Lease on the Line
Pinning Down a Home for Your Business
By Sharan Barnett - Illustration by Mark Watson

A lease is many things. It is first and foremost a contract, one of the most important you will enter into as an independent business. If properly designed, it can be one of your most significant assets. But it can turn into a liability should you be forced to close your doors under unfavorable terms. A lease is a crucial component in determining the value of your operation, and as such, has the potential to make or break your business. Knowing how to negotiate this document to your advantage is every bit as important as knowing how to pull the perfect shot. At times, it might feel like you're wrestling a gargantuan beast of a landlord into submission. But with a team of experts at your side, you'll have a fighting chance of pinning down a home for your business.

First Things First
As you probably already know, your first step in opening a shop is to develop a sound business plan. But not all business plans, are created equal. In fact, you should have several business plans for different purposes and audiences. Consultant Ed Arvidson of Eugene, Ore.-based Bellissimo Coffee InfoGroup recommends designing a "presentation" business plan tailored to the unique needs of the lease negotiation process. The audience for this plan is the property managers from whom you intend to lease your space. The plan describes the overall outline of your business, the products you intend to sell, who your customers are likely to be, and how you intend to market your business.
   In addition, it should also include information about the growth of the specialty coffee market. Give special attention to making the point that consumers are more likely to patronize your business than that of your competitors, and spend some time explaining why. You are not only selling yourself, you are selling specialty coffee, in such a way that it will help make the case for you.
   One of the truisms of business plans is that you need to look ahead to the day you might want to sell your business, and use it as a stepping stone to your next venture or even retirement. As a key business asset you must negotiate for the contingency of a sale or sublet.
   You may want into specialty coffee for gustatory or aesthetic reasons, but you'll have to run the numbers at some point, and the business plan is a good place to get into the habit. The number one reason businesses fail (all businesses, not just restaurants or†coffeehouses) is undercapitalization. Make a spreadsheet program your friend. You don't have to be a software whiz; you can have your accountant's office set up a program that will allow you to plug in different scenarios to run your numbers based on determining your minimum requirements for sales to meet your overhead.
   At the basic level, you need to know how much money you must make to ensure your rent, insurance, water, power, coffee and food costs are met, as well as how much your employees will cost you. Research what your build out costs will be. Determine how much monthly rent and other expenses your new enterprise will cost you. You need to know this before you can make any reality-based plans. You don't want to be stretched so thin economically that you can't afford to hire the help you'll need in running the shop-whether it's a barista or a bookkeeper. Once these numbers begin to take on some sort of coherence, you're ready to start shopping for a space.

Finding the Perfect Spot
This article is not about location, but location is a key aspect to negotiating your lease. Obviously, location matters for the prospective success of your business. Put a drive-thru too far from a major arterial, rent a space in a dark recess of a dying office building, ignore the proximity of derelict storefronts and the ambient wash of foul odors from below the streets, and you're flat out not going to make it.
   That said, even a dream location can become an albatross if you haven't negotiated a favorable lease. You should look upon location as a bargaining chip, and a challenge to your strategic skills. Each location demands a different nuance in your negotiating emphasis. A random parcel of vacant property might require an approach that stresses development and capital improvements, while a drive-thru pad in a grocery store parking lot might take advantage of the competitiveness between supermarket chains to demonstrate your value as an easy way to boost traffic. A storefront in a period charmer may seem a natural fit for you, but you'll need to sell your concept-and the viability of specialty coffee-to your potential audience, who may be considering applications from a bookstore, a Swedish clog outlet or an upscale dog bathing salon for the same spot. In some cases, you may have to sell a landlord on the idea of commercial use of space, period. Carts and kiosks carve out otherwise unused niches of space in hospital lobbies, airport terminals and parking garages. If you're running one of these, you may have to challenge your prospective landlord to imagine his property in a new way.
   All of these considerations should go into the presentation of a business plan. Seen this way, it's no longer a dry recitation of numbers. It's an exercise in the art of persuasion, and a performance.

