Franchised Location Lease Renewals

November 7, 2017

If you are a franchise that occupies commercial real estate, you'll likely want to engage a commercial real estate advisory firm (tenant representative) to negotiate your lease renewal.  In fact, many franchisors are starting to mandate that all lease renewals be handled by a prescribed advisor directly within the franchise agreement.  But why?

 

1.  First and foremost, a call directly to a landlord by either the franchisor or the franchisee immediately signifies a desire to renew - and this reduces leverage.  In contrast, a call from a third party advisor signifies that the franchise "may or may not" renew - which increases leverage and causes the landlord to consider the costs of a backfill tenant.

2.  Tenant representation firms and landlords negotiate hundreds of renewals as their primary profession, whereas franchisees/franchisors do it occasionally (or as little as once every five or ten years).  Given that even the smallest leases are worth hundreds of thousands in term value, leaving as little as 2% on the table through inexperience can make a big difference.

3.  Having an intermediary allows for completely different angles of negotiations and reduces the transparency of intentions.  This increases leverage.   

4.  Researching market information and potential relocation options (whether real or not) increases leverage.

5. Tenant representation firms will likely be familiar with the property owner's internal priorities.  For example, some property owners prefer to "buy up" their renewal rates for property valuations with healthy allowances that would go uncollected if it were not identified & addressed.

6. Commercial real estate firms can promote landlord competition whereby other property owners may provide enough capital or tenant allowances to justify a move to a better location.  Markets, competition and traffic patterns shift - especially over the course of a typical 10 year term so this is an ideal time to review alternatives.

7. A third party can help preserve essential tenant/landlord relationships by providing a cushion during intensive or protracted negotiations while allowing both the franchisee and franchisor to concentrate on their core businesses during the process.

 

Franchisors want to protect and preserve their royalty streams - which underpin the entire value of their business models.   Not only does retaining an expert tenant representative allow them to reduce renewal rents, it ensures consistency amongst franchisees, protects valuable locations and helps identify and remove lease landmines.  The franchise agreement is a great place to establish this important set of responsibilities.

 

 

 

 

 

 

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