Every month, an average of over 90 foodservice licenses are issued in every state. That’s over 4,500 new restaurants going into business every month across this country.

Do you have a restaurant space that you would like to fill with a quality tenant? Certainly there is no lack of tenants out there that would be interested in your site, so how do you go about finding the right tenant? This information was created specifically for Landlords who want to find the right tenant for their property.

When a prospective tenant is looking for a restaurant space, you as the prospective Landlord should know what they’re looking for, and in this order its; a lease they can afford, a site that fits their concept design wise, visible signage space, and parking. Everything beyond this is secondary.

Yes, the quality of the location is of vital importance, but the affordability of the site is paramount. Armed with this information, you should be able to present a sales package to your prospective tenant in terms that they can understand. If you can make the location financially easy to get into, that will give your prospective tenant the extra cash to commit to the other things related to getting the new restaurant off the ground.

In order to protect yourself from an unqualified tenant, there are many questions that you will want answers to. Set your expectations with the prospective tenant upon your first initial meeting. By doing this and listening closely to the answers, you can avoid a lot of potential pain for both of you.

Six factors that can help you select the right tenant:

#1. Create an interview checklist. You will want to cover a lot of ground with your new prospective tenant, and you’ll want to ask relevant questions. Depending on your unique situation, you may have legal restrictions placed on your ability to ask questions, so you will want to review your interview game plan with your legal advisor. This information is meant to be informative only and is not to be considered legal or accounting advice.

#2. Credit worthiness. Let the prospective tenant know that you care about their prompt payment history, and that you will expect them to personally be on the lease. Few restauranteurs will want to personally sign a lease, and it will be important to deal with this matter right up front. If the prospective tenant knows that their personal creditworthiness is of importance to you, you’ll cut right to the chase every time. Are you as a Landlord willing to lease to a company with little or no operating history? Perhaps if you have a space that has been vacant for a while you’d consider it, but you will want a significant amount of financial security up front.

#3. Background check. There’s an old saying that goes something like this, “What has happened in the past is indicative of what may happen in the future”. Your prospective tenant may have a background that may not be spotless. Only you can be the judge of what you are willing to tolerate—but don’t forget that old saying. Background checks are inexpensive and can provide a lot of valuable information into the business dealings of your prospective tenant.

#4. Feasibility study. Has your prospective tenant had a feasibility study done or is one planned? This study will evaluate the chances of success of the new restaurant venture, by examining the location and facilities offered (such as: walk in coolers, delivery doors, restroom facilities, and power availability), concept, competition, niche market, financial opportunity, and the overall viability of the project. This study will give you and your tenant the security in knowing that the new restaurant may be the right concept in the right area. If the prospective tenant has not considered a study, and you like what you see from the Landlord perspective so far, you may wish to split the cost of a feasibility study with the tenant, or just pay for it yourself and bill the prospective tenant back over time. The findings are hard hitting, and factors that never may have been contemplated may be brought to light. Most importantly, the Feasibility Study will help identify and confirm the market niche that your prospective tenant is seeking to fill. This is of vital importance both to you and to your prospective tenant.

#5. Business plan. A restaurant business plan is focused on the menu, and everything revolves around it, including revenues, expenses, equipment, payroll projections and all of the other numbers and concepts that will go into a business plan. It is not realistic to think that your prospective tenant has a business plan yet, because the location issue is still unresolved, as it the seating count, and so many other variables. Want to surprise a quality prospective tenant with something great? Offer them a long term lease that includes a business plan that you are willing to pay for (and of course, include in the lease terms). This will set you apart as a caring Landlord who wants the very best for the tenant. Don’t you think this would be just the thing to close the deal? Think about how few Landlords are including a business plan with an executed lease, and you could end up being the Landlord of choice! One of the nice hidden factors in this equation is that as you have commissioned the business plan as the Landlord; don’t you now have the ability to give your input into the concept as a whole? Now, you are not only the Landlord, you have become somewhat of an informal business partner, allowing you a good view of what’s happening in your space without being surprised.

#6. Business team. A restaurant management team not only consists of the owner(s) and the managers, it’s those outside the day-to-day operation that provide advice, direction and counsel that play very key roles in the success of the new restaurant. Legal, accounting, and restaurant consultant all play unique roles and contribute to the profitability of the operation. Regardless of the experience of the prospective tenant, this team should be in place in the very early stages, and by the time this person is ready to start looking for space, it should be a red flag to you as the Landlord if this team is not together yet.