Your Dream Team
If you've never owned a business or worked in foodservice, contact knowledgeable individuals and industry consultants who can help educate you on the pitfalls you need to avoid. Having a team of experts can also help you to learn of the items you will want to negotiate into or out of your lease.
   Sherri Johns, of Portland, Ore.-based Whole Cup Consulting, counsels that your first step before negotiating a lease is to build a team that includes an accountant, an attorney who focuses on real estate and lease negotiation, your contractor and even the health inspector.
   Johns also advises that you make your eventual landlord a member of your team. As she notes, it's a lot easier to make concessions if you are dealing with someone who has not taken an adversarial position. Having an experienced realtor on your team is also an asset. If you have more than one location in mind, it can be easier to walk away from a potentially unfavorable situation.
   Getting to the lease can be a game that enlists your finesse and sense of drama. Arvidson counsels making a powerful and professional first impression that stops short of negotiation. This is merely the prelude, the appointment to discuss your business prospect. At this point, you should view yourself-and project your coffeehouse-as an opportunity for the landlord. It's not about you getting a space, it's about the landlord getting a tenant who is going to bring in enough traffic and money to benefit other tenants and raise the general value of the landlord's own holding. You're doing them a favor. You can roll out the numbers of specialty coffee's growth, relate real-life success stories from other coffeehouses in similar locations and circulate your business plan. Even here, Arvidson advises, be prepared to walk out the door without signing anything. Instead, after you have heard favorable response to your plan, send a letter of intent and request a lease.
   If the landlord bites, you will likely receive a document that puts you severely at a disadvantage. You can't blame a landlord for trying. After you've stopped laughing, your team can set about pulling the lease into some form that benefits you.
   You should spend time with your attorney, reviewing the lease carefully section by section, listing items you wish to have added or changed during the negotiation process. You need to understand what each item means before signing your name.
   Negotiating the lease is a painstaking point-by-point process. Each clause in the lease spells out the responsibilities of the landlord and the tenant. As a consequence, one point alone could have a significant impact on your business that, over the life of the lease, could amount to thousands of dollars.
   A good example is "percentage rent," an arrangement whereby you agree to pay your landlord a percentage of your gross sales above and beyond your base rent. This locks you into a must-earn scenario that could severely restrict your flexibility, especially if gross sales includes such things as nonfood items, catering income, credit card fees and sales taxes. For example, if your percentage rent is five percent of gross sales, you would need to exceed $140,000 in gross sales each month to pay beyond a base rent of $7000 (which you probably shouldn't be paying anyway). Arvidson frowns on such arrangements, unless they are in lieu of a fixed base rent.
   As you review the lease with your attorney, go over each item with a "worst case scenario" mentality. This exercise will provide you with a clear understanding of the financial impact you are assuming during the life of the lease. In negotiating your lease and projecting your fixed expenses, you must consider the maximum amount you can pay for rent. Don't let your emotions and dreams for your business, or any claim by the landlord regarding the high cost of real estate, lure you into signing a lease you can't afford. Leases are usually negotiated for a base dollar rate per foot, so you need to take your own measurements of the total space you are renting to assure that the total square footage stated in the lease is accurate. In Arvidson's calculation, you should figure on limiting rent to 10 percent of your break-even point.

Do Your Homework
Negotiating a lease isn't quite like facing down Doc Holliday over a pair of aces, but it does require a degree of sangfroid. It helps to work from a calculated position of knowledge and strength. Do your homework and learn all you can about your potential landlord. After researching code violations at city government, ask around the neighborhood. Other tenants may be willing to give you some pertinent information about the landlord's personality, willingness to be helpful and average response time to necessary repairs-in hours, days or weeks. A lease is a long-term relationship, and like any such arrangment, little things can ultimately mean a lot. The more you know, the more responsible you can be to your own vision.
   Look at your potential location with analytical eyes. How much build out will be required for the space to meet your needs? Remember, if you add beautiful granite countertops to the structure, they will become an asset to the landlord when it comes time to find another tenant. Are there adequate assurances that you won't be bounced upon completing the build out? To assure this is not a one-way street, you might be able to wrest a few dollars from the landlord for the construction. Determine what your construction costs will be and how long the building process will take from beginning to end, including the time needed to secure the requisite permits and health department certifications.
   If this represents a significant amount of time, you should ask the landlord to waive your monthly rent until you open your doors for business. This may seem like a lot to ask, but it is not uncommon, and since you've made the case that specialty coffee is a gold mine, the landlord may not balk. Besides, if you don't ask for it during negotiation, you won't get it and your expenses will be mounting before your first customer is served.
   A location's history is another thing that should be exhumed before you enter into a lease. If a restaurant or coffeehouse is, or has recently been, in the location you've chosen, you'll want to know beforehand if there have been any health department violations. If so, find out what those violations were and if they were resolved.    And if you're looking at a space that needs to be converted to meet your needs, bringing in the health inspectors early can be very beneficial. You'll know at the outset crucial issues like plumbing, ventilation and restroom requirements. And you'll have enlisted the health inspector to be a member of your team. If he or she finds items that need correcting, then those items need to be addressed during negotiations. This is not only important for purposes of negotiating the lease. Word gets around, and you want your shop to be free of any taint that might be lingering from former tenants.
   Tracy Olsen, owner of Random Order coffeehouse in Portland, Ore., notes that even if your business fails and you have to close the door, you may still be responsible for the monthly lease payment until its term expires. As Olsen says, "It's hard enough to have your dream die, but imagine having to pay the lease for years beyond having laid off your staff, cut down on expenses, run the shop yourself and still called it quits."
   Olsen negotiated to buy an existing business this past August. She admits that having graduated from law school was a big plus when it came to negotiating the assumption of an existing lease. One key point she brought up was to first make sure the present owner's lease is assumable. The previous owner had an assumable lease with very favorable terms and Tracy's legal training gave her the knowledge to make sure those terms didn't change when she took ownership.

