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Landlords are NOT Your Friends, when Buying a Business

May 17, 2012

There are any number of reasons for deals to fall apart.  The biggest, by far, is because of Landlords.  The bigger the Landlord, the worse they seem to be.  REITs (Real Estate Investment Trusts) are by far the worst, in our experience.  Yes, we know we are generalizing, and we should say this is in our experience, particularly inMarylandandVirginia; however, REITs are found throughout the Nation, and we cannot believe they do not follow similar strategies and methodologies.

And their methods – in OUR experience – are largely based on apathy, arrogance and greed, all at the expense of the Tenant-Buyers and Sellers, alike.

We are representing a Seller at this time that has a bona fide Buyer under contract.  But try as we may, we cannot get the Landlord’s Representative to answer phones, e-mail, regular mail or correspondence sent via overnight courier, candygrams – you name it!.  They have ignored the Tenant, they have ignored us and they have ignored the Tenant’s Attorney.  This has been going on for almost ten (10) months, long before we got involved in representing the Tenant for the sale of his business.  And we cannot go further with the Contract, until the Landlord blesses the Buyer and offers and Assignment of the Lease.

About three months ago, another Tenant in the same Shopping Center came into our Client’s establishment and asked if he – our Client, had heard from the Landlord.  It seemed that this other Tenant’s lease was to expire in about a year, and he was attempting to determine how the Landlord was going to respond, because this Tenant wanted to take out a loan, in order to improve his store.  He, too had gotten no response.  And he had spoken to five (5) other Tenants, each of whom had similar difficulties.

We have had identical problems with four (4) other Landlords and their Representatives.  When attempting to contact other people in these REITs, the Tenants (and we) are shuttled back to the original Representative, who still ignores all communications.

Unfortunately, many, many Landlords have a “take it or shove it” attitude.  They begin with an adversarial position, which gets worse once your Lease is signed.  And this is not found only with large, institutional entities.  We went to one, private Landlord, to speak about a Restaurant space.  The prior Tenant had gone bankrupt and it was our position that the Rent was too high for the area.  We attempted to negotiate a more reasonable rate.  His response was:  “This is what it is.  If your guy does not like it, screw him!  There are plenty of dumb-ass restaurant people who will take it, if he doesn’t.”

We counseled our guy to walk away, and sure enough, the Landlord got another Tenant…who is now about to fail.  We spoke to that Tenant recently, and he said:  “If I was a mile west of here, the Rent would have been about 25% less and I would have been making money!  Not getting rich, but surviving!”

Some locations may be worth the price.  In our area, Rents are going from $35 to $47 per square foot, NNN.  (More on this in another post.)  That means  your BASE Rent for a 2,000 square foot space is going to cost you $5,833 to $7,833 per month, plus the NNN charges.

If we stay with the Restaurant theme, the Rule of Thumb on Restaurant Costs suggests that Rent should be no more than about 8% to 10% of your Gross Revenue.  At $5,833 per month, or $70,000 per year, that means you have to earn Revenue of at least $700,000 to justify that amount.  At 2,000 square feet, that is $350 per square foot, or a little less than your average Ruby Tuesday’s.  Put another way, that is $1,918 per day (based on 365 days per year), or $13,425 per 7-day week, or 58,333 per month!  That is a lot of pizza and subs!

And you need to think in terms of patterns.  Landlords typically charge more Rent for Restaurants than for other businesses, because of the perceived additional wear and tear on the property.  Yet, Landlords typically NEED Restaurants, because in many locations, such as Malls and Outlet Centers, having the Restaurant there helps retain Shoppers there longer – they do not have to go out of the Shopping Center for a break or to eat, where the Landlord can risk them going to other shopping areas, afterward.

But typically, the Landlord will resist making your eatery the exclusive one, in the Center.   They might give you exclusivity for pizza or hamburgers.  But they claim they want to infuse a diverse menu, so the Shoppers will have no reason to go elsewhere.

Great!  Except that if LL Bean and Eddie Bauer are in the same Center, you might buy two sweaters from them.  But if you just ate a pizza at one end of the Mall, you are not going to eat a hamburger at the other, just for the variety.  It does not work that way!  But the Landlord does not know or care that he/she is cutting your sales in half, by bringing in a second Restaurant.  He/she is not going to discount your Rent by 50%!

YOU NEED TO THINK OF THESE THINGS!

Think about the fact that, in those shopping areas, you would be paying for Rent from 9:00AM until 9:00PM, in your Restaurant.  But people do not eat en masse except during the hours of perhaps 11:00AM until 2:00PM.  You still have the lights on during the rest of the day.  The refrigerator is still on.  So is the grill and oven.  You have to have staff, or be there, yourself.  And the Landlords frequently dictate the hours you must be open.  So, if you are relying on shoppers for your traffic, you have some severe limitations with which to deal.

Therefore, if this is your kind of operation, you need to get several items included in your Lease, IN ADVANCE – because you may never be able to speak to the Landlord or his/her representative again, until it is time for him to raise your Rent:

  1. Get exclusivity, if that is a requirement of your business, like in a Restaurant.
  2. Use your Business Plan (remember that?) to project the Rent you can afford, and negotiate that rate.
  3. Make certain the Landlord’s marketing goals meet your needs, as well.

If you are in other types of businesses, think about the essential space issues you need to address.  What about being able to occupy a large office building after 5:00PM?  Is that important to you?  Many large buildings lock the doors after that time and, even if you have access, they frequently shut down the Heat and Air Conditioning.

How does your business intend to operate?  What do you need?  Anticipate these things, well in advance, for your own sake!

(Receive in-depth, personal consulting online, with The BAF Group’s principal at https://clarity.fm/donaldbarrick .

The BAF Group LLC is a full service Business Brokerage, with a history of more than a decade of service. Its Principal Broker possesses 25+ years of Business Sales and Divestiture. Although most of our work is involved in the Mid-Atlantic States, we have represented Sellers and Buyers throughout the Continental USA, and a number of overseas Buyers, as well. Some of our listings and additional information about us can be viewed at www.bafgroup.com. Thank you for your interest.)

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