Norman Vincent Peale once said, “We tend to get what we expect”. Let’s begin expecting a quality tenant and put ourselves in a positive conducive to that goal by using these steps above. Stay focused on the goal of a long-term relationship with a profitable tenant.

If you would like additional information on Feasibility Studies, Business Plans, or other aspects of how a Restaurant Consultant can aid in adding value to your property, the author, Kevin Moll is President of Restaurant Consultants, Inc. and can be reached via his website at http://www.restaurantconsultantsinc.com or local Denver at 720-363-0164 or toll free at 1-800-961-6005.

Plan Ahead

Before seeking lease proposals, invest a little time in planning and preparing. Establish priorities by considering the relative importance of such factors as lease pricing, balance sheet considerations, ongoing leasing needs and the necessity of the prospective lessor to have specialized equipment/industry knowledge. If the transaction is relatively insignificant in the overall scheme of things, a truncated planning process might be in order. If not, allow enough time to: 1) identify and pre-qualify lessors, 2) review and select a lease proposal, 3) allow selected lessor to conduct due diligence and get credit approval, and 4) to complete lease documentation.

Assemble an information package for prospective lessors that anticipates what they will want to know before submitting a proposal, including: 1) background information on your company and management bios, 2) three years of financial statements and interim financials, 3) a list of company trade and credit references, and 4) a description of the equipment to be acquired, including acquisition cost. Anticipate questions about your firm and disclose them in advance.

Choose the Right Leasing Company

The starting point for getting an attractive leasing proposal is in choosing the right leasing companies to bid. All leasing companies are not alike. Some specialize in specific industries, some in certain equipment types, and still others in transaction sizes. Leasing companies also vary in size, capabilities, expertise and integrity. Do your homework to pre-qualify leasing companies that will bid. Lessor qualities to look for include: 1) knowledge; 2) reputation; 3) ability to perform; 4) helpful business contacts; and 5) a relationship approach. Try to identify at least three leasing companies to bid.

As in any field, leasing professionals have varying degrees of knowledge and expertise. Look for leasing representatives and managements that have a good understanding of lease structuring, equipment issues, documentation, credit evaluation, the capabilities of their firms, your industry and other leasing issues. Avoid lease ‘sellers’ with obvious limited knowledge. It is too easy to be led down the painful path of misinformation and misrepresentation.

Because the entry bar for setting up shop in equipment leasing is relatively low, it is important to locate leasing companies that have good reputations in the business. Check to see whether the bidding leasing companies belong to one or more of the major industry trade associations (e.g. ELA, EAEL, UAEL, and NAELB). While membership in these associations doesn’t guarantee high ethical standards, each of these organizations has standards and processes to review members’ unethical business practices. Contact relevant associations for references. Then, get several names of customers, banks and vendors to contact.

Along with good ethics, the ability to perform as agreed is equally important in considering leasing partners. Ask for and get financial information, background information on the key managers, a listing of recently completed financings, names and contacts at key funding sources for each leasing company being considered. Review this information and follow up with the contacts provided. If your industry and/or the equipment to be leased are highly specialized, make sure the leasing companies have completed several arrangements similar to the one you are seeking. Check lessors’ websites and brochures to make sure that the type of leasing arrangement you are seeking is specifically referenced and discussed.

Good leasing partners offer more than equipment financing. In many cases, lessors have met or worked closely with bankers, attorneys, CPA firms, business insurers, equipment vendors and investors. If the leasing company serves a wide variety of customers, some of these contacts can prove invaluable. Try to get a feel for the depth and breadth of each leasing company’s ability in this area.

Since you will be working closely with the selected leasing company and may have additional leasing needs in the future, why not choose a leasing partner that values relationships? Although it is not easy to identify relationship-oriented leasing companies at the quoting stage, check customer references to inquire about lessor follow-up, attentiveness, willingness to learn about customers and willingness to be helpful.

Get a Large Enough Lease Facility

Right-sizing the leasing facility can save a lot of time. Look for an arrangement that will cover equipment needs for at least the next six to twelve months. A helpful rule of thumb is to obtain a leasing facility that is at least 20% more than what is needed. If a leasing credit line is an available option, this can be a helpful tool in securing the right amount of lease financing.

