Franchising Today - Summer 2016 - 19
markets. Corporate-owned retailers are flexing their financial muscle
to outbid small franchise groups on
many of the high-priced new development opportunities.
After the initial shock of rents
and competition for locations, what
should franchisees do? Understand
how to shop sites, show their value to
a landlord and become sharp talkers
To set themselves apart from other competitors, franchisees need to
communicate how their concept will
create value to both the shopping
center and the landlord. What type
of demographics will their concept
bring to a shopping center? How will
that create synergy with the other
tenants? How will that make a center
more competitive with the one down
the block or across the highway?
Painting the picture of value for landlords is more important than ever.
SELL YOURSELF TO
Many franchisees have found benefit
in supplying landlords with information on franchise concepts, including their track record of success. For
example, if a franchise is a regional
group from out-of-market, a franchisee could explain to the landlord how
it would create a buzz by having the
first local store in their center.
Building a hamburger chain with
a dozen locations in other parts of a
state and high credibility elsewhere
can create excitement for a landlord
that can give a franchisee an edge over
other prospective tenants vying for
the same space. Supplying landlords
with the backgrounds on franchisees'
investors and managers - highlighting
their successful track records as business owners - also can help a franchisee compete for a location. Where it
"FRANCHISEES NEED TO SHOW HOW
THEIR CONCEPT WILL CREATE VALUE."
makes sense, bringing together the
franchisee and landlord so that they
can achieve a higher level of comfort
in doing business might be helpful.
While moving quickly where and
when they can, franchisees also need
to understand that they will need to
have patience in other areas of the
transaction. Occasionally, deals can
take months to sign - even after the
terms are agreed upon - because
property owners and management
companies are running lean and their
decision-makers are pressed for time.
Franchisee groups need to understand this seeming paradox - they
need to move fast on a planned project
that may not open for a year or two.
For new construction, some franchisees tend to doubt whether a center will actually be built, a reasonable
concern given the number of uncompleted projects during the last
recession. They often want to wait to
commit until after they can see the
physical building being constructed,
but typically by then, it is too late.
When the developer is credible, the
project is funded, and plans are working their way through the long approval process. If a franchisee waits
too long, another franchise or corporate-owned concept will cut a deal.
Landlords are pushing harder for
personal guarantees from franchisees in this period when they have
the upper hand. In most cases, such
guarantees can be limited to one or
two years, made rolling instead of
full-term or prevented from extending into option periods.
A franchise group also can attempt
to reduce the guarantee by increasing
the security deposit. For example, a
franchisee could extend the guarantee up to six months as opposed to
one or two months, with the deposit
being returned to the tenant periodically over the term of the lease.
Another solution, especially for a
franchisee entity that owns multiple
locations or has substantial assets, is
to use a letter of credit issued from
the franchisee's bank.
Franchisees will face these conditions until the supply of locations
is adequate to meet the demand of
fast-growing retail concepts. It will
probably take 18 months for enough
new retail projects to be delivered to
take the pressure off occupancy rates.
For those entering a market, there
will eventually be opportunities to
move into a space when an existing retailer upgrades to a newly constructed
center or relocates to fit a new prototype. But for those who want prime
locations today, there will be a bigger
concern: making the numbers work.
Experienced franchisees might
back off when they can't obtain the
right combination of rent and property improvements. Others cannot
wait, however, because of requirements found in their agreements with
their franchisors. So this is a time for
franchise groups to move quickly but
wisely. When they find the right location, they have to grab it and be diligent to negotiate the right terms.
Brian Bern is a senior director and Samantha Berk
is a director at Franklin Street, a full-service commercial
real estate company based in Tampa, Fla. Both specialize
in retail tenant representation. Brian can be reached
at email@example.com and at samantha.berk@