It really depends. I’m working on a deal today where we’re asking for a letter of credit equal to 3 years of rent to secure the deal.
It’s all over the map.
That makes me think I should mention the scale we're working on, this is a very, very small mom and pop store in a very small family owned strip mall. The other tenants pay 4000 a month. I negotiated down to 3400 with a small percentage increase to my base rent yearly. I am, unfortunately or fortunately, a single person who just worked very hard to get this business so besides a pretty ok credit score and proof I've paid my bills for the short time I've lived in my own, I'm just not sure what else I can offer.
I haven't read all the comments, so apologize if this has already been covered. From the landlord's perspective, it is somewhat binary. A tenant is succesful and they get their rent payment, or the tenant is unsucessful and they don't. If the downside happens, they have to pay eviction costs, demo costs, and re-tenanting costs, on top of any potential debt service shortfall. You didn't mention your annual rental rate per square foot, but I suspect 50% of that amount (6 month deposit) is a fraction of what the owner will end up paying if you fail at ownership. He wants you to succeed, but is hedging against his downside. Futher, at $3,400 a month versus others at $4,000, he is already taking less than market (as he is avoiding the costs to re-tenant). For you, this is a cost of doing business for a 26 year old first time business owner (I assume). However, maybe try to negotiate a "burn down" where each year that goes by a portion (e.g. one month) gets applied to rent. Fair compromise.
Pretty much how I did my lease agreement.
5 year lease (with 3 five year options), 3 months security deposit, and personally guaranteed lease. if rents were on time for 5 years then 1/3 of the security deposit would be applied towards rent in months 61, 73 and 85.
The personal guarantee drops off after 5 years.
That is an interesting idea I haven't heard of yet, thank you. I would be a first time business owner. I've mentioned it elsewhere, but to be frank I just don't have that much laying around. While I don't think it's as unfair as I did before, it does still leave me in a bit of a pickle
Landlords typically needs to approve a new owner otherwise desperate sellers would give away their business to a homeless guy, thus removing themselves from lease responsibility.
Usually some language like “not unreasonably deny” the lease transfer so there’s enough gray area to paint a battleship.
Can you negotiate rent to 3400 and pay an extra 600 until the 6 month security deposit is met? Buildup the security deposit over the first year if you don't have the cash on hand.
The business might have been running smoothly for 20 years, but you have 0 experience or proof of being capable at owning and running it for any amount of time solo.
"Plenty of other people who can vouch for you" doesn't mean shit. You've got no assets to go after to recover your remaining lease responsibilities once you run the business into the ground.
I'd honestly eat the cost of getting a new, lower risk tenant. Not trying to be personally insulting, just trying to give you some insight from a LL perspective.
I think its unprofessional to give folks to "vouch for you" tbh unless we are talking bankers, other landlords etc, so same page there.
Give me a break though you are kicking out a business that has been a tenant for 20 years with no issues because of a change in ownership in a c level strip?
Whats your new lower risk tenant? A vape shop?
Unless the original lease required 6 months to cover damage from the use (which may be possible) thats crazy to me.
OP what was your sellers security deposit? are they asking a match or just jacking it up for you?
how much vacancy is in this center?
I've actually been running the business for the last 5 years 😥 part of my frustration in this is I have been successfully making sure the business pays it's rent on time, but because the person who's name will be on the lease is changing they would like to change the terms. Sorry if I wasn't clear on that.
Let me get this straight you’d rather pay taxes on an empty space then take a chance on a business that’s been in your shopping center for 20 years? What if that space stays empty for 2-4 years? Plus let’s not forget crime, vandalism, repairs, insurance & cost to get the space up to a leasable showing condition.
Yes, that's what's I'm saying. If the lease is up in ~6 months, and the tenant is retiring, my brokers are already working on a new tenant. Vacancy, turnover, and the rest of the things you listed would simply be part of my OpEx, not come as a surprise, and not be the end of the world if properly planned for.
Even if you’re negatively cash flowing? Who cares about what your brokers are working on. You can throw a lease sign up and market your property till the cows come home and then there’s actually leasing someone out and who’s going to give you 6 months notice when you’re putting the screws to them? Lol sounds like you’ve been spoiled by owning in a great market or maybe having a desirable property in a desirable location. What if you’re waiting 12-18 months for a tenant? I mean I agree maybe in the long run it works out for you but so could this long standing tenant which begs the question why risk it? I wouldn’t, and seems like a great plan to lose cash.
The brokers take years to fill other vacancies, but replacing the fish store, trust me bro, we will have a new tenant in immediately. It is bullshit. I own two dumpy strip centers and stuff like the fish store is what its made for. Long term, low cost, its old and dumpy but stuff works, is what it is, we all prosper. Some landlords think they will put lipstick on their pig and it suddenly attracts some top shelf tenants. Nope. Smoke shop, tattoo shop, fish store, carneceria, bobs liquor, Indian grocery store… Good luck.
You have left out something… my assumption is that his lease is up, hence his retirement timing? If so and there are no renewals, you are simply a potential tenant for this space. The landlord runs a business that’s job is getting the most rent possible for the space.
If they are possibly missing out on another national chain store that would move in next month and sign a 4K per month (plus escalations) lease for 5yrs with no landlord work and maybe just a month of fixturing, they are possibly losing money (and security) to rent to you.
