How restaurant tenants can negotiate free rent
By Jeff Grandfield and Dale Willerton – The Lease Coach
Free rent is just one negotiable factor in a commercial lease. To be clear, free rent is a period of time where you are not paying the Base or Minimum Rent (but are, typically, paying your Operating Costs) and you are open for business. Many restaurant tenants confuse this with a rent- free build out or fixturing period when opening a new business.
This is probably the most unpredictable but most interesting part of the lease agreement we negotiate. Some landlords are quite flexible when it comes to free rent, but others are not so liberal. To demonstrate, we remember one tenant we negotiated the first four years minimum rent free (on a 10-year lease). For other tenants, landlords may offer little or no free rent. Free rent on lease renewals is not unreasonable and often achievable — if you know what buttons to push with your landlord.
Negotiate (ask) for more than you expect to get: Free rent is often one of the easiest concessions for a landlord to make. As a general negotiating rule, always ask or negotiate for more free rent that you need or want. This is especially pertinent if other commercial spaces in the premises are vacant and have been so for some time. Aim for at least one month of free rent for each year of your initial or lease renewal term. But remember to begin your negotiations at more than that. If you begin your negotiations at five month’s free rent, you may be counteroffered three months of free rent.
Negotiate half-rent free: Some landlords are very concerned with the lack of cash flow when providing free rent. Suppose you want seven months of free minimum rent, but the landlord will give you only three months free. Rather than concede your position, you might counter propose that months 4, 5, 6, and 7 be half-rent free; that is that you pay only half the agreed-upon monthly rent. Your landlord may well agree to this proposal. When renewing your lease, you will have more history on your side (you will have a track record of paying your rent on time), so you can easily ask for more. If you are trying to negotiate this, suggest that it be written as a separate condition or concession rather than as actually lowering the rental rate per square foot value. This allows the landlord to have their full rental rate showing on paper, while you get the concession anyway.
Cashing in your free rent: You may find it necessary to raise capital at some time in your business. If you have negotiated a free rent period for your lease agreement or your lease renewal, it may be possible for you to exchange that free rent for cash. Mind you, there is often a price to be paid. For example, if your rent is $3,000 per month, and you have five months of free rent, the cash value is $15,000. However, because this means an outlay of cash for the landlord, he or she may want you to discount this cash value by up to 20 percent. You will have to weigh the pros and cons of your particular situation to determine if cashing in free rent minus a discount for the landlord still makes sense for you and your restaurant.
Topics: Operations Management