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While the terms “base rent” and “minimum rent” may sound like they refer to different things, they are, in fact, identical. To make things easier, we will use the first term throughout this article. Base Rent is the portion of the rent payable to the landlord, excluding Operating Costs, and is the most negotiable portion of the rent you pay. Typically, North American landlords calculate a franchise tenant’s rent per square foot per year. Things, however, are a bit different for franchisees in the western United States – their landlords will calculate their rent per square foot per month.
By doing some simple math, a franchise tenant can multiply the number of square feet that he/she is leasing by the number of square feet. This calculation will provide you the annual base rent. Conversely, if you are quoted an annual base rent, simply divide that number by 12 (as there are 12 months in a year) and this will equal your monthly base rent for your franchise tenancy.
Due to inflation, a franchisee’s base rent will frequently increase over a lease term. Although the landlord may stipulate a regular rental rate increase, remember that this is based on the landlord’s interests rather than yours. Commercial leasing is a business and a landlord will need to pay his/her mortgage, cover related business expenses, and earn a reasonable profit. As a tenant, you are not obligated to accept rental rate increases … these are often negotiable and it will be in your better interest to keep your own business costs down.
The landlord can or likely will attempt to get the highest rental rates possible from a franchise tenant. That may appear self-evident, but many first-time franchise tenants simply don’t understand how negotiable landlords can be on the rent, given the right negotiating strategies and franchisors often lack the time, money, or personnel required to help their franchisees with these matters (especially when the franchisor’s head office and a franchisee’s chosen location may be in two completely different cities or States). Franchise tenants need to understand that the landlord’s asking price is the landlord’s asking price – this amount, is, however, negotiable to your benefit. By asking the proper questions and using some practiced strategies, The Lease Coach has frequently achieved rental rates for our franchise clients 15 to 25 percent lower that the landlord’s asking or stated rental rate on new leases. Achieving a rental rate reduction on your lease renewal is also possible.
Negotiating the base rent is not unlike negotiating anything else in life. We typically start negotiating at a lower base rental rate than the tenant is prepared to pay, so as to create some room to maneuver. The landlord or their agent probably sets the asking base rent higher than what they expect to achieve and negotiate down from there. The franchise tenant’s leverage is based on their knowledge of many things including market rental rates, prevailing rates, vacancy rates and so on. It’s important to remember that every piece of the lease puzzle is interconnected. The base rent you pay is relative to the length of the lease term, the incentive package, the economy, and other factors.
If the landlord’s rent percentage increases seem small, remember that this amount will compound annually – you could well be paying far more than you expected over the course of your five or 10-year lease term. Can you justify this?
For a copy of our free CD, Leasing Do’s & Don’ts for Franchise Tenants, please e-mail your request to JeffGrandfield@TheLeaseCoach.com
Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals FOR DUMMIES (Wiley, 2013). Got a leasing question? Need help with your new lease or renewal? Call 1-800-738-9202, e-mail DaleWillerton@TheLeaseCoach.com or visit www.TheLeaseCoach.com.