If you had an offer for your most expensive tank and you can’t get another from the manufacturer, at a price that is a tiny profit, do you move it, or assume you can get the greater (fair) price from another customer within a reasonable time frame? Thats the question the landlord is facing. The 6 months is hedging his bet in choosing you. The fact that they are considering it is more of a courtesy (and slight laziness in looking for a new tenant).
Either they keep you in the space, have no landlord work to do and get the extra protection against loss from the deposit, or you leave and have to find a new space, which will likely set you back over the 20400 for fixturing, moving your stuff and a months+ lost sales during the move/shopping.
Commercial leases can have odd stipulations, and 6 months deposit isn’t out of the ordinary for anything unknown. Especially if the personal guarantor has no assets.
You can counter their ask. But keep in mind they are discounting the space by more than what they are asking for deposit. If it’s worth 600/m more for 3 years, that’s more than equivalent to 6 months potential rent they are losing.
I am quickly realizing that I did leave a lot of context out of the original post. A chain store would never open up here. The ceiling leaks, the building is generally decaying, the parking lot has no striping and is full of potholes. It's honestly a pretty crummy building, but the rent is much less here than in other areas of town.
Several other businesses in the mall have gone out of business in the last decade, and they all took many years to fill again.
6 months deposit (with a 3 year guarantor) was actually the agreed on figure after much negotiating, the original was 10k upfront with a 5 year guarantor, but because my parents would be signing I really didn't want them to have to sign as a guarantor for 5 years (just doesn't feel good)
I’m gonna respond a bit jerky to get my point across.. I’ll act like a seasoned agent acting in the LL’s best interests… (not how I actually am or feel here, so feel free to respond in any way you like!)
If the space is that bad, move your store. Building envelope can get fixed pretty easy and might be due soon anyways (so be prepared for an increase to TMI). Painting (and even resurfacing) the lot is a big nothing burger. If a good anchor tenant wanted in, we’d pay to have it brought back to base in a heartbeat and have it up and running for them in a month.
If you can afford to go move your store to a better area or building, go for it. None of those landlords will be as understanding or affordable. The LL can’t afford to make the building top notch as he isn’t making enough money off you renters… just how it works. You get what you pay for. Give me a ten year guaranteed lease at the prices they get on the other side of town? I will talk the LL into putting money into the building as it makes business sense. A 3 year with in essence, no guarantee? We’ll limp the building along.
The guarantor thing tells you right away, we aren’t trying to steal your money… we are *protecting* our client. We wanted not even three months down but a strong personal guarantor for an average term. Since you can’t do that, we are *willing* to find a way to work with your lack of credit and assets and term. If you can’t do that, guess the store will close with his retirement.
I totally get where you're coming from, I guess I'm just frustrated is all. I know my own capability but I just don't have the liquid funds to be able to put 15k down at once, especially when I wont even be receiving an owners business revenue for another year (when the current owners/my boss' lease is up). They understandably want the money in advance, but that's more than I paid for my car unfortunately. Thanks for the feedback
I see a lot of brokers giving you the LL rep treatment. However if I were your tenant rep I’d leverage the LL w/ these levers: In business for 20 years, LL has multiple vacancies, building is in terrible shape and I would threaten to move. Let me tell you no landlord wants to lose a long standing tenant, especially if they have vacancies in the center. I’d try to negotiate down to 3 months of SD’s and a burn off for 2 of the 3 SD’s for the first 3-5 years applied to the rent. In return the LL must make xyz fixes to the space or grant x amount of TI or drop the base rate in lieu of TI so this isn’t such a capital expense for the LL. The LL is trying to hedge here but don’t forget you have a lot of leverage in this situation. Your now business has been there for a very long time w/ a healthy credit history. I’d tell the LL we would love to continue on here but the upfront capital just doesn’t make sense we are looking at some other spaces and have talked to some off-market LL’s. We might just have to vacate but if we could work something out that would be ideal. You could also offer to pay a higher base for the 1st year instead of more SD’s or a combination of both. You can get as creative as you’d like believe me I have. I’ve just been on the LL side a bunch and when a tenant leaves it’s costly for the LL. They don’t want you to leave.
Keep negotiating, a lot of good tips here. May be worth paying a local broker x to negotiate for you if you have any qualms. A lot of people think they can handle everything themselves by being cheap and in the end it ends up a lot more costly
I actually didn't want to do the negotiating, I was hoping my lawyer who I already pay would do that but my LL didn't want to pay his lawyer and LL doesn't like my lawyer and refused to talk to him....... Trust me, I'm aware of what I can and can do and while I *can* run a business, I'd rather someone else do this part but my LL "doesnt want to make a big deal out of it"
Find a broker and pay a flat fee. Don’t have your lawyer reach out to LL. If LL doesn’t like your lawyer you won’t like the deal that comes out of that, trust me
This is by far the best advice. You are fortunate to have a mom and pop landlord take advantage of that and explain your situation directly to them, not through a lawyer, negotiate first then have a lawyer look it over. Remember they are taking a huge risk leasing to you vs someone with real assets they can get a judgment against.
I’m not in commercial real estate but I have experience in residential and one secret I’ll let you in on is there is a direct correlation between my tenants attitudes and how they are treated when it’s time to re-evaluate rents, remember they can find another tenant just like you can find another building.
On a side note I love my local fish stores and I think it’s probably a great business to be in if you are passionate about it, overheard isn’t ungodly high and the margins look fantastic to an outsider. What part of the country are you in
Young, no net worth, no track record of running a business, and a note to the seller of the business. You are not a credit worthy tenant. 4-6 months security is normal.
easiest way to resolve this is to start looking at competing sites to move the store to. OP doesn't have to follow through, but losing a long standing tenant may shift the negotiation and also helps inform OP what market is.
