By: Stephen Nault
It was early in my career that I learned the value of a well written lease. It was 2008 and I was a financial analyst for a medium size property management and investment firm in Rhode Island. At that time we had a property in Boston that was going through a period of transition. It was a mixed-use property with street level retail, some garden level offices, and residential units above. The tenant mix of the retail was a hodgepodge with everything from a pawnshop to a high end Japanese steak house. An accidental rather than intentional tenant mix, at best. It presented a huge opportunity to add value.
Our property was contiguous to the Boston Symphony Orchestra and occupied an entire city block. On the corner was a Burger King whose lease was about to expire. This was the most visible corner of the building as it sat on a major intersection, very close to a train stop. Thousands of people per year would walk right past this building on the way to the Orchestra. Long before the Burger King lease expiration, we began our search for a more prestigious tenant.
Placing a better quality tenant on that corner would literally change the entire building. Panera Bread was our prospective Tenant. They were perfect, it was classy but not formal, and people could grab a bite to eat on their way to the Orchestra. All the Tenants in the building would benefit. Our entire plan was in motion, Panera was ready to sign a nice long lease, and our transformation was set to begin. But there was just one problem.
Elsewhere in the building was a sandwich shop. The owner of this shop was in his mid 30’s and he had two things he cared about most, his family, and keeping his store profitable in order to support them. Of course he was not excited to hear about our proposed new addition to the building. Lucky for him, he was protected by his lease. In his lease he had a non-compete clause that gave him the exclusive right to sell “sub-style sandwiches.” What is a “sub-style sandwich,” we tried our best to define that term with our lawyers. All definitions resulted in the description of a product similar to Panera. We concluded that our only road to success would be to get rid of that clause.
Jeff, the president of our company, and I went to meet with the sandwich shop owner. I had done a complete financial analysis and on the drive up filled him in on all the particulars. We had a few other undesirable leases set to expire in the near future, and those vacancies represented future opportunities. The financial outlook for our plan was tremendous. It would increase our rental income as well as the market value of the property. To put this deal into context it was the winter of 2008, right after Lehman Brothers filed for bankruptcy. Times were uncertain, but this deal was solid.
When we walked into the sandwich shop the owner was visibly nervous. We were dressed in our suits and ties, and he had his apron covered in flour. He had just finished making the fresh baked bread for the day. As the conversation began, he told us how he worked and saved for years to open his business. If we put a Panera only a few doors away he was convinced it would cause his demise. We too were unsure if he would be able to survive. I sat and waited for our president to respond, and when he did I almost fell out of my chair.
Jeff asked the storeowner how much it cost him to open up this store. The owner responded $250,000. Jeff then asked how much money he made from the shop on an annual basis. The owner responded, he made about $65,000. What came next was a moment I will never forget. Jeff responded, “I care about you, your family, and the success of this business. I also care about the responsibility I have to help revitalize this property, maximize its performance, and change this neighborhood for the better”. He then reached into his jacket pocket.
Out from his jacket he pulled his checkbook. He said, I would like to give you enough money to open up two new locations, and wrote a check for $500,000. The check was contingent on the shop owner agreeing to delete just one sentence from his lease. The look on this shop owner’s face was unforgettable. I think he was about to cry but he just sat silently, obviously trying to process what had just happened. After a silence that felt like hours, but was probably less than a minute, he responded “Do I have to open up two new stores”. Of course the answer was no.
We got the clause negotiated, signed the lease with Panera and our plan was a success. There are two lessons to be learned from this story (1) for the Landlord how costly a bad term can be and (2) for the Tenant the protection and financial opportunity your lease can hold. If I learned nothing else that day, it was the value of the services we as brokers provide to clients.
Depending on your relationship with real estate, this story might have you thinking a few things. As a Tenant you may be thinking, “if my biggest competitor moved in next door, would I be helpless”. As a Landlord you may be regretting that otherwise tiny concession you gave up in your last negotiation. Or as a prospective purchaser of a property, you may take those existing leases a little more seriously. As your real estate advisor this is my role. To take your goal and turn it into a strategy. Don’t be reactive. Call me before the Panera sign is threatening the demise of your business.
If this story has you wondering “what could be hidden in my lease?” Call me today for a free lease review. My services don’t stop there. My focus is learning your business, goals, and future plans. With that knowledge I will provide you with a comprehensive real estate strategy. This is Stephen Nault with SVN – Nashville. You can call me anytime at 615-297-4999. I look forward to your call.