement allowance — twice the going rate. The landlord agreed to give him the allowance, and in return Bloom agreed to pay significantly higher than market rent. The landlord loved the deal because the higher rent built up the value of his shopping center, and Bloom got the cash to do the work he needed.
Of course, landlords are more likely to dole out discounts and concessions freely when markets are oversupplied with space. According to Volpe, if there’s a glut of free space in an area, you can get up to six months free rent. “If you’re really smart you’ll go to your three favourite spaces and pit one against the other,” she advises. “Don’t be afraid of jumping into a new strip mall that’s half empty. The landlord will be anxious to fill space and you can get a great deal.”
The right of exclusivity — the ability to specify that no other business offering competing services may move in — is very important to some business owners. Your local rental climate may affect your ability to get an exclusive. In some cases, a landlord is prohibited by his lender to give exclusives. Since you will likely have to give up something for this benefit, you need to consider how important exclusivity is to you.
Gina Marsilii, owner of A Perfect Ten in Wilmington, Del., has exclusivity under her current lease. She didn’t have this protection with her original lease and a hair salon moved in next door. “I was unhappy because I wanted to expand my business to include services they offered such as waxing and facials.” When the hair salon eventually moved out, Marsilii renegotiated an exclusive. Marsilii has recently expanded, taking over two neighbouring spaces and negotiating a lower price per square foot.
Volpe offers another perspective: “You can negotiate exclusivity, but you’ve still got to be good to hang on to clients. It’s the quality of service that builds a business. If you’re good, don’t worry.”
If you’re faced with a situation where you can’t get into a certain spot because a beauty salon has an exclusive, Volpe recommends talking to the owner to find out how much nail business they’re doing. Usually it’s a small percentage of their business. “Explain to the shop owner that you are going to bring in 400 to 500 women a week and that you don’t do hair. It should be obvious that both businesses will benefit from two female services located so closely,” says Volpe.
The question of how long to lease is a tricky one. If you’re unsure of your business, the location, or your plans for the future, you may feel more comfortable with a shorter-term lease. This will, however, produce the opposite effect on your landlord. Uncomfortable with your unwillingness to commit, he will be less inclined to favour you with much in the way of concessions such as free rent or tenant improvements. You may get a less favourable rate per square foot and have to come up with out-of-pocket cash to finish the space.
A shorter term also leaves you vulnerable to a rent increase when you can least afford it. The last thing you want when you’re just developing a business is to find yourself having to accept a large rent increase or move. Not only is moving expensive, but you run the risk of losing clients any time you change locations. For that reason, Bloom recommends a three- or five-year initial term and several three-year options to renew.
Agreeing to a longer lease can also give a smaller business a more favourable bargaining position. Says Volpe, “If you’re willing to sign a five-year lease, even a small operation can get a lot of accommodations m terms of free rent and tenant improvements.”
You may also want to include an option that gives you the right of first refusal on adjacent space when other tenants’ leases expire. This means you are offered newly available space in the location before it is offered on the open market, which gives you an opportunity to expand without having to move
What determines who’s doing the giving and who’s doing the taking in a negotiation? Basically, it’s a question of clout To negotiate successfully, you need to have a realistic concept of how strong a tenant you are. The stronger you are, the more generous the landlord will be. He may accord you a bigger move-in allowance, lower base rent, or other tenant “perks.”
Unfortunately, a mom and pop business doesn’t have a lot of leverage. Even then, a small business can take advantage of a weak rental market or a unique situation to create a deal that works well for them. Don’t be afraid to involve an attorney at the negotiating phase. An attorney can bring objectivity and experience that can often result in more favourable terms.
Volpe urges owners of any size salon to sell themselves as valuable assets to the prospective landlord. “You can get more concessions if you act confident that you’re going to bring in a considerable amount of business. Make it clear that you will be bringing in 300 women a week who are going to use the grocery store, dry cleaners, etc.,” says Volpe.
Chemicals And Odors
Of critical importance when leasing space for a nail salon are the issues of hazardous chemicals and odors. These issues have to be addressed before any paperwork is signed.
