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The QSR rental rate trifecta: 3 things to know before negotiating your rate
When it comes to negotiating any QSR operator's commercial rental rate, it pays to first understand that not only does the amount of rent paid per square foot vary by tenant, but this rate can be negotiated around many variables.
April 3, 2019
By Jeff Grandfield and Dale Willerton/ The Lease Coach
When it comes to negotiating any QSR operator's commercial rental rate, it pays to first understand that not only does the amount of rent paid per square foot vary by tenant, but this rate can be negotiated around many variables. In the simplest analysis then, keep in mind that a landlord's asking rental rate is based on what they need to satisfy their mortgage and financial commitments, not necessarily on what you can afford to pay.
Here then, are three factors to consider in order to knowledgeably negotiate for the best possible rate.
- Understand the importance of the rental figure:
Rent is one of your business's most hefty expenses, so never under-estimate the absolute criticality of getting the space at the rate that best lends itself to your overall financial health because rent can easily make or break your restaurant business. So, if you're struggling to pay your rent, your agreed-upon rate is either too high or your customer count is inadequate to support what you're paying.
- Know how landlords set rates:
Smart landlords don't simply pull their rental figures out of the air, rather they base them on a simple formula where rental revenue collected covers the mortgage, along with a good capitalization rate, or return on investment.
Mathematically, this is an easy calculation involving two numbers or factors for the landlord: face rate versus net effective rental rate. The face rate is the dollar amount of rent the tenant pays and the amount that appears on the lease agreement. The net effective rental rate is the amount left after deductions for real estate commissions, inducements and incentive packages as well as maintenance and structural improvement costs the landlord makes.
By way of example, with a $24-per-square-foot rental face rate, the net effective rental the landlord is left with can easily be reduced to $17 per square foot after these deductions.
- Understand the reasons that tenants may pay different rents on the same property:
It's a wise move to figure out what other tenants in the building pay in rent, though it's not always realistic to expect all tenants to pay the same rent. Legitimate reasons why the rates may vary for the same property, include:
- Size:The size of space the tenant requires (sometimes based on industry) or the size of the commercial space can make a difference.
- Term: The length of the term or number of years the tenant has agreed to lease can be a factor, though longer lease terms don't necessarily mean lower rates, as they are affected by fluctuating economic conditions and building occupancy rates.
- Strength:The covenant and history of each tenant is relevant to the landlord from a rental perspective. Whether the tenant is a "Mom and Pop" start-up or a national restaurant franchise, signing the lease corporately matters to the landlord and their mortgage holder.
- Inducements: The dollar value of the inducement package also impacts the rental rate. Although most landlords build some financial inducements into their asking rental rate, the two are connected.
- Timing: The exact time that the business becomes a tenant of the property matters. In a newly developed property, for instance, the first and last tenants may pay different rental rates due to overall supply and demand.
- Industry: The tenant's industry is a factor. For instance, industries like the restaurant business with many competitors seeking similarly situated property, allows the landlord to command higher rents. Likewise, other fields of tenants that are not as plentiful may have more bargaining power as most landlords strive to have a solid tenant mix in their properties.
About the authors:Commercial lease consultants, Dale Willerton and Jeff Grandfield are collectively, The Lease Coach and co-authors of "Negotiating Commercial Leases & Renewals for Dummies."
Photo: iStock