Choose a Lease Term That Matches Equipment Use

The term of the lease should match the expected use of the equipment as closely as possible. If the term is too short, the monthly cash outlays for the equipment might exceed the expected benefits to be derived from the equipment (cost savings or revenue production). If you sign a lease that is too short that also includes fair market value end-of-lease options, and you exercise one of these options, you might wind up overpaying for the equipment. If the lease term is too long, you might lose the flexibility of upgrading to newer more desirable equipment. More than a few lessees have been stuck with equipment they no longer need, yet they still have a significant lease balance remaining.

Notwithstanding your preference, a shorter lease term returns the lessor’s investment in the equipment faster and lessors generally perceive a faster recovery to be a credit enhancement. You might be able to manage any mismatch between your preference and the lessor’s by obtaining favorable end-of-lease options. Seek end-of-lease options that include: 1) the right to return the equipment to the lessor; 2) favorable renewal options; and 3) favorable purchase options. Seek ways to limit what you are charged by requesting fair market value options that are “capped” (have upper limits) or favorable fixed options.

Look For Lease Flexibility

Obtaining lease flexibility can easily trump obtaining the lowest price. In fact, you can trim lots of money from overall leasing costs by having a flexible leasing arrangement.

First, make sure the lease allows you to include most of the equipment you intend to acquire. Also, check that it will be easy to add more equipment to the lease as your needs change. The better leases provide for multiple schedules under a master lease or the ability to amend existing leases to make additions. What if you no longer need some of the equipment? An early termination formula is useful in these situations. Generally, these formulas consist of present valuing the remaining rents. If the equipment has a strong residual value, try to negotiate a more favorable termination charge by incorporating some of the anticipated residual value.

A flexible lease arrangement anticipates upgrades. Usually, at the time of equipment upgrade, the present value of rents associated with the upgrade can be combined with the present value of the remaining equipment rents to create a revised schedule. Other methods might be required in the event that the lessor will incur penalties or additional charges resulting from the way the lessor has funded the lease.

Will you be able to terminate the lease early without an onerous charge? An amount consisting of the present value of the remaining rents plus a termination charge no greater than 3% to 5% should compensate the lessor for early termination in most leasing arrangements. Where equipment has high residual value, request that a portion of the anticipated residual value be applied to reduce early termination charges.

Does the lease have flexible end-of-lease options? Clearly, if the lease contains a nominal purchase option, there is little need for additional end-of-lease flexibility. Otherwise, a good array of end-of-lease options is desirable. Request the right to return the equipment to the lessor without undue penalty or expense, the right to purchase the equipment at a fair or reduced price, and the right to continue leasing the equipment at a fair or reduced rent. Use of ‘caps’ in fair market value purchase or rental options can greatly reduce potential costs at lease end. Beware, however. Lessors may insist on fair market value ‘floors’ (lower limit) when they agree to ‘caps’.

It may become necessary to relocate the equipment to another site. Make sure the lease provides that equipment can be relocated without unreasonable penalties or charges, subject to notifying the lessor. Keep in mind that equipment relocation may create extra expense for the lessor, particularly if it is to be moved to another state or to multiple locations. Most lessors perceive multiple locations as adding additional risk to the transaction in the event they must repossess the equipment. As long as these considerations are taken into account, the lessor should permit relocation of equipment with reasonable notice and reimbursement of lessor’s direct costs and administrative expenses.

Is there a sufficient notice period at the end-of-lease for you to indicate your desire to renew the lease, purchase the equipment or return the equipment? The notice period generally ranges from one to six months, with three months being typical. If you violate the notice period, the lease kicks into an automatic renewal period, usually one to six months. You should seek notice and automatic renewal periods that are short, to avoid unintended additional lease charges. If the lessor is unwilling to negotiate this provision, you can manage the situation by making sure the notice requirement is fulfilled within the allowed time.

Look For Competitive Lease Pricing

Lease pricing is a function of many factors, including: market rates, perceived lessee credit risk, lessor competition, equipment collateral quality and equipment re-marketing prospects. Get at least three lease bids, if possible. At the end of the day, lease pricing is market driven. A properly completed present value analysis will bring into focus comparison of diverse proposals otherwise difficult to make. Make assumptions about the equipment residuals and incorporate all anticipated costs and fees. Take into account the amount and timing of the periodic rental payments, any advance rental payments, security deposits, cash collateral, interim rents and commitment fees. To achieve an accurate analysis of cash flows, you should incorporate any tax charges/benefits as they are to be realized.

