Small-Business Owners Face Hard Lessons In Leasing

By Virginia Bridges
The News & Observer (Raleigh, N.C.)


When Zydeco Downtown closed here last month, Antwan Harris didn’t just lose his business, he lost a lot of money.

For nine years, Harris, a Raleigh native and two-time Super Bowl winner who played in the NFL from 2000 to 2005, served Cajun- and southern-style food at lunch, as well as drinks at night.

But Harris packed up much of Zydeco in January after the landlord’s property management company sent him a letter asking him to move out, he said. The lease had expired, and he was trying to renew it when he was asked to leave.

That situation left Harris with little leverage, despite the fact that he had invested more than $450,000 to upfit the space, not including the $15,000 he spent on a heating, ventilation and air conditioning system over the summer, he said.

Harris would like to recoup some of his costs, but that is unlikely, he acknowledged, as his initial lease agreement called for him to leave anything that is attached to the space.

Harris is learning the hard way the importance of understanding and staying on top of a small-business lease.

Businesses need to make sure they understand all the details and provisions in the lease, and review and update the document annually, said Michelle Rich Goode, president of Raleigh-based Rich Commercial Realty, which provides buyer and tenant representation in commercial property transactions.

“Check in with your lease just like you would check in with your financial statements, tax information,” she said.

If owners don’t ask the right questions, they could end up losing money, Goode and some small-business owners said.

That was a lesson learned by Kate Steadman, co-owner of Frill, a Cary, N.C., clothing company that makes bridesmaid outfits and custom recruitment dresses for sororities.

The Frill owners signed a short-term lease on a space so they could meet with clients and package orders during their busy season. The venture ended up costing more than they expected, Steadman said, as fees were tacked on for using items in the common area.

Before small-business owners lease a building, Goode said, they need to have a strong business plan. Owners need to understand their finances, their growth projections and the company’s plan, along with their own tolerance for risk, she and others said.

Each lease varies and commercial real estate landlords often incorporate extra expenses such as maintenance fees, upkeep for shared facilities and use of tools in common spaces, according to the U.S. Small Business Administration.

Working with a real estate broker and an attorney will help owners negotiate with the landlord and better understand the terms they are agreeing to, according to the SBA, Goode and small-business owners.

“It’s better to be prepared and understand what could happen,” Goode said.

In many cases, owners of new retail businesses have to sacrifice security and location until they prove their concept over time.
“You have to understand that if you are a small tenant (in a larger complex), you are not going to get flexibility rights, such as options to renew, options to expand and right of first refusal,” she said.

Gaurav “G” Patel is president of Raleigh-based Eschelon Experiences, a hospitality company that uses leased spaces for five restaurants. He recommends that owners start by putting their ideal lease scenario on paper via a letter of intent.

That scenario should include a figure for rent that is ideally no more than 8 percent of their gross monthly sales, he said. Owners can use the letter to identify and understand the gap when reviewing a proposed lease.

“Obviously the landlord is going to ask for the moon, but that doesn’t necessarily mean that you have to sign that,” Patel said.

Some key terms to cover and understand include the length of the lease, annual increases and renewal options. A longer lease could allow for more favorable options, but it also increases the risk.

Owners also need to consider subletting and default clauses that define options and consequences if they can’t pay the rent. If owners foresee a problem paying the rent, they should work with their landlord to mitigate the shortfall in the short term and pay back the rest over the long term.

“Don’t wait until it’s a problem,” Goode said. “Have those upfront conversations.”

Owners should also plan ahead if they are considering moving or buying their own space.

Jerry Schott, a Penn Station East Coast Subs franchisee, recommends that owners pay attention to relocation clauses.

About two years ago, Schott bought two existing Penn Station restaurants in Raleigh and opened two more. With the two restaurants he bought, he inherited leases with relocation clauses that gave his landlords the option to move the eateries to a new space in the same complex if Schott renewed his lease.

Both landlords called in the clause, Schott said. So he closed one of the restaurants and is in the process of finding a new location for the other. He estimates that the relocation is going to cost him about $175,000. His former property management company gave him $5,000 for the move, Schott said.

“The lease can make or break you,” he said.

Meanwhile, Zydeco Downtown’s Harris said he is working with Raleigh commercial real estate company Hunter & Associates to recoup some of his investment. A company representative said they generally do not comment on situations involving tenants.

Harris hopes to open another restaurant in the future, he said, but this time he wants to own the building or a lease that gives him more leverage.

“I am a go-getter,” he said. “And as long as I can walk, I am going to get.”

_Understand costs beyond rent, including maintenance, repairs, utilities and how your use will be measured.

_Be sure to read your lease in detail and hire an attorney who specializes in commercial real estate to explain the clauses and fine print.

_Protect your long-term business interests by investigating and negotiating some potential add-on clauses to your lease, which might include sublease, exclusivity and co-tenancy.

_Know what happens if you default on lease payments and try to negotiate lease terms that allow you to take measures before you are locked out.

SOURCE: U.S. Small Business Administration

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