Calculating the Base or Minimum Rent for Franchise Tenants
While the terms “base rent”and “minimum rent” may sound like they refer to different things, they are, infact, identical. To make things easier, we will use the first term throughoutthis article. Base Rent is theportion of the rent payable to the landlord, excluding Operating Costs, and isthe most negotiable portion of the rent you pay. Typically, North Americanlandlords calculate a franchise tenant’s rent per square foot per year. Things,however, are a bit different for franchisees in the western United States –their landlords will calculate their rent per square foot per month.
By doing some simple math,a franchise tenant can multiply the number of square feet that he/she isleasing by the number of square feet. This calculation will provide you theannual base rent. Conversely, if you are quoted an annual base rent, simplydivide that number by 12 (as there are 12 months in a year) and this will equalyour monthly base rent for your franchise tenancy.
Due to inflation, afranchisee’s base rent will frequently increase over a lease term. Although thelandlord may stipulate a regular rental rate increase, remember that this isbased on the landlord’s interests rather than yours. Commercial leasing is abusiness and a landlord will need to pay his/her mortgage, cover relatedbusiness expenses, and earn a reasonable profit. As a tenant, you are notobligated to accept rental rate increases … these are often negotiable and itwill be in your better interest to keep your own business costs down.
The landlord can or likelywill attempt to get the highest rental rates possible from a franchise tenant.That may appear self-evident, but many first-time franchise tenants simplydon’t understand how negotiable landlords can be on the rent, given the rightnegotiating strategies and franchisors often lack the time, money, or personnelrequired to help their franchisees with these matters (especially when the franchisor’shead office and a franchisee’s chosen location may be in two completelydifferent cities or States). Franchise tenants need to understand that thelandlord’s asking price is the landlord’s asking price – this amount, is,however, negotiable to your benefit. By asking the proper questions and usingsome practiced strategies, The Lease Coach has frequently achieved rental ratesfor our franchise clients 15 to 25 percent lower that the landlord’s asking orstated rental rate on new leases. Achieving a rental rate reduction on yourlease renewal is also possible.
Negotiating the base rentis not unlike negotiating anything else in life. We typically start negotiatingat a lower base rental rate than the tenant is prepared to pay, so as to createsome room to maneuver. The landlord or their agent probably sets the askingbase rent higher than what they expect to achieve and negotiate down fromthere. The franchise tenant’s leverage is based on their knowledge of manythings including market rental rates, prevailing rates, vacancy rates and soon. It’s important to remember that every piece of the lease puzzle isinterconnected. The base rent you pay is relative to the length of the leaseterm, the incentive package, the economy, and other factors.
If the landlord’s rent percentage increases seemsmall, remember that this amount will compound annually – you could well bepaying far more than you expected over the course of your five or 10-year leaseterm. Can you justify this?
For a copy of our free CD, Leasing Do’s & Don’ts for FranchiseTenants, please e-mail your request to JeffGrandfield@TheLeaseCoach.com
Dale Willerton and Jeff Grandfield - The Lease Coachare Commercial Lease Consultants who work exclusively for tenants. Dale andJeff are professional speakers and co-authors of Negotiating Commercial Leases& Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need helpwith your new lease or renewal? Call 1-800-738-9202, e-mailDaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.
4 Benefits to Running a Kiosk Franchise
Kiosk franchises are franchised businesses that operate out of kiosks. But what are the benefits of running a kiosk franchise? This article will go over four of them.
Stages of Growth in Franchising
Last month we learned that franchise systems go through five predictable stages of growth, each offering challenges and opportunities for prospective franchisees.
Identifying The Best Franchise Industries
If you are willing to spend some time doing a little homework, or research, you can identify dozens of franchise businesses that meet the criteria of hot or best opportunities. Here’s how you can do it.