If you are concerned about the impact of the lease transaction on your firm’s financial statements, compare the impact of each proposed lease on the balance sheet and income statement (if lease accounting is not your forte, get a qualified accountant involved). For example, if your company is sensitive to adding additional debt to its balance sheet, a capital lease should probably be avoided. As you can see, there are several ways to evaluate lease proposals and to compare lease pricing. The important thing is to use an analysis method with consistency and to choose the method that best fits your company’s priorities.

Understand All Fees and Penalties

Leasing proposals vary in the types and amounts of fees and penalty charges. Some common lease charges include: commitment fees; documentation charges; charges for attorney fees; and charges for UCC financing statements. Additionally, some leases might contain penalty charges for late rental payments or early lease termination. These are only a few of the possible fees and charges. It is important that you go through the lease proposal and lease agreement to identify likely charges. If fees or charges are significant and likely, you should incorporate them into your pricing analysis.

Understand the Lessee’s Major Responsibilities and Obligations

Most lease proposals cover the basic terms of the lease, but are silent regarding many of the obligations and conditions normally included in the lease agreement. Lessors usually will not negotiate the lease agreement before receiving a signed proposal letter. While negotiating lease terms might not be customary or practical at the proposal stage, requesting a copy of the lessor’s standard lease along with the proposal letter is a good idea. In their standard agreement, look for any onerous or non-standard terms that would otherwise eliminate the proposal from consideration.

There are lease provisions that are common to almost all ‘net’ lease agreements, including: 1) prompt payment of rent, taxes and other required payments; 2) equipment & liability insurance; 3) equipment maintenance and upkeep; 4) tracking and reporting relocation of equipment; 5) freedom from any liens or other encumbrances against the equipment; and 6) return of equipment. Less common lease provisions, such as financial covenants or requiring personal guarantees might not be competitive or might result in you rejecting a proposal that is otherwise attractive. Review the proposal letter and the lessor’s standard lease agreement to insure that they are free of provisions that are problematic.

In all cases, it is important that you have the right to terminate the proposed transaction if you and the lessor can not come to terms on the lease agreement, especially if onerous terms appear in the lease that are not covered in the lease proposal.

Conclusion

Snaring the best lease deal and relationship need not be like getting a root canal. With a dash of advance planning and a few well defined objectives, you can find a good match. Remember to establish your priorities in making a decision on lease proposals and allow enough time to go through the proposal, lease approval and documentation phases. Also, while lease pricing is usually of utmost concern, make sure you consider other factors that can increase costs or create problems.

George A. Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. (“LTI”). He is responsible for overseeing the company’s marketing and financing efforts. One of the co-founders of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry leader, frequent panelist and author of several articles pertaining to equipment financing.

Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in direct equipment financing and vendor leasing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at http://www.ltileasing.com.

Many tenants will openly admit to me they are poor negotiators. These people I can help. Its the business owners, retailers and tenants who think they know it all that invariably won’t do any homework. At my seminars, I teach tenants that good preparation is an excellent substitute for brilliant negotiating…so do your homework. This is your assignment:

Adopt a “Negotiate To Win” mindset. Many tenants get so focused on not losing their shirt they don’t even try to win. When the CBC television network asked me to appear on their Venture program I agreed. A crew of four followed me around for half a day filming and interviewing me in action. Most of that footage was left on the cutting room floor but one statement that made it to air was this “there is nothing wrong with negotiating aggressively”.

Tenants need to realize that the landlord’s realtor or leasing agent is negotiating to win – and tenants can (and should) do the same. I’ve actually had tenant clients discourage me from getting them too good of a deal or it might spoil the landlord/tenant relationship. No wonder some tenants are paying too much rent in poor locations. You don’t have to apologize for negotiating agressively if you speak and act professionally.