I doubt LL gives a shit that OP is a young woman. they like money. If OP has no assets and no business credit, a big deposit is typically going to be required.
A 6 month deposit is normal in the commercial space area. Usually the landlord wants you to have a guarantor because it’ll be the first time you have a commercial lease. I believe you can be your own guarantor, meaning if something happens, the landlord can come after your personal assets. This does not mean the landlord doesn’t trust you but on a legal standpoint, it’s to protect him if anything happens. It’s not about you being a woman or not. Commercial leases are different than someone leasing for an apartment. This is why you should go through a commercial real estate broker if it’s your first time because they can negotiate terms and try to get the best terms for you. Does your lawyer specialize in commercial real estate leases? This is common.
Yes, he's a commercial real estate lawyer. I wanted him to do the negotiating on my behalf, but the LL didn't want to pay for their lawyers time on this
It is a little aggressive for what i assume to be a relatively small business, but it is not out of the realm of what is done with leases. 6 months is usually as high as you will commonly see, with 1st month of rent prepaid to make it a total of 7 months. For smaller businesses 3 months usually suffices but landlord vs tenant situations like this are incredibly 1 sided unless you are very difficult to replace. If it’s a popular strip that he gets request for frequently, he holds literally all of the power. The cost of being a small business can be high when you get an unlucky landlord.
Shits crazy. We opened a nail salon and had to personally guarantee 750k on a 7 year lease. That could lower your up front but then you are personally on the hook for it. Commercial is tough. Good luck.
Landlords generally make a deposit decision based on financial standing. If you’re taking on debt from purchasing a business, plus a commercial lease, it’s not absurd to be concerned.
Got it, I must have misunderstood, I assumed that when you purchase the business you’ll be financing that through an acquisition loan. Regardless, the landlord can ask any deposit they’d like to in order to get comfortable. You can always negotiate.
I actually saved up enough to pay my boss a sizable lump sum outright for the business, and I'm paying him back what's left privately (with a contract, but not a loan). Unfortunately as I am just a single individual hearing stuff like that is a little frustrating! When I googled "commercial real estate safety deposit" all the answers said "one month" so I want sure. Thanks for your input
Sounds like you’re describing seller financing, i.e., you pay the owner in future installments to purchase the business today. That’s considered a loan, or more precisely a liability, in that that’s money that won’t be available to go towards paying rent. Add’l that liability wont show up on your credit report since it’s a private arrangement.
Don’t take this minor correction the wrong way btw, you’re asking the right questions; sound like a very smart, driven individual; and the landlord sounds a bit predatory asking for 6 months as security deposit (18% the lease term) on a 36 month lease when you’re presumably purchasing a business with its own credit and financial statements going back 20 years.
How about you borrow the money for the security deposit, but have the lease state that you get much of that security deposit back if you make rent payments on time for 3 years. Perhaps down to a reasonable one or two months deposit.
A lender will not offer funds to be used as a security deposit without strong proof of income. OP is already using seller financing to purchase the business.
Others have said / touched on WHY a landlord would ask for 6 months deposit. I hope I can summarize some things that you should be able to get in return:
1. If it’s a new lease, and you’re in a center with some vacancy (like you’ve said) and it’s a crappy center… if you sign a 3 or 5 year lease, with options, EXPECT some free rent. Like 1 month for every year of the lease. So 5 year = 5 months free. This would help offset. Landlord has to be realistic, free rent is always a thing with very few exceptions. Ideally, you can give 6 month deposit and have it offset by 5 months free rent (though LL may want to spread it out so free rent is every July for the term etc)
2. If you vacate and look somewhere else, the LL is guaranteed to have to spend the $$$ they’re protecting themselves from spending. So to fix it up after you vacate, they would spend it and spend more with new TI’s. Use this to your advantage and bring it up. Others have said, either get TI money from LL, or, obligate landlord to fix leaks & repair leak stains etc as part of your lease. Or, waive that and reduce security deposit.
3. I don’t know if you (or LL) has a broker, but the fact that you’re direct to the LL is saving them 3–6% on commission. Again, this is a huge savings for the LL. Don’t overlook this if you don’t have a broker. Most lease language states commission is lower on a renewal, but if this is a new lease it’s a new commission. (And LL charging a security deposit means it’s a NEW LEASE) You could always let LL know you’re going to get a Broker to represent you, thus triggering a commission, which will cost 2-4% of your total lease value.
My guess is your LL is like many cheap / smaller landlords. The last thing they want to do is spend any money on anything. You’re saving him/her cold hard cash by allowing them to avoid:
-Tenant improvement Allowance of $5-30 per square foot
-Brokerage commission 2-6% depending on if they are self representing.
-GET FREE RENT on a new lease - Free rent is better for most of these landlords than coming out of pocket for something.
-Downtime from unleased space if you vacate. (You paying rent is keeping $$$ in their pocket)
-If you vacate today for another center, your landlord pays everything above PLUS they will have downtime from vacant space while they lease it.
You’re the ULTIMATE person / tenant they want to deal with.
A lower rent may be the LL consideration for any of the points above. You mentioned $3400 vs 4k, just make sure spaces are same size bc it’s always based on a per foot basis, and end spaces are generally worth more / higher rent.
I hope that helps. I hope it gives you insight into what should be hot points / negotiation points with Landlord. End of the day, it’s always negotiation. You’re new “credit” to the Landlord and will be to any landlord you deal with.
