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Options to Extend Your Lease ( 6 Little Known Factors Can Kill Your Restaurant)

November 13, 2020 by Mark Chase Leave a Comment

Options to Extend Your Lease ( 6 Little Known Factors Can Kill Your Restaurant)

 

Today you will learn six tips about options to extend your lease that your Landlord wishes you did not know.

 

You see, most restaurateurs overlook essential details when signing a lease.

 

Options to extend your Lease are super important and often overlooked.

 

Ready to outsmart your Landlord?

 

Let’s get started.

 

What is an Option to Extend Lease?

 

The option to extend Lease provides the ability to extend your term of Lease if your business succeeds.

 

Most restaurateurs will sign a lease for a period of 5 to 10 years.

 

If your restaurant is successful, you will want to extend the lease term when the Lease expires or sell your restaurant for a profit.

 

But what if you don’t want to sign a long-term lease?

 

Since you may be personally liable for the Lease, you may prefer to keep the Lease shorter to hedge your bets if things don’t work out as planned.

 

The option to extend the Lease allows you to extend the lease term if your restaurant succeeds.

 

If things don’t go as planned, your total lease commitment has a shorter lease term.

 

The Truth About Options to Extend Lease

 

Landlords hate options!

 

Why?

 

There is no benefit to the Landlord, and often, the option to extend can lock the Landlord into a lease with below-market rents.

 

It’s the reason the Landlord will try to sneak in the legal mumbo-jumbo we will explore next.

 

Options to Extend Lease Have Conditions

 

For example, you sign a 5-year lease with two 5-year options to extend.

 

The options to extend the lease grants you the opportunity to extend the term of the Lease. But you must meet certain conditions.

 

There are many loopholes in the standard Lease and option to extend clause that can either:

 

  • Void the option to extend
  • Make the terms financially unacceptable for the restaurant

 

6 Important Option to Extend Lease Clauses You Need to Understand

 

Let’s dive into a typical Option to Extend clause.

 

I have included just a few paragraphs of a Lease Agreement and an Option to Extend the Lease.

 

The first clause provides the number and length of term for each option.

 

Option Periods

 

The following is pretty straight forward.

 

The Tenant shall have the option to extend the Lease Term hereof for one (1) additional period of sixty (60) months (hereinafter “Option Period”), subject to the Tenant’s compliance with the conditions outlined in this section.

 

The paragraph above provides for one five (5) year option to extend the Lease.

 

The next clause to understand is the notice requirement.

 

Notice Requirement

 

The tenant may exercise each option by giving Landlord written notice of its intent to exercise the said option, such notice to be received by Landlord at least twelve (12) months before the expiration of the original Lease Term, or a previous Option Period (“Notice Period”).

 

The paragraph above states that you must provide notice to extend the Lease at least 12 months before the expiration of the original lease term.

 

Why does this matter?

 

It’s difficult to make business decisions a year in advance.

 

For example, if you are considering a sale within the next few years, you may need to extend the Lease to sell the business.

 

If you exercise the option a year in advance and decide not to sell, you will be liable for another five years.

 

The notice date should be closer to the expiration of the original lease term.

 

For example:

 

To exercise an option to extend, the Tenant must give written notice of such election to the Landlord.

 

The Landlord must receive the same at least four but not more than six months before the date that the option period would commence, time being of the essence.

 

If proper notification of an option’s exercise is not given or received, such option shall automatically expire.

 

Let’s continue.

 

Conditions Precedent to Exercise of Options

 

At the time of exercise, Tenant (i) is not in Default, and (ii) is operating a business in the Leased Premises per the Permitted Use.

 

The paragraph above is vague and could cause problems down the road.

 

Although the definition of a default is in the body of the Lease, this paragraph should be specific to certain types of default, such as a monetary default.

 

There should be a period for the Tenant to cure the default before losing their right to exercise the option.

 

For example, if you were late one time paying the rent, you should not lose your option to extend.

 

The next clause deals with the rent if you exercise your option to extend the Lease.

 

Base Rent Payable During First Option Period

 

During the Option Period, all other terms and conditions of this Lease shall remain unchanged and apply except that the minimum rent shall be the then-prevailing fair market value for the use of the Leased Premises during the Option Period (“Fair Rental Value. Notwithstanding anything to the contrary contained herein, in no event shall the Fair Rental Value be less than one hundred five percent (105%) of the Minimum Rent due and payable for the last Lease Year of the First Option Term (the “Renewal Floor”).

