Lease Negotiation is Essential When Starting a Coffee Shop

So you are starting a coffee shop.  Before you sign any lease, be sure you read it.  You will be amazed how ‘boiler plate’ most commercial leases are.  Try to do everything you can to get what you want in your lease.  That is, things that will benefit you and your business first.  Most leases usually benefit the landlord, not the tenant.  However, if you do not feel that you can negotiate your own lease consider a commercial real estate attorney or an experienced commercial realtor. 

Now, just because you ask for something to be in your lease does not mean you’ll get it.  However it cannot hurt to ask; you may just be surprised.  These last few years and for the next few years, vacant store fronts and other spaces are not exactly filling up so landlords are willing to give incentives to sign you up.  On the flip side, be prepared to give something on the backend such as a few additional months or a rent increase at a certain point in time.  The following items are always negotiable and many are NOT in most leases unless you ask for them specifically:

Rental Amount

Yes, this is always the first negotiable point when negotiating a space to open a coffee shop.  A landlord calculates the rent amount based on the square footage of the space.  Be careful what footage the landlord uses to figure the rent.   A common tool for them is to include common areas like the floor area on the outside of the door, or an elevator if you are in an office type building.  Try to get this out of your lease.  Generally they base the rent on a yearly rate such as $12.00 per sf.  (1000 sf would be $12 x 12 months = $12,000 per year, or $1000 per month).

Description of the Property

The lease should clearly describe the property under lease.   For instance, it should clarify whether bathrooms, common areas, kitchen area, a parking lot, etc is included in the lease.

Signage

Be certain that the lease agreement does not prohibit putting up signs that are visible from the street, or certain types of signs on the building itself.   If you cannot put up a large enough sign for cars driving by to see, then this spot may not be a prime location and you may want to just pass.

Use Clause

Be sure you can open and operate a coffee shop there.  Then again, your landlord should have already qualified your business type prior to getting to the lease negotiation.  If you plan to sell coffee beans you are roasting on premises, be sure you can actually roast them there.  If you plan to rent a 1st floor space and there are other units or apartments above you, be sure you check with the city about use of open flames or proper venting for your roaster.  You may be required to run the venting through the upper units and box it in rather than up the outside of the building.

Exclusives or Write Outs

This means that no other tenants in the plaza now, or future tenants (as long as you are a tenant) will be allowed to sell coffee beans, brewed coffee, tea, smoothies and anything else you make your living from, as long as it is in your lease. 

Free Rent (Rental Abatement)

Try to get as many months of free rent as possible.  However, you usually have to ask for it.  All the landlord can say is ‘no’.  Then you have to decide if you can do without.  That depends on how good the location is and what you have to have done to make it functional for your coffee shop.  You should also ask for the free rent to begin AFTER the construction has completed on your unit and you are officially occupying it or when you actually open for business.

Personal Guarantee

In most cases, you will not get around a personal guarantee especially since you are just opening a coffee shop.  This means that if you are late on your rent or you leave before your lease is completed, it can be held against you personally, even if the lease is in the business name.  I advise to put a personal guarantee on the first year only if possible, maybe 2.  This can be written into the lease that after 1 or 2 years, your corporation is responsible from that point on, not you anymore. This will give you time to show you are responsible. 

Lease Term

Standard can be anywhere from 1-5 years.  I always ask for 3 years for a new business, with four 5 year renewal options (discussed below).  The reason I ask for 3 years is that is the maturity point.  You should know if your business is profitable enough to stick around for more time once you hit the 3 year mark.  After starting a coffee shop business it should be just becoming profitable at year three.

Renewal Options

Standard to ask for is ONE five year option.  Most leases do not even offer renewal options automatically.  You should ask for at least one five year option to renew.  If this location is prime (which it should be), you should ask for at least 4 five year options.  This gives you the option to renew the lease for five years, four consecutive times in a row, giving you a term there for at least 25 years.  That can mean a permanent spot for your business!

Improvements

This should be a ‘gimme’ but be sure it is spelled out how you are redecorating the space when starting a coffee shop.  This is more than hanging pictures; I am talking about putting up walls, taking them down, adding a drive thru window, etc or anything else major.  Be sure whoever is responsible for the payment of such is also spelled out so there are no questions later.   You also may be responsible for returning the unit to its original condition at the end of your lease.  Watch out for this!

Option to Sublet Premises

You should be able to do this as most leases allow it, but be sure it is in yours should you want to vacate early and have someone that wants to sublet from you for the remainder of the lease term.

Option for Assignment/Transfer of Lease/Assumption

This is harder to get.  A landlord wants as MUCH time on the lease as possible by one tenant, so they would rather re-lease your space to a new person than to just transfer it, or let someone assume it.  This comes in handy however, if you should sell your business.  One of the main components of business worth is the time remaining on the lease.  It can help or hinder a business but in most cases, it is an asset so a lease assumption clause is essential.

Outline of Landlord Responsibilities

Most leases state this already but be sure you get particulars as to what you are responsible for and what your landlord is responsible for.  The most common type of commercial lease is the triple net (NNN).  That means that not only are you responsible for paying the property taxes, you are pretty much responsible for all repairs of equipment like air conditioning units, heaters, water heaters, etc.  Not too bad a deal if your building is new or just a few years old.  However if you are going to lease an older building with marginal or old equipment then you need to come to some agreement on who is responsible for what, when and where.  If you are just starting a coffee shop business, this can add to your start-up reserve capital so be careful.

Rental Increase

This really should be minimal.  Most landlords figure the yearly rental increase based on a certain percentage of some magic number like the consumer price index.  Try to negotiate with the landlord for a cap on the percentage increase in order to avoid unmanageable rental costs later on during the lease term.  2-4% is usually a standard to ask for and is, in my opinion a reasonable amount of an increase yearly.

Compliance with the Americans with Disabilities Act

The lease should determine who is responsible for making any necessary alterations to the property such as handicapped bathrooms or wheelchair ramps, and who must pay for these changes.  Most commercial spaces already comply with this act.  However, if the space has not been rented to a new tenant in many years, or if the previous tenant was not retail oriented then there may be a chance that the space needs to be modified.

These items are some great terms to get into your leases when starting a coffee shop business as they will greatly help you during your lease term.  If your prospective landlord will not budge on any of these items, than do not be afraid to walk.  There is always another possibility around the corner.

My name is Tony DiCorpo, and I am a coffee roaster, coffee shop business consultant and barista trainer.  I am a coffee shop business consultant and have an eBook on how to start a coffee shop.  I also own Troubadour Coffee Roasting Co. where I sell coffee and espresso equipment and where you can buy gourmet coffee beans online.  

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