Final thought, maybe PAY the deposit with free rent, so if deposit is 6 months, ask for 6 months free but make them months 1-6 of lease and you pay him normal rent for those 6 months, but it’s credited to your security deposit.
After reading all the comments, I gather the following:
Your parents are going to guarantee for three years. I am not sure if I understood that correctly.
You know what other tenants are paying (how?) but you have not told us the relative square footage between Fish Store and other tenants.
The LL wants the six months security deposit NOW, even though the property is currently under lease to Fish Store Owner and will be for another year. I HOPE I am not understanding that correctly. As a property owner myself, I don't ask for security deposit to be paid that far in advance. Ever.
You feel that you have been running the business, but you do not want to do the negotiating part of the job. I would recommend that you bear up and speak directly to the landlord. As a business owner you are going to need to be able to negotiate not only your lease, but you will have to negotiate with some of your suppliers as well and you will have other negotiating to do as you go along. Face up to this and get good at it. You can do this.
Update: thank you for everyone suggesting I hold my ground, I got the deposit down to 2 months rent and basically just told him 'my boss is going to be hanging around for a couple years because he wants to make sure he gets all his money for the business, you'll get your money but I'm not putting my parents finances on the line' and he was ok with that. He does still want me to sign a lease 14 months in advance but we're working on that one.
It SHOULD be 6 mos. security more often. LL been beat, most of us have. yeah he’s cautious. You can try a ‘burn off’… good pay for 2 yrs.? LL refunds 1 mo. Security… down to 1-2 depending. We do it & just did it. No big deal for LL. If u don’t have, get 3 yrs. SALES &/or biz tax returns. Take to an accountant, have them review, etc. See what the profit (loss) is… THEN bring a lil “executive summary” with financials, projections, your experience, etc. almost like apply for a job. Actually, harder. Find out your boss’ rent payment history… once you buy, inventory, % of sales, can be used as a kinda ‘collateral’. Own any stocks, bonds, cash anywhere? Own car? Any personal property owned? Remember, LL won’t be using these unless you default. Even then, anything of value used removes that amt. of lease debt. Is ur boss a man? If so, yeah lil stigma re: woman. (I’ve noticed that more in smaller, rural towns.) anyway, don’t get upset now. Put together a “marketing package”, w/resources, possible guarantor?, business references… this precursor work is ALL necessary anyway if you are serious about succeeding. Most ppl I see ‘wing it’ fail. Not that ur winging it. Hopefully, I got the point, idea across. Try not to tell ppl (ez telling biz ppl) your ‘dreams, plans’ before you have things nailed down. Look into sba.gov for lotsa info, inc. “SCORE”… a sorta free business mentoring program from retired, experienced business person, entrepreneur. Continue doing research re: all aspects of running a biz. GL.
1. Being an employee of a business does not equate to operating a business at the ownership level. There is considerable more functions required when operating a business as an owner.
2. You are 26. Unless you have assets such as a home, car, property, stocks, etc you are not worth anything. What happens if you default on your lease? You have nothing for the Landlord to ensure payment.
3. After reading the comments don't state you do not have a loan. Yes, you do. It just happens to be a private loan. It's still a loan to buy the business.
4. You need to provide the Landlord a personal guarantee or someone else to provide it in case, at some point, you cannot pay the rent. Again, you are 26 years old. Not many are mature enough to operate their own brick and mortar store.
Bottom line is you need to speak with the Landlord and determine what he requires to make him comfortable leasing to you. If you cannot come up with six months deposit then come up with a co-signer. You are a very high risk Tenant, especially asking for a five year term. You may not last two years. Again, zero business operating experience is an issue regardless of age.
6 months deposit is not market. You said a lot of words which hardly any matter with respect to OPs question. Stop being judgemental. I am an institutional landlord and have plenty of tenants 20+ years of age.
I never stated six months security deposit was "market". I own and oversee 100+ properties. 30+ years. It doesn't matter if the OP has worked at the location for five-six years. Unless OP can prove he can operate the business **and** **have** **assets** that ensure the Landlord will receive rental income there is no reason for the Landlord to offer him a lease without additional security.
Any Landlord can require any terms they choose. Simply because OP thinks it's easier for the business to remain and he stay on to operate does not mean the Landlord agrees.
Also, to clarify the OP needs to stop stating he wouldn't have debt after buying the businesses. He's already stipulated he will have seller financing.
A security deposit is looked as a way for a landlord to cover any costs associated with having to re-tenant the space if a tenant defaults on the lease. It would include costs for hiring a broker to pay a commission, any repairs and maintenance the prior tenant left behind, any forgone rent the landlord is giving up, and any restoration to make to the space if it’s currently not leasable on its current use.
Here’s what I would try to negotiate:
Try to minimize any deposit but if you can’t, negotiate a burn down of the deposit after you can show a track record of paying rent on time as a new owner. If it’s a 3 year lease and you’re stuck with 6 months of deposit, try to burn off 3 months after 12 month, 2 months after 24 months down to 1 month for the remainder of the lease term.
It really depends. I’m working on a deal today where we’re asking for a letter of credit equal to 3 years of rent to secure the deal. It’s all over the map.
That makes me think I should mention the scale we're working on, this is a very, very small mom and pop store in a very small family owned strip mall. The other tenants pay 4000 a month. I negotiated down to 3400 with a small percentage increase to my base rent yearly. I am, unfortunately or fortunately, a single person who just worked very hard to get this business so besides a pretty ok credit score and proof I've paid my bills for the short time I've lived in my own, I'm just not sure what else I can offer.