 

The paragraph above states the rent will be “Fair Market Value”.

 

Also, it states in no event shall the rent be less than 105% of the rent during the last year of the Lease.

 

In essence, this clause states that the rent has no chance of going down if the real estate market plummets, but every chance of going up at least 105%.

 

How do You Determine Fair Market Rent?

 

In this situation, both parties will hire an appraiser or qualified brokers to determine the market value.

 

They will often have a third appraiser or broker determine which appraisal is closest to market value and use that valuation.

 

This process would be fair if there were not a floor of 105% on the rent increase.

 

Whenever possible, you should negotiate the Option Rent in advance. Hence, you know your rent exposure and plan if it makes sense to exercise the option or let the Lease expire.

 

Be sure to have the right not to exercise the option if you can’t agree on rent.

 

Two Risky Option to Extend Mistakes Almost All Restaurateurs Make

 

Most restaurateurs don’t realize the Option to Extend’s importance until they decide to sell the business and assign the Lease.

  • You cannot assign an option to a buyer
  • Personal guaranty.

 

Your Option is Personal (Why it Matters)

 

This Option is personal to the original Tenant, and cannot be assigned or exercised by anyone other than said original Tenant and only while the original Tenant is in full possession of the Premises and without the intention of after that was assigning or subletting.

 

Let’s assume you signed a 5-year lease with a 5-year option to extend.

 

You have been in the space for just over four years and decide to sell.

 

You think great, and I have a 6-year term remaining that the buyer can assume.

 

You list the business with a restaurant broker to sell the business.

 

Suppose the broker is not a savvy restaurant real estate advisor.

 

In that case, you soon learn that the Option to Extend is void, and you only have one year remaining on the Lease.

 

You soon learn your business has no value.

 

If an experienced restaurant real estate advisor and or an attorney specializing in commercial lease agreements, they would have noticed this little clause hidden in the Lease.

 

Worst case scenario, you cannot sell the business. You will either close the business or risk signing a new lease to sell at a later date.

 

In the best-case scenario, the Landlord will agree to allow the Option to Extend Lease to be assigned. Still, he will require a substantial payment from you.

 

Personal Guaranty

 

Most restaurant leases will include a personal guaranty unless you are a large corporate chain with strong financials.

 

In the event of a lease assignment, the assignor (you) often remains liable for the Lease after the assignment.

 

If the assignee (buyer) defaults on the Lease in the future, the Landlord has the right to pursue damages from you.

 

The buyer’s default becomes an even bigger issue if the guaranty includes the option periods.

 

For example, suppose you sell a restaurant. The new owner exercises an option to extend the Lease and still have a personal guaranty.

 

In that case, you will remain liable if the Tenant does not pay rent during the lease extension.

 

It’s essential to negotiate that upon any Lease assignment, or if you exercise an Option to Extend, the guaranty becomes void.

 

Summary

 

Now you know the 6 Little Known Factors About Options to Extend Your Lease that Can Kill Your Restaurant Business.

 

You will be able to negotiate a lease that protects your long-term interests.

 

By carefully following the tips below, you’ll be well on your way.

  • The Option to Extend grants you the option to extend the Lease
  • The notice period should be as close to your lease expiration as possible
  • If you default but cure the default, the Option to Extend should not be void
  • You should negotiate a rental rate for the Option to Extend in advance if possible
  • You should have the right not to exercise the Option to Extend if you disagree with the Fair Market Rent after the appraisal process
  • You should make sure the Option to Extend is not personal to the original Tenant
  • You should include language so a personal guaranty will become void upon lease assignment and upon exercise of the Option to Extend

 

Lease negotiations are often hectic as you have many moving pieces to deal with at once.

 

Often you are focused on the near-term deal points such as rent and how much time you have to build out your store before paying rent.

 

It’s essential to think about worst-case scenarios, exit strategies, and the fine print.

 

Many restaurateurs have no issue spending thousands of dollars on a new sign or remodel but balk at spending a few thousand dollars to protect their investment.

 

This decision can be the difference between a walk down the yellow brick road or the boulevard of broken dreams.