Determine what motivates the landlord. There are many different types of landlords such as financial institutions, pension funds, local developers and even small family property owners. You need to determine or find out who the landlord is and what their long-term goals are if you expect to have successful negotiations. For example, some landlords prefer the security that comes with a national tenant. Other landlords will want to maximize cash flow – so if an independent tenant will pay more rent than the national chain store they lease to the independent. While many landlords willing participate with flexible tenant incentives such as free rent and allowances this is not always the case. If you learn that a landlord for a particular property always insists on a personal guarantee and you are not prepared to give one then having this information in advance from the landlord’s leasing representative is helpful. Gathering information about the landlord will save you hours and even days going down what turns out to be the wrong path.

Ask questions – but watch what you say. Asking questions is simply the most useful activity you can engage prior to actually starting negotiations. Is the building for sale or conversely how long ago did the landlord develop or acquire it? Who really is the landlord and who makes the final leasing decisions? Ask which tenants recently moved in (or out), seek them out and interview those tenants. Be prepared to lead the initial leasing interview by asking pertinent questions. It’s also a good idea to prethink your answers to possible questions they will ask you. What you say and how you say it will help you or hurt you. Try to be friendly without being too informative. By telling the landlord’s realtor that your current lease is expiring in six months, that you like the location she has just shown you; or that you’ve just purchased a franchise for this area you may be prequalifying your tenancy in their mind. Ask probing questions so that you will become an informed negotiator.

Avoid purely emotional decisions. A lady called me one day to inquire about our lease consulting services. She went on to tell me that just prior she had met with a local mall manager and looked at space for lease. Even though she didn’t know what the landlord was asking for rent she wanted to lease the space and made her desire very clear to the mall manager. She loved the space and was determined to have it whatever the price. Keep your emotions in check to avoid being taken advantage of by the landlord. I admit that the majority of the decisions we make as humans are emotional decisions. Your intuition can be extremely helpful at times and should not be ignored. However, a tenants ability to weigh these emotions quietly on the side and make calculated decisions that will ultimately prove most effective in the overall decision making process.

Ask for more than you want. A retail tenant whom I have subsequently negotiated several Lease Agreements for was pleasantly surprised to hear that I had successfully negotiated the first 12 months free of rent on his five-year shopping center lease. I was hoping you would get me at least three months free, how did you do it, he questioned me with excitement. I replied by explaining that originally I had asked for 18 months of free rent, then settled for 12 months. The point is, most landlords will counter-offer your proposal so ask (or more precisely – negotiate) for more than you need, expect or want. This also applies to tenant allowances, the deposit, rent reductions and so on. Another tenant told me she needed a $500 per month rent reduction to make her business viable. I opened negotiations with the landlord asking for a $1000 per month reduction. We settled on $800 per month, saving the tenant $48,000 in rent over the next five years.

Walk away from the negotiating table. Once you’ve invested days, weeks or months negotiating on a particular site it’s hard to walk away from the negotiating table, but more often that not this is when the real negotiating begins. Some of the best deals I’ve gotten for tenants was after the deal fell apart or after we walked away. Most tenants can afford to walk away from a potentially bad deal, but few can afford to make a five or ten year mistake. If you are feeling unsettled about the deal I recommend you take a cooling off period of a few days before signing the Offer to Lease or Formal Lease Agreement.

Consider delegating the negotiations. When I wrote my book Negotiate Your Commercial Lease I hired a person experienced in the book industry to negotiate the terms and conditions of my publishing contract. Even though I am a skillful negotiator I recognized that I was emotionally involved – unfamiliar with the industry and that I couldn’t afford to pay “stupid taxes”. This is the money you waste making unwise decisions. Consequently, the end result was much more in my favor with a lot less stress than had I stumbled through it myself. A professional Lease Consultant can help you with lease negotiations, site selection, document review or simply provide you with ongoing consulting. In my opinion it is a grave mistake to let a realtor represent you if that realtor’s fee is being paid by the landlord. It’s virtually impossible to serve two masters, which is why as a Lease consultant I exclusively work for tenants.

Dale Willerton is the founder of The Lease Coach – a network of Certified Commercial Lease Consultants working exclusively for tenants. Willerton is author of the book NEGOTIATE YOUR COMMERCIAL LEASE and speaks at franchise shows and delivers public seminars. Contact The Lease Coach toll free 1 800 780 9202 Fax (780) 448-2670. Visit http://www.TheLeaseCoach.com or email DaleWillerton@TheLeaseCoach.com – Consulting inquiries and leasing questions welcome.