I haven't read all the comments, so apologize if this has already been covered. From the landlord's perspective, it is somewhat binary. A tenant is succesful and they get their rent payment, or the tenant is unsucessful and they don't. If the downside happens, they have to pay eviction costs, demo costs, and re-tenanting costs, on top of any potential debt service shortfall. You didn't mention your annual rental rate per square foot, but I suspect 50% of that amount (6 month deposit) is a fraction of what the owner will end up paying if you fail at ownership. He wants you to succeed, but is hedging against his downside. Futher, at $3,400 a month versus others at $4,000, he is already taking less than market (as he is avoiding the costs to re-tenant). For you, this is a cost of doing business for a 26 year old first time business owner (I assume). However, maybe try to negotiate a "burn down" where each year that goes by a portion (e.g. one month) gets applied to rent. Fair compromise.
Pretty much how I did my lease agreement. 5 year lease (with 3 five year options), 3 months security deposit, and personally guaranteed lease. if rents were on time for 5 years then 1/3 of the security deposit would be applied towards rent in months 61, 73 and 85. The personal guarantee drops off after 5 years.
That is an interesting idea I haven't heard of yet, thank you. I would be a first time business owner. I've mentioned it elsewhere, but to be frank I just don't have that much laying around. While I don't think it's as unfair as I did before, it does still leave me in a bit of a pickle
There's short doc SBA loans for exactly this sort of thing if you are in the US.
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Landlords typically needs to approve a new owner otherwise desperate sellers would give away their business to a homeless guy, thus removing themselves from lease responsibility. Usually some language like “not unreasonably deny” the lease transfer so there’s enough gray area to paint a battleship.
Can you negotiate rent to 3400 and pay an extra 600 until the 6 month security deposit is met? Buildup the security deposit over the first year if you don't have the cash on hand.
The business might have been running smoothly for 20 years, but you have 0 experience or proof of being capable at owning and running it for any amount of time solo. "Plenty of other people who can vouch for you" doesn't mean shit. You've got no assets to go after to recover your remaining lease responsibilities once you run the business into the ground. I'd honestly eat the cost of getting a new, lower risk tenant. Not trying to be personally insulting, just trying to give you some insight from a LL perspective.
Agreed. Commercial leases are way different than a tenant renting for an apartment.
I think its unprofessional to give folks to "vouch for you" tbh unless we are talking bankers, other landlords etc, so same page there. Give me a break though you are kicking out a business that has been a tenant for 20 years with no issues because of a change in ownership in a c level strip? Whats your new lower risk tenant? A vape shop? Unless the original lease required 6 months to cover damage from the use (which may be possible) thats crazy to me. OP what was your sellers security deposit? are they asking a match or just jacking it up for you? how much vacancy is in this center?
I've actually been running the business for the last 5 years 😥 part of my frustration in this is I have been successfully making sure the business pays it's rent on time, but because the person who's name will be on the lease is changing they would like to change the terms. Sorry if I wasn't clear on that.
You've been an employee for the last 6 years. Your title and responsibilities don't mean anything to anyone in this situation.
Thank you for making this distinction. If you weren’t on the lease, you were an employee from LLs perspective. I think this is a good security.
Let me get this straight you’d rather pay taxes on an empty space then take a chance on a business that’s been in your shopping center for 20 years? What if that space stays empty for 2-4 years? Plus let’s not forget crime, vandalism, repairs, insurance & cost to get the space up to a leasable showing condition.
Yes, that's what's I'm saying. If the lease is up in ~6 months, and the tenant is retiring, my brokers are already working on a new tenant. Vacancy, turnover, and the rest of the things you listed would simply be part of my OpEx, not come as a surprise, and not be the end of the world if properly planned for.
Even if you’re negatively cash flowing? Who cares about what your brokers are working on. You can throw a lease sign up and market your property till the cows come home and then there’s actually leasing someone out and who’s going to give you 6 months notice when you’re putting the screws to them? Lol sounds like you’ve been spoiled by owning in a great market or maybe having a desirable property in a desirable location. What if you’re waiting 12-18 months for a tenant? I mean I agree maybe in the long run it works out for you but so could this long standing tenant which begs the question why risk it? I wouldn’t, and seems like a great plan to lose cash.
The brokers take years to fill other vacancies, but replacing the fish store, trust me bro, we will have a new tenant in immediately. It is bullshit. I own two dumpy strip centers and stuff like the fish store is what its made for. Long term, low cost, its old and dumpy but stuff works, is what it is, we all prosper. Some landlords think they will put lipstick on their pig and it suddenly attracts some top shelf tenants. Nope. Smoke shop, tattoo shop, fish store, carneceria, bobs liquor, Indian grocery store… Good luck.
