Sunday, February 27, 2011

Negotiating a Lease Part 3

I wanted to continue to post on topics which will materially benefit potential cafe owners and especially baristas hoping to own their first shop. I can't think of any topic which is more important to the success of a coffee shop than negotiating your lease. I have already posted a couple of times with some helpful hints, but believe the spreadsheet I have created will greatly benefit coffee shop owners and arm them with the same tools landlords have in their arsenal.
Basically the spreadsheet measures the landlords costs and income related to the lease, and the tenants potential costs related to the lease. When a tenant enters asking price and other inputs they should be able to determine how much room the landlord has to negotiate which ultimately benefits the tenant (good guys). There are some terms which I should explain in more detail.
NPV is short form for Net Present Value. Net Present Value is the total value of the lease added, then each year multiplied by a factor related to the expected rate of inflation. This factor is available from a Net Present Value table similar to the one following.




The reason NPV is useful is it represents a value today to the tenant and conversely the landlord. On the landlord's side we would make the factor the expected rate of inflation plus the desired return. The difference between the tenants and landlords NPV is the negotiating room.




If you would like a copy of the spreadsheet, please let me know through the comments and I'll email it to you. In the interim I'll try to figure out how to make it available for download. Try entering numbers from listings of commercial space from online listings in your area and get a feel for the numbers landlords use to skew deals in their favour. I have made the calculations assuming a constant rate of inflation of 4% which may need to be adjusted over time. The key of this whole exercise is to realize that the landlords have these tools and they understand them fully in order to determine how to make you pay as much as possible. Get tough, learn everything you can about how your landlord thinks, and save yourself tens of thousands of dollars. Commercial Real Estate agents are reluctant to share these numbers with you since effectively their compensation is based on getting you to pay as much as possible as well, but ask your agent to prepare a similar breakdown for you. Let me know whether this is useful or not.
Good luck.

2 comments:

  1. Hi Richard,

    Our 1st coffee shop is going pretty well and we're planning a 2nd location in the next months. First we started with a lot of will and passion but neglected numbers a bit. After 3 years, we now fully understand the key to good business results : precise financial planning and monitoring. Needless to say that your knowledge is very welcome as we are now in the process of rewriting our business plan.

    Would it be possible to get a copy of this spreadsheet? This will help us a lot on our actual rent negotiation.

    Thanks and keep writing, this stuff is really useful for any kind of business whatsoever!

    Constantin Ioan
    Le Nektar
    www.lenektar.com

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  2. Constantin, thank you for the comment. One thing that surprises me is that some of my oldest posts are some of the most read. Each month, the lease posts rant among the highest. Tomorrow I will send you a copy of the spreadsheet to the email on your website if that works. Good luck and let me know how you make out with the new space. Rich

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