Negotiating the Lease

The space we've leased has been unoccupied since December 2007, just after the US housing bust and 6 months before the Great Recession hit Seattle.  It's a 1563 sf space divided into a back kitchen area and a front service area and is located in a plaza just off I5, on the Snohomish/King county border.  There are 20 stores in the plaza, including a full-service grocery, 24 Hour Fitness, Blockbuster, Starbucks, Massage Envy, and a hair salon.  

It took nearly 3 months to negotiate the lease.  We began with a review of the space and mining for traffic patterns.  We checked to ensure that the location of electrical outlets and plumbing were sufficient for a smoothie operation.  Insufficient utility infrastructure can significantly increase start-up costs.  We probably should've had a plumber or architect look over the space.  At any rate, the space was adequate, though not ideal, for a smoothie operation.  The back kitchen area had the plumbing we needed for food-prep work -- proper drainage for 3 compartment-sink and wash-sink, and a floor drain for an ice-maker.  The front service area was more problematic, as it only had plumbing for a wash-sink, meaning prep-work would have to be done in the back kitchen (at least during hours when health inspectors are working).  This could increase labor costs because the person handling the service area can't do prep work.

We only considered the traffic coming from 24 Hour Fitness, and not car and plaza traffic, because we assumed that 24 Hour Fitness customers are more predictable than the average person who drives by the plaza -- those who work-out regularly take nutrition more seriously and are more likely to consider smoothies/protein shakes as necessities, meals.  Those not interested in nutrition tend to treat smoothies as luxuries, like candy, and therefore aren't reliable customers.  Corporate 24 Hour Fitness won't release their traffic information, but the manager of the gym told us that they average 1000 sign-ins per day, which matched our qualitative estimate of its traffic patterns.  We'll discuss more about traffic patterns in another post.    

Finding the infrastructure and traffic pattern acceptable for our needs, we sent the leasing agent a letter of intent (LOI) that describes what we intend to do with the space.  After the landlord agreed that our intention met the plaza' use guidelines, we received a preliminary lease.

It took us a week to review the lease.  We discussed lease negotiation tactics with someone in the commercial real estate business and carefully considered how each requirement impacts the business.  Some of our requests include:

* Option to break a lease.  Landlord asked for a 5 year lease.  We agreed but asked for an option to break the lease if the 24 Hour Fitness gym next door doesn't renew their lease in 2013.  We consider the smoothie shop a parasitic business, one that doesn't draw people to the plaza and instead leverages businesses existing in the plaza.  We're not sure if the smoothie shop can survive without the gym.

* Extending store hours.  They asked for a standard 8am-6pm.  We asked to be allowed to stay open as early as 5am and as late as midnight (we need to work around gym crowd).

* Time for build-out (free rent).  Landladies typically give up to 3 months free for build-out and we were offered 2.  We likely won't need more than 2 months to begin operations, as the space doesn't require much renovation.  But we're novices at operating smoothie shops and it'll take us at least a month to figure out work-flow processes and customer needs.  And we can't hire workers until we've figured out work-flow processes.  So we asked the landlord to give us 4 months of free rent so that we'll have enough time to work out the kinks and become profitable.  Summary of our argument:  we don't have much start-up funds and thus, we have nothing to protect us from a disaster (like the power outage in 2006 that kept the plaza closed for a week); we don't have money for signage and free rent will give us the funds to put a sign that costs 5k; we need 2 months of operation to understand customer needs and business operation processes.  In other words, we need time to not worry about profits and paying rent, and to instead figure out how to run the operation.

We tried our best to frame our response in terms of how our version of the lease agreement benefits the landlady.  The agent told us that the landlord wants shops that quickly become profitable and stable. Using this information, we responded that 4 months of free rent would increase the chances of our shop being stable and fully operational within 4 months.  The free rent gives us the flexibility to adapt to customer needs at low risk and to complete build-out in a shorter time-frame.  The landlord gave us 4 months of free rent and we promised that we'll put up signage within 60 days of opening.

If we had more credibility, we probably could've gotten the landlord to pay for tenant improvements or an additional month of rent because of the weak economy.  But we don't have credibility. The landlord doesn't know if we can operate a smoothie shop.  If we were Starbucks, the landlady would probably go out of her way to ensure we get the space.

In the end, we got what we think we need to make this shop work.  We hope to begin operations a month into the lease.  That'll give us 3 months of business operations without having to worry about rent.  We'll use the money saved to install signage, add additional equipment and furnishings, and perhaps take a few risks.  We're confident that the store will look complete within 4 months of the beginning of the lease.