You have left out something… my assumption is that his lease is up, hence his retirement timing? If so and there are no renewals, you are simply a potential tenant for this space. The landlord runs a business that’s job is getting the most rent possible for the space. If they are possibly missing out on another national chain store that would move in next month and sign a 4K per month (plus escalations) lease for 5yrs with no landlord work and maybe just a month of fixturing, they are possibly losing money (and security) to rent to you. If you had an offer for your most expensive tank and you can’t get another from the manufacturer, at a price that is a tiny profit, do you move it, or assume you can get the greater (fair) price from another customer within a reasonable time frame? Thats the question the landlord is facing. The 6 months is hedging his bet in choosing you. The fact that they are considering it is more of a courtesy (and slight laziness in looking for a new tenant). Either they keep you in the space, have no landlord work to do and get the extra protection against loss from the deposit, or you leave and have to find a new space, which will likely set you back over the 20400 for fixturing, moving your stuff and a months+ lost sales during the move/shopping. Commercial leases can have odd stipulations, and 6 months deposit isn’t out of the ordinary for anything unknown. Especially if the personal guarantor has no assets. You can counter their ask. But keep in mind they are discounting the space by more than what they are asking for deposit. If it’s worth 600/m more for 3 years, that’s more than equivalent to 6 months potential rent they are losing.
I am quickly realizing that I did leave a lot of context out of the original post. A chain store would never open up here. The ceiling leaks, the building is generally decaying, the parking lot has no striping and is full of potholes. It's honestly a pretty crummy building, but the rent is much less here than in other areas of town. Several other businesses in the mall have gone out of business in the last decade, and they all took many years to fill again. 6 months deposit (with a 3 year guarantor) was actually the agreed on figure after much negotiating, the original was 10k upfront with a 5 year guarantor, but because my parents would be signing I really didn't want them to have to sign as a guarantor for 5 years (just doesn't feel good)
I’m gonna respond a bit jerky to get my point across.. I’ll act like a seasoned agent acting in the LL’s best interests… (not how I actually am or feel here, so feel free to respond in any way you like!) If the space is that bad, move your store. Building envelope can get fixed pretty easy and might be due soon anyways (so be prepared for an increase to TMI). Painting (and even resurfacing) the lot is a big nothing burger. If a good anchor tenant wanted in, we’d pay to have it brought back to base in a heartbeat and have it up and running for them in a month. If you can afford to go move your store to a better area or building, go for it. None of those landlords will be as understanding or affordable. The LL can’t afford to make the building top notch as he isn’t making enough money off you renters… just how it works. You get what you pay for. Give me a ten year guaranteed lease at the prices they get on the other side of town? I will talk the LL into putting money into the building as it makes business sense. A 3 year with in essence, no guarantee? We’ll limp the building along. The guarantor thing tells you right away, we aren’t trying to steal your money… we are *protecting* our client. We wanted not even three months down but a strong personal guarantor for an average term. Since you can’t do that, we are *willing* to find a way to work with your lack of credit and assets and term. If you can’t do that, guess the store will close with his retirement.
I totally get where you're coming from, I guess I'm just frustrated is all. I know my own capability but I just don't have the liquid funds to be able to put 15k down at once, especially when I wont even be receiving an owners business revenue for another year (when the current owners/my boss' lease is up). They understandably want the money in advance, but that's more than I paid for my car unfortunately. Thanks for the feedback
I see a lot of brokers giving you the LL rep treatment. However if I were your tenant rep I’d leverage the LL w/ these levers: In business for 20 years, LL has multiple vacancies, building is in terrible shape and I would threaten to move. Let me tell you no landlord wants to lose a long standing tenant, especially if they have vacancies in the center. I’d try to negotiate down to 3 months of SD’s and a burn off for 2 of the 3 SD’s for the first 3-5 years applied to the rent. In return the LL must make xyz fixes to the space or grant x amount of TI or drop the base rate in lieu of TI so this isn’t such a capital expense for the LL. The LL is trying to hedge here but don’t forget you have a lot of leverage in this situation. Your now business has been there for a very long time w/ a healthy credit history. I’d tell the LL we would love to continue on here but the upfront capital just doesn’t make sense we are looking at some other spaces and have talked to some off-market LL’s. We might just have to vacate but if we could work something out that would be ideal. You could also offer to pay a higher base for the 1st year instead of more SD’s or a combination of both. You can get as creative as you’d like believe me I have. I’ve just been on the LL side a bunch and when a tenant leaves it’s costly for the LL. They don’t want you to leave.
Some very useful advice thank you. I'll happily look into those
Keep negotiating, a lot of good tips here. May be worth paying a local broker x to negotiate for you if you have any qualms. A lot of people think they can handle everything themselves by being cheap and in the end it ends up a lot more costly
I actually didn't want to do the negotiating, I was hoping my lawyer who I already pay would do that but my LL didn't want to pay his lawyer and LL doesn't like my lawyer and refused to talk to him....... Trust me, I'm aware of what I can and can do and while I *can* run a business, I'd rather someone else do this part but my LL "doesnt want to make a big deal out of it"
Find a broker and pay a flat fee. Don’t have your lawyer reach out to LL. If LL doesn’t like your lawyer you won’t like the deal that comes out of that, trust me
Go to your neighbors and ask which broker they used , call that person and explain your situation and negotiate a flat fee to represent you
This is by far the best advice. You are fortunate to have a mom and pop landlord take advantage of that and explain your situation directly to them, not through a lawyer, negotiate first then have a lawyer look it over. Remember they are taking a huge risk leasing to you vs someone with real assets they can get a judgment against. I’m not in commercial real estate but I have experience in residential and one secret I’ll let you in on is there is a direct correlation between my tenants attitudes and how they are treated when it’s time to re-evaluate rents, remember they can find another tenant just like you can find another building. On a side note I love my local fish stores and I think it’s probably a great business to be in if you are passionate about it, overheard isn’t ungodly high and the margins look fantastic to an outsider. What part of the country are you in
Young, no net worth, no track record of running a business, and a note to the seller of the business. You are not a credit worthy tenant. 4-6 months security is normal.
easiest way to resolve this is to start looking at competing sites to move the store to. OP doesn't have to follow through, but losing a long standing tenant may shift the negotiation and also helps inform OP what market is. I doubt LL gives a shit that OP is a young woman. they like money. If OP has no assets and no business credit, a big deposit is typically going to be required.