 

Before signing a Lease, it is highly advised you retain an experienced restaurant real estate advisor and attorney specializing in commercial.

 

Lease agreements to protect yourself.

 

Lease agreements are involved.

 

This article is a great start.

 

I recommend you read more about how to lease a restaurant to fully understand how your Lease can make or break your restaurant.

The Ultimate Guide to Restaurants for Lease

 

Do you need a restaurant real estate advisor or an attorney specializing in commercial Lease agreements?

 

Shoot me a message, and we will connect you with a professional in your area.

 

 

Filed Under: Uncategorized

Restaurants for Sale or Lease (Best 4 Ways to Find Yours)

November 11, 2020 by Mark Chase Leave a Comment

Restaurants for Sale or Lease-Best 4 Ways to Find Yours

 

Are you looking to find restaurants for sale or restaurant space for lease?

There are four approaches you can use to find restaurant space for lease or sale.

Which one is best?

One of the first decisions you need to make is to buy a restaurant or consider restaurants for lease.

 

Pros and Cons of Buying or Leasing a Restaurant

 

Should you buy or lease a restaurant? Compare the Pro’s and Con’s

 

Top 4 Methods to Find Restaurants for Sale or Lease 

 

  • Internet Sites
  • Restaurant Real Estate Brokers
  • For Lease Signs
  • Off-Market Deals

Which methods are right for you?

Like many choices in life, it often comes down to time and money.

The more time and money you have available, the more options you have to find restaurants for sale or lease.

 

Best Internet Sites to Find Restaurants for Sale and Lease

 

The best website for you depends on if you prefer a vacant restaurant space for lease or if you wish to purchase a turn-key restaurant with furniture, fixtures, and equipment.

Finding a house online is easy. Locating a restaurant space for lease requires a little more work.

Zillow aggregates homes for sale in one place. There is not a similar service for commercial properties.

Locating the right restaurant property may require searching on multiple sites.

The site that works best for you will depend on your geography and requirements.

Let’s look at your choices and which sites are best for you.

 

3 Types of Listing Sites (Which Works Best for Restaurants for Sale or Lease?)

 

  • Commercial Real Estate Listing Sites
  • Business Opportunities Listing Sites
  • Restaurants for Sale or Lease Listing Sites

 

Commercial Real Estate Listing Sites

 

There are numerous commercial real estate listing sites. 

These sites generally provide listings for the major categories of commercial real estate including, office, retail, industrial, and land.

Most offer a free search option, but some sites do require a subscription.

  • Loopnet.com
  • Cityfeet.com         
  • CoStar.com             
  • Showcase.com
  • Crexi.com                                                           

Which one should you use?

Loopnet.com is the best bet for most people.

Why? They have the largest number of listings and include both restaurant space for lease and restaurant space for sale. 

You will need to conduct different searches within Loopnet.com, depending on if you are leasing or buying.

 

Business Opportunities Listing Sites

 

There are numerous sites advertising business opportunities. 

These sites include every type of business, including restaurants for sale.

  • BizBuySell.com
  • Bizben.com
  • Bizquest.com
  • USBusinessforsale.com

What’s the best site for you?

Bizbuysell.com is your best choice. 

 

Restaurants for Sale and Lease Listing Sites

 

The following websites are more focused on foodservice and restaurants for sale or lease.

Some of these sites are operated by restaurant brokers to funnel buyers to their listings.

  • Restaurants-for-sale.com
  • Restaurantsforsaleglobal.co

Which site is best?

There is no clear winner in this category.

Most of the sites are focused on geographical areas, so the number of listings can vary greatly depending on which cities you search.

 

Should You Use a Real Estate Broker?

 

The term “real estate brokers” or “agent” is inclusive.

It’s essential to understand the different roles of real estate brokers and how they are involved with various aspects of commercial real estate.

Most brokers work for the property owner or landlord. Some brokers called Tenant Representatives or “Tenant Reps” work primarily for tenants.

 

Restaurant Real Estate Brokers

 

A restaurant real estate broker will specialize and work exclusively with restaurant operators to buy, sell, or lease restaurant properties.

A restaurant real estate broker should have in-depth knowledge of lease agreements, business sales and acquisitions, parking codes, and liquor license regulations.

