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Key Points of Real Estate Negotiation
Mark Whittle, SVP, Global Development, Hooters
Seth Goldstein, Dunkin’ Donuts/Baskin Robbin’s
Site Quality
• Focus on A Quality Sites FIRST
– Brand dynamics, what works for your concept
– Long term success is worth potential cost in rent for A sites
– Higher sales units from A sites drive down fixed cost of the business
Deal Structures• Deal Structures
– Purchase• Build asset value for the business on the balance sheet• Low interest rates extremely favorable today• Con – ties up capital that could be used to grow faster if capital is constrained
– Building/Center lease– Ground Lease
• Highest cost of capital to build (can’t SLB, ground up construction)• Should consider only as last resort if site is AAA quality
– Purchase and SLB flip• Extremely favorable on cash/cash returns today with low cap rates• Strong market out there with 1031 investors• Could be a fairly short window on the favorable caps dependent on interest
rates• Must be A sites to drive sales to get the maximum funding from the rents
established
Negotiation Points
• Key Negotiation Points
– Purchase
• Pricing, diligence time, cost of survey, soils, environmental and title
• Non competing uses by seller
Negotiation Points
• Key Negotiation Points– Building/Center Lease
• Rent, free rent and TI – make up the economic proposition• Term – have control via term and options for at least term of
FA• Use and Exclusive• Diligence timing ---permit period, fixturization period – work
to have rent commence at or after opening of business• Anchor contingencies• Assignment – to other franchisees’, franchisor, and inter-
familia entities without LL consent• Personal guarantees – avoid if possible, otherwise due
rolling or burn off guarantees
Negotiation Points
• Key Negotiation Points
– Building/Center Lease -Continued
• Purchase Option and/or ROFR
• Casualty/Condemnation
• Common Area Contributions – Exclusions – Cap on management/admin fees
– Capital improvements, depreciation on same, replacements
– Leasing commissions
– Leasable versus Leased for denominator
– Annual cap on increases
Negotiation Points
• Key Negotiation Points
– Ground Lease
• Similar to above on most points
• Ability of LL to subordinate to Tenant financing
• Typically longer term and options due to investment
Negotiation Points
• Key Negotiation Points– Purchase and SLB Flip
• Diligence and timing in the purchase agreement to obtain clearances and permitting– Title, geotechs, Phase 1, Phase 2 if necessary, Permitting,
Liquor if needed
– Lease terms on the SLB should be comparable to B above.
– Know the market going in for the SLB flip-current and trends on CAP rates
– Structure forward sale lease back as potential to fund project during construction
– Today’s market trends – franchisee cap rates tend to run 75 to 125 basis points higher than corporate credit
Negotiation Points
• Other Key Points
– What value does the proposed business bring to the center?
– What is the time of day use?
– Is this a use that can add value to the landlord
– Does this tenant add to the landlords cap rate value
Needs for Franchisees
• Ability to transfer to approved franchisees of the system or the franchisor
• Rent and renewals that will allow for remodels, if contractually obligated in offering
• Ability to finance, landlord will need to subordinate
• Right of first refusal to purchase if single use property
Needs for Franchisees
• Clear understanding of who is responsible in lease for current code compliance issues at space
• TIME, Time, time…
• Signage to meet brand expectations and needs
• Hours of operation that meets or exceed FA
• Knowledge of any proposed road/other projects that could impact the site
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