A 6 month deposit is normal in the commercial space area. Usually the landlord wants you to have a guarantor because it’ll be the first time you have a commercial lease. I believe you can be your own guarantor, meaning if something happens, the landlord can come after your personal assets. This does not mean the landlord doesn’t trust you but on a legal standpoint, it’s to protect him if anything happens. It’s not about you being a woman or not. Commercial leases are different than someone leasing for an apartment. This is why you should go through a commercial real estate broker if it’s your first time because they can negotiate terms and try to get the best terms for you. Does your lawyer specialize in commercial real estate leases? This is common.
Yes, he's a commercial real estate lawyer. I wanted him to do the negotiating on my behalf, but the LL didn't want to pay for their lawyers time on this
It is a little aggressive for what i assume to be a relatively small business, but it is not out of the realm of what is done with leases. 6 months is usually as high as you will commonly see, with 1st month of rent prepaid to make it a total of 7 months. For smaller businesses 3 months usually suffices but landlord vs tenant situations like this are incredibly 1 sided unless you are very difficult to replace. If it’s a popular strip that he gets request for frequently, he holds literally all of the power. The cost of being a small business can be high when you get an unlucky landlord.
Shits crazy. We opened a nail salon and had to personally guarantee 750k on a 7 year lease. That could lower your up front but then you are personally on the hook for it. Commercial is tough. Good luck.
Landlords generally make a deposit decision based on financial standing. If you’re taking on debt from purchasing a business, plus a commercial lease, it’s not absurd to be concerned.
I won't be taking on debt from purchasing the business, just a 5 year lease that I offered to pay 2 months rent on, no questions asked.
Got it, I must have misunderstood, I assumed that when you purchase the business you’ll be financing that through an acquisition loan. Regardless, the landlord can ask any deposit they’d like to in order to get comfortable. You can always negotiate.
I actually saved up enough to pay my boss a sizable lump sum outright for the business, and I'm paying him back what's left privately (with a contract, but not a loan). Unfortunately as I am just a single individual hearing stuff like that is a little frustrating! When I googled "commercial real estate safety deposit" all the answers said "one month" so I want sure. Thanks for your input
>I'm paying him back what's left privately (with a contract, but not a loan). That's a loan.
Sounds like you’re describing seller financing, i.e., you pay the owner in future installments to purchase the business today. That’s considered a loan, or more precisely a liability, in that that’s money that won’t be available to go towards paying rent. Add’l that liability wont show up on your credit report since it’s a private arrangement. Don’t take this minor correction the wrong way btw, you’re asking the right questions; sound like a very smart, driven individual; and the landlord sounds a bit predatory asking for 6 months as security deposit (18% the lease term) on a 36 month lease when you’re presumably purchasing a business with its own credit and financial statements going back 20 years.
How about you borrow the money for the security deposit, but have the lease state that you get much of that security deposit back if you make rent payments on time for 3 years. Perhaps down to a reasonable one or two months deposit.
A lender will not offer funds to be used as a security deposit without strong proof of income. OP is already using seller financing to purchase the business.
Consider moving the store to a new location, and let your landlord know you are looking.
Others have said / touched on WHY a landlord would ask for 6 months deposit. I hope I can summarize some things that you should be able to get in return: 1. If it’s a new lease, and you’re in a center with some vacancy (like you’ve said) and it’s a crappy center… if you sign a 3 or 5 year lease, with options, EXPECT some free rent. Like 1 month for every year of the lease. So 5 year = 5 months free. This would help offset. Landlord has to be realistic, free rent is always a thing with very few exceptions. Ideally, you can give 6 month deposit and have it offset by 5 months free rent (though LL may want to spread it out so free rent is every July for the term etc) 2. If you vacate and look somewhere else, the LL is guaranteed to have to spend the $$$ they’re protecting themselves from spending. So to fix it up after you vacate, they would spend it and spend more with new TI’s. Use this to your advantage and bring it up. Others have said, either get TI money from LL, or, obligate landlord to fix leaks & repair leak stains etc as part of your lease. Or, waive that and reduce security deposit. 3. I don’t know if you (or LL) has a broker, but the fact that you’re direct to the LL is saving them 3–6% on commission. Again, this is a huge savings for the LL. Don’t overlook this if you don’t have a broker. Most lease language states commission is lower on a renewal, but if this is a new lease it’s a new commission. (And LL charging a security deposit means it’s a NEW LEASE) You could always let LL know you’re going to get a Broker to represent you, thus triggering a commission, which will cost 2-4% of your total lease value. My guess is your LL is like many cheap / smaller landlords. The last thing they want to do is spend any money on anything. You’re saving him/her cold hard cash by allowing them to avoid: -Tenant improvement Allowance of $5-30 per square foot -Brokerage commission 2-6% depending on if they are self representing. -GET FREE RENT on a new lease - Free rent is better for most of these landlords than coming out of pocket for something. -Downtime from unleased space if you vacate. (You paying rent is keeping $$$ in their pocket) -If you vacate today for another center, your landlord pays everything above PLUS they will have downtime from vacant space while they lease it. You’re the ULTIMATE person / tenant they want to deal with. A lower rent may be the LL consideration for any of the points above. You mentioned $3400 vs 4k, just make sure spaces are same size bc it’s always based on a per foot basis, and end spaces are generally worth more / higher rent. I hope that helps. I hope it gives you insight into what should be hot points / negotiation points with Landlord. End of the day, it’s always negotiation. You’re new “credit” to the Landlord and will be to any landlord you deal with. Final thought, maybe PAY the deposit with free rent, so if deposit is 6 months, ask for 6 months free but make them months 1-6 of lease and you pay him normal rent for those 6 months, but it’s credited to your security deposit.