A restaurant real estate broker will have extensive relationships with advisors that specialize in restaurant transactions such as:

  • Architects
  • Attorneys
  • Kitchen Designers
  • Liquor License Expediters
  • Contractors

 

Business Brokers

 

Business brokers typically sell a broad range of businesses.

They may or may not have much experience with lease agreements and the many lease issues that can affect a business.

Many business brokers do not cooperate with other brokers and limit access to their listings only.

If you use a business broker to purchase a restaurant or sell a restaurant confirm in writing that they will cooperate and share a commission with brokers from a company other than their own. 

Otherwise, you risk seeing a limited number of opportunities.

 

Commercial Real Estate Brokers

 

Commercial real estate covers a broad range of property types. 

Most commercial real estate agents or brokers specialize in a specific type of property or geographical area.

For example, office agents specialize in office buildings, and retail agents typically lease or sell retail properties and shopping centers.

Most commercial real estate agents don’t have experience with business sales or acquisitions.

If you use a commercial real estate agent, make sure they have some restaurant leasing experience and are familiar with restaurant operators’ specialized needs.

So, should you work with a restaurant broker?

The short answer-it depends.

If you are buying a restaurant priced below $200,000 or looking for a short-term lease, it will be hard to find an experienced broker to help.

In this scenario, do the groundwork of finding a restaurant for lease or sale.

You can hire a restaurant real estate advisor to help you with due diligence, letters of intent, and answer any questions you have.

If you are looking to sign a long-term lease to build-out your restaurant, working with a qualified broker will be a huge time-saver. 

In most cases, there will be no cost to you for their service.

Learn How to Choose a Restaurant Broker

 

Calling For Lease Signs ( Do Sign’s Work to Find Restaurants for Sale or Lease?)

 

Before the internet, classified ads and lease signs were the two primary methods to find a restaurant property.

Driving and walking the neighborhoods that fit your concept is a great way to learn the market.

You will learn essential factors such as traffic patterns and which areas attract the most visitors.

Unfortunately, driving and calling “For Lease” signs is time-consuming and frustrating.

Necessary information such as square footage and rental rate requires a phone tag game if you are lucky enough to get a return phone call. 

Lease signs can uncover a hidden gem.

But you won’t find a large percentage of turn-key restaurants for lease. 

Restaurants for sale rarely advertise with a “for sale” sign or banner.

 

How to Find Off-Market Restaurants for Sale or Lease

 

Seldom-used by first-time restaurateurs, targeting off-market restaurants is an excellent approach in areas with little inventory or turn-over.

Specific properties are selected to buy the existing restaurant from the owner or negotiate a future lease with the landlord when the current lease expires.

Off-market deals can be a very time-consuming process and require the patience to possibly wait months or years into the future for a specific restaurant site.

If you wish to take this approach, you will need to research the landlord and existing restaurant owner’s contact information. 

A restaurant real estate advisor can assist you with researching and contacting the parties involved.

Next steps

So, there you have it, my four steps for finding a restaurant. 

Now it’s time to implement them.

The first step?

Leave a comment to let me know which technique you’re going to try first?

In summary, the methods above provide the most common ways to lease or buy a restaurant.

No matter which options you chose, align yourself with experts to help you navigate the many minefields of leasing or buying a restaurant.

Are you leasing a restaurant or buying an existing restaurant? 

Do you want step-by-step instructions to get you from “I want to open a restaurant” to “here are the keys to your new restaurant”?

Read our free guides:

How to Buy a Restaurant A Dead-Simple Guide
The Ultimate Guide to Restaurants for Lease

Filed Under: Uncategorized

Why Lease Assignment Rights Are Critical To Your Restaurants Success

June 25, 2020 by Mark Chase Leave a Comment

What is a lease assignment?

The lease assignment and or subletting provision in your lease is one of the most important provisions and often given little attention by new business owners when they negotiate restaurants for lease. [Read more…]

Filed Under: Blog

Lease Commencement Date vs Rent Commencement Date

June 23, 2020 by Mark Chase Leave a Comment

[Read more…]

Filed Under: Uncategorized

Personal Guaranty-How to Reduce Your Risk of Personal Guaranty

June 19, 2020 by Mark Chase 1 Comment

[Read more…]

Filed Under: Blog

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