May 22, 2019

6: Navigating a Commercial Lease Agreement with Guest Eric Finkelstein

37 minutes

Sourcing a franchise location and learning to understand how a commercial lease agreement works can be daunting. The technical jargon can be overwhelming—and these agreements are riddled with things you need to know. On this episode of Franchise Secrets, I interview Eric Finkelstein and we talk about everything from crafting your Letter of Intent to finessing the final lease agreement itself.

Eric is a commercial real estate attorney at the firm of Chiesa Shahinian & Giantomasi. He graduated from Boston University and Rutgers University School of Law. With years of experience under his belt, he is a wealth of knowledge for his clients and a valuable asset. He’s joining us today to give you some insight into commercial real estate!

Outline of This Episode

[0:35] Introduction of Eric Finkelstein
[3:45] What a Letter of Intent should contain
[7:08] Jumping into details about a commercial lease agreement
[12:15] Assignment and subletting
[15:49] Covering non-competes: why everyone wants them
[20:30] Educate your landlord on your business and how it works
[21:25] Sound mitigation issues to consider
[25:20] Things to consider in the tail end of lease negotiation
[27:45] Tenant improvement dollars (TI dollars) and free rent
[32:40] What a tenant should be aware of if their landlord changes
[34:10] What happens when the property you lease is reassessed

The Letter of Intent is a proverbial handshake—not a binding contract

A Letter of Intent (LOI) is typically something you or your broker will be drafting as a sort of template for your lease. You’re laying out the groundwork for the lease agreement you would potentially be signing. It’s also a time-honored way of letting your potential landlord know you are taking this seriously. The final LOI could include items such as rent structure, time-frame of your build-out, permitting, and other pertinent information.

Remember—it is not a binding contract.

However, the more you lay out in your LOI, the more groundwork you’ve done for your attorney when it comes down to navigating the lease. Landlords will take what you’ve spoken about and laid out in that letter and give it to their attorney’s to draft a lease agreement. In turn, once you receive the initial lease agreement you’ll go over it with your attorney. Listen as we talk about some of the details associated with this letter.

Understanding the basics of a commercial lease agreement and what you should fight for

As a future tenant, you have some leverage in negotiations. When you take the lease draft to your attorney, be prepared. Immediately tell them what matters to you and what doesn’t. This is a great way to save time and money on legal bills upfront. What within the lease could be a deal breaker for you? What do you need to have changed in order to make the deal work? Have your attorney walk you through what is important and avoid cumbersome legalese. Continue listening as we talk about the unexpected things that impact your leveraging power in a lease agreement.

Make sure certain remedies are built into your lease agreement

A landlord needs to build some protections into the lease so that down the line, they are still getting paid. On the flip-side, you want to make sure that this agreement is also protecting your future. It may not be your intent now, but if there is potential to sell your business make certain there is an exit strategy built into your lease. Perhaps it’s important to you that a non-compete clause is built in—so you’re the only pizza place in the complex, for example. Consider who your neighbors may be and if you need a sound mitigation clause. Continue listening as we cover many more items to consider building into your lease to protect your business.

Negotiating Tenant Improvement Allowance and free rent

Tenant Improvement Allowance or Dollars (TI) is money that a landlord gives you to put towards costs of building out your space or making improvements. However, keep in mind that this is more of a loan—it’s wrapped into your rent cost. So if you’re negotiating a higher amount per square footage, remember you could be increasing your base rent.

In lieu of a larger TI, your landlord may offer a lower amount of money per square footage but in exchange offer a certain length of time of free rent. They typically give you enough time to build out your storefront. So you need to consider upfront what is more important to you. Listen to the rest of the podcast as we discuss this topic in length as well as other things to be aware of as you’re wrapping up your lease agreement.

Resources & People Mentioned