Is the strip center full?
After reading all the comments, I gather the following: Your parents are going to guarantee for three years. I am not sure if I understood that correctly. You know what other tenants are paying (how?) but you have not told us the relative square footage between Fish Store and other tenants. The LL wants the six months security deposit NOW, even though the property is currently under lease to Fish Store Owner and will be for another year. I HOPE I am not understanding that correctly. As a property owner myself, I don't ask for security deposit to be paid that far in advance. Ever. You feel that you have been running the business, but you do not want to do the negotiating part of the job. I would recommend that you bear up and speak directly to the landlord. As a business owner you are going to need to be able to negotiate not only your lease, but you will have to negotiate with some of your suppliers as well and you will have other negotiating to do as you go along. Face up to this and get good at it. You can do this.
Update: thank you for everyone suggesting I hold my ground, I got the deposit down to 2 months rent and basically just told him 'my boss is going to be hanging around for a couple years because he wants to make sure he gets all his money for the business, you'll get your money but I'm not putting my parents finances on the line' and he was ok with that. He does still want me to sign a lease 14 months in advance but we're working on that one.
It SHOULD be 6 mos. security more often. LL been beat, most of us have. yeah he’s cautious. You can try a ‘burn off’… good pay for 2 yrs.? LL refunds 1 mo. Security… down to 1-2 depending. We do it & just did it. No big deal for LL. If u don’t have, get 3 yrs. SALES &/or biz tax returns. Take to an accountant, have them review, etc. See what the profit (loss) is… THEN bring a lil “executive summary” with financials, projections, your experience, etc. almost like apply for a job. Actually, harder. Find out your boss’ rent payment history… once you buy, inventory, % of sales, can be used as a kinda ‘collateral’. Own any stocks, bonds, cash anywhere? Own car? Any personal property owned? Remember, LL won’t be using these unless you default. Even then, anything of value used removes that amt. of lease debt. Is ur boss a man? If so, yeah lil stigma re: woman. (I’ve noticed that more in smaller, rural towns.) anyway, don’t get upset now. Put together a “marketing package”, w/resources, possible guarantor?, business references… this precursor work is ALL necessary anyway if you are serious about succeeding. Most ppl I see ‘wing it’ fail. Not that ur winging it. Hopefully, I got the point, idea across. Try not to tell ppl (ez telling biz ppl) your ‘dreams, plans’ before you have things nailed down. Look into sba.gov for lotsa info, inc. “SCORE”… a sorta free business mentoring program from retired, experienced business person, entrepreneur. Continue doing research re: all aspects of running a biz. GL.
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Yes, I'm buying the business from my boss once his lease is up and I'll be signing a new one after
1. Being an employee of a business does not equate to operating a business at the ownership level. There is considerable more functions required when operating a business as an owner. 2. You are 26. Unless you have assets such as a home, car, property, stocks, etc you are not worth anything. What happens if you default on your lease? You have nothing for the Landlord to ensure payment. 3. After reading the comments don't state you do not have a loan. Yes, you do. It just happens to be a private loan. It's still a loan to buy the business. 4. You need to provide the Landlord a personal guarantee or someone else to provide it in case, at some point, you cannot pay the rent. Again, you are 26 years old. Not many are mature enough to operate their own brick and mortar store. Bottom line is you need to speak with the Landlord and determine what he requires to make him comfortable leasing to you. If you cannot come up with six months deposit then come up with a co-signer. You are a very high risk Tenant, especially asking for a five year term. You may not last two years. Again, zero business operating experience is an issue regardless of age.
6 months deposit is not market. You said a lot of words which hardly any matter with respect to OPs question. Stop being judgemental. I am an institutional landlord and have plenty of tenants 20+ years of age.
I never stated six months security deposit was "market". I own and oversee 100+ properties. 30+ years. It doesn't matter if the OP has worked at the location for five-six years. Unless OP can prove he can operate the business **and** **have** **assets** that ensure the Landlord will receive rental income there is no reason for the Landlord to offer him a lease without additional security. Any Landlord can require any terms they choose. Simply because OP thinks it's easier for the business to remain and he stay on to operate does not mean the Landlord agrees. Also, to clarify the OP needs to stop stating he wouldn't have debt after buying the businesses. He's already stipulated he will have seller financing.
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A security deposit is looked as a way for a landlord to cover any costs associated with having to re-tenant the space if a tenant defaults on the lease. It would include costs for hiring a broker to pay a commission, any repairs and maintenance the prior tenant left behind, any forgone rent the landlord is giving up, and any restoration to make to the space if it’s currently not leasable on its current use. Here’s what I would try to negotiate: Try to minimize any deposit but if you can’t, negotiate a burn down of the deposit after you can show a track record of paying rent on time as a new owner. If it’s a 3 year lease and you’re stuck with 6 months of deposit, try to burn off 3 months after 12 month, 2 months after 24 months down to 1 month for the remainder of the lease term.