Most hazardous materials clauses tend to be very general, which leaves the salon owner in a vulnerable position. If a landlord wants a tenant out — for whatever reason — your storage and use of certain products may provide him with reason to find you in breach of your lease. “Let’s say a nail salon is keeping acetone or primer on the premises,” explains Bloom, “the landlord could accuse you of keeping dangerous materials on the premises, insisting they’re flammable or the odor is bothering other tenants. He might require you to carry extra insurance, or even insure the rest of the shopping center. This gives him the ammunition to try to break the lease.” To prevent situations such as this, the lease must explicitly acknowledge that the tenant is a nail salon, and that it will use and store certain chemicals to conduct business. List the products and the amount to be kept on hand. Bloom incorporates the following clause in his leases: “Tenant has the right to use and store, as per city fire codes, all items used in the nail industry. Odors from use of these chemicals will be kept to a minimum.”
Volpe takes a different approach to the problem. She tells the landlord up front that the products the salon uses have an odor. Before she finalizes any deal, she opens a container of monomer and blows the fumes around the space for a few days to see if the odor eeks outside. She encourages owners to take the time to do this test and seek a new location if any problems arise.
You should also be aware of who your neighbours are going to be and use common sense. Don’t move in next door to a restaurant; instead, choose another odor-intensive business such as a dry cleaner, printer, or hair salon.
In general, odor is less of a problem in a strip mall where you can open your front and back doors a few times a day. In an enclosed mall, odors have to vent in common areas, and a specialized air filtration system may be required.
While it’s impossible to address all the areas covered in a lease (that’s what you pay a lawyer for), there are a few more issues you should consider before you finalize a deal.
Signage. The question of signage — what you can put in your window, on your parapet, or on the marquis — is another item that must be documented in your lease. In addition to limitations posed by your lease, there may be zoning ordinances that restrict the size, placement, or height of signs. Without adequate signage, you may be forced to spend extra dollars on other forms of advertising.
Parking. Find out if parking is restricted. You may want to stipulate that there will no assigned parking, except for a dry cleaner or convenience store. Or, you may want to ask for your own assigned spaces.
Personal liability. Owners of new or small businesses often will be asked to sign personally for the property their business is leasing. Without a track record or the strength of a franchise behind you, landlords are reluctant to lease without that extra security. Depending on your strength in the negotiations and prevailing market conditions, you may have no choice but to accept personal liability However, if you establish a good payment record during the original term of the lease, you may be able to avoid this condition at renewal time.
Bloom employs a creative compromise when negotiating a personal guarantee: “I guarantee the lease by the amount of dollars that the landlord expends to me. So if he gives me $30,000 up front, I’ll guarantee that amount of money back to the landlord through rent. After that, the guarantee no longer holds. I’ve never had a landlord say no to that.”
Insurance. Most leases require you to provide $1 million in liability insurance and enough property insurance to repair any damage the property might sustain You should find out if the landlord’s insurance covers damage to plate glass windows. If not, you may be required to purchase a special endorsement to your own policy, since this kind of coverage is not part of a basic commercial insurance package.
Subletting. The standard language on subletting is highly restrictive and favours the landlord. Make sure you’re allowed to sublet and that the landlord must be reasonable in his approval of a replacement tenant.
The Big Picture
When negotiating a lease, you can create a win/win situation “A good lease is when both parties are able to walk away from the negotiating table happy with what they did It’s a give-and-take situation, and the key,” says Bloom, “is reasonableness.” Throughout any negotiation, remember your goals and priorities. Compromise in areas that are not so important to you and hold firm when it comes to those elements essential to your success.
Consult an Attorney Before You Sign
Remember: the lease you are being asked to sign was drawn up for the landlord by his lawyer. This means two things: one, it is biased in favour of the landlord, despite any assurances he may give you that it’s “standard.” Two, you need your own lawyer to review the document just to level the playing field. You may be reluctant to assume yet another expense, but the long-term protection is worth it. You should not attempt to practice law any more than a lawyer should attempt a backfill.
It sounds obvious, but if you do use a lawyer, it’s important to use a good one. Most courts tend to favour the more naive party. In a leasing dispute, this is usually the tenant. If you consult a lawyer prior to signing your lease, the court will consider that you had legal representation and apply a tougher standard, So stay away from your cousin Morty, the personal injury lawyer, however much his mother praises his skills. Seek out an experienced real estate attorney who is familiar with your area.
If your venture puts a large amount of money at risk, you may even want to bring in a second lawyer who specializes in the beauty industry. A real estate lawyer may not be familiar with issues unique to the industry.