Words For The Wise
If your idea of a good time is swimming with piranhas, you may want to forego the help of a lawyer. Otherwise, working with an attorney is crucial in negotiating your lease. As one attorney friend noted years ago, "If I have a contract brought to me to review after it was signed, there isn't anything I can do." Don't think that because the lease looks somehow "normal" that it's a standard form and that all you need to do is fill in the blanks and sign on the bottom line. There are no such leases. Standard commercial leases are always written to minimize the landlord's risk and maximize the tenant's responsibilities. They are not tailored to your needs.
   For example, some items that look small can make a huge difference. If your lease has the landlord paying for water, that's a terrific benefit. You'll be using a lot of water making coffee, steaming milk and washing dishes.
   Hire and use a qualified real estate attorney. It is his or her job to tell you in plain words what the terms mean and to point out the advantages or disadvantages each aspect of the lease contains. You may feel uncomfortable negotiating the lease. That's okay. You can have your attorney do that for you. There is no shame in directing all landlord criticisms of your demands to a professional verbal pugilist.
   Still, there are some general terms of the trade that you should know, if you are to be a responsible partner for your team of experts.
   "Lease term" refers to the length, or term, of the lease. It usually runs from five to 20 years. The longer the lease term, the better. Should you decide to sell, a long lease term is a very attractive incentive for the new owner. It is often recommended that a lease term be five years with a minimum of three five-year renewal options. Defining a 20-year term in renewable segments of five years gives you an advantage if things don't work out.
   "Base rent," also called minimum rent, is the minimum amount of rent you will pay each month. This figure is usually stated as a monthly amount based on a formula of "X" dollars per square foot. The dollar amount per square foot will vary from location to location. Be sure to take your own measurements of the space to assure the accuracy of the base rent.
   We have already delved into the issue of "percentage rent," the amount you will pay the landlord over and above your base rent. Since this is based on gross sales, make sure your lease spells out what these include and exclude, should you decide to go this route.
   Your lease should have a clause that provides for rent to be reduced or totally waived in the event of a disaster such as a flood, fire, road construction or other "acts of God" like an earthquake or tornado. This is called "rent abatement." (Your insurance policy should also take account of this possibility, by providing income during the time you are rebuilding or just plain out of commission.) It is unreasonable that you should take the total economic hit due to interruptions in your business because of forces beyond your control.
   In order to have more freedom and flexibility in how you use the space, you'll want the lease to spell out the "use of premises." For example, you might not have art openings, charity fundraisers, conversational Italian meetings, film showings and musical events in mind at the moment, but unless you make provisions for them in the lease, you may not be legally able to host them, and to reap the economic rewards of increased traffic. Make sure you negotiate this carefully to include a definition that is flexible and broad enough to not restrict you or a future subleased tenant's activity (remember: The lease is a selling point). Avoid requirements that define your opening and closing hours. While you don't want to be forced to close when potential customers abound, it would not be in your favor to be obligated to stay open during the evenings if your location won't support you during those hours.
   Another crucial element to your lease is to have a provision that allows you to sublease the property to any "reasonable tenant" without additional charge. This "assignment and subleasing" clause needs to stipulate that the landlord will not have the right to withhold the sublease. Negotiating this means that if you are successful and wish to sell your coffeehouse, or if you aren't doing as well as you'd hoped, you will not be restricted in selling your business.
   If you will be renting equipment fixtures, you need to be clear about who will pay for the maintenance of that equipment, how often or when they should be replaced and who pays for that cost. You should also consider a provision that defines a reasonable length of time for the landlord to make required repairs to the premises. If there are common walkways, parking lots or other spaces shared with other tenants of the building, be sure you have an understanding in writing of what you are responsible for and what benefit you will receive. An example of this is to negotiate a specific amount of reserved spaces for your customers if there is a small parking lot for your building.

Clear The Air
By now it's clear: Negotiating a lease for your coffeehouse is a lot more involved than simply finding the right place and signing a boilerplate form. But it's not as complicated as a Middle East ceasefire, and has a reasonable chance of being mutually beneficial to all parties involved. The key is being an equal partner. Don't let the terminology intimidate you and always negotiate using strength and knowledge. Your attorney and accountant will be invaluable allies during this important startup phase of your business, and the Internet can provide a wealth of information to aid you in learning more. If you've done your homework and laid out what you absolutely must have, what you'd like to have and what you can give up in the lease, you'll find that the negotiations will be easier to get through, especially if you have established good relations with your landlord to avoid miscommunications and adversarial conditions.