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Negotiating a Coffee Shop Lease

  • By Bernie Rosenstein

Negotiating a lease for a coffee shop is a critical step in ensuring the success of a coffee owner’s business.  The lease is often a material cost, and once you sign a lease, it is a multi-year fixed cost that must be factored into your coffee shop business plan.

Effectively negotiating a lease can be a challenging and daunting process, especially for first-time business owners but doing it well could potentially save the business owner a lot of money over the lease term.  Whether you are an entrepreneur planning to start a coffee business or an existing coffee business owner who will need to renew an existing lease, this guide will provide some strategies and tips that business owners can consider when negotiating a lease. Many of the topics in this guide are covered in further detail in coffee business education classes at the New Jersey Coffee School in Hoboken, New Jersey.

Also Read: Guide to Choose a Site for your Coffee Shop

Lease Negotiation Strategies

The following general strategies should be considered and can be employed in any lease negotiation by coffee business owners.

1. Don’t fully rely on a commercial real estate broker

  • Real estate brokers can be very instrumental in assisting you in your search for properties and can help you narrow down your choices based on your needs in an efficient manner. They also have a lot of knowledge about the local market. However, although you may gain a feeling of trust and advocacy from your broker, keep in mind they are likely compensated by the landlord and their commissions are often tied to the terms of the lease such that a higher lease price and a longer lease term may favorably affect their commissions.

2. Don’t fully rely on a commercial real estate broker

  • It is prudent to negotiate leases for more than one location at the same time. This can provide the business owner with negotiating leverage if the landlord is aware that the business owner has other property choices.  Additionally, if the lease negotiation does not work out, the owner has other properties to fall back on and does not have to start the entire process from square one.

3. Research the market, the neighborhood, and the building

  • Research the lease rates for similar properties in the area
  • Ensure the location aligns with your target customer base
  • Verify the property is zoned for a coffee shop
  • Research the occupancy rate in the landlord’s lot or building – a high occupancy rate may provide you with better negotiating leverage
  • Perform reference checks with recent tenants who moved into the building

4. Everything is negotiable

  • Do not accept the landlord initial offer or the first landlord counteroffer
  • Initially ask for more than you want as many of the lease provisions may end in a compromise. This includes asking for a lower base rent than the landlord’s initial asking price.

5. Put everything in writing

  • Often, lease negotiations begin with a letter of intent (LOI) which is a non-binding agreement that outlines the general lease terms. Despite the LOI being a non-binding document, it is recommended to include as many of the lease terms and your positions on each in the document.  This will avoid having to bring up many new points in the negotiations later or having to challenge new points that the landlord will introduce later.
  • Ensure all verbal agreements throughout the negotiation are included in the lease document

Understanding the Different Types of Leases

Business owners need to understand the different types of leases and the nomenclature used to describe them.  There are basically three different types of leases a business owner may encounter – a “Gross Lease”, a “Triple Net Lease”, and a “Modified Gross Lease”.  It is important to understand the differences in each lease.

1. Gross Lease

  • In a Gross Lease, the business owner will pay a fixed amount of base rent (e.g., $30 per square foot) and there will be no separate charges for taxes or common area charges (known as CAM) such as insurance or maintenance

2. Triple Net Lease

  • In a Triple Net Lease, the business owner will be responsible for their pro-rata share of taxes and any common area charges (CAM) such as insurance, maintenance, or any other common area charges

3. Modified Gross Lease

  • In a Modified Gross Lease, the business owners will be responsible for some but not all the costs for the charges (e.g., taxes and CAM) mentioned above, so they will need to ask the landlord and broker to spell out those charges they will be responsible for

Additionally, in all these cases, the business owner will need to find out what utilities they are responsible for as utilities are treated separately in many leases.  And in cases where the business owner must pay taxes and CAM fees, they should try to negotiate a cap on the annual increases for these charges that can be passed on to them.

Key Lease Terms to Consider

The following are some of the key lease terms that will be in most leases and positions that the business owners can consider for each term.

1. Lease Term and Renewal Options

  • Common lease terms are 3,5,7,10, and 15 years. It is prudent that a business owner balances the need for a long-term lease for stability and a short-term lease for flexibility.
  • If the landlord asks for a 10-year lease, it would be prudent for the business owner to negotiate a shorter initial term with renewal options that can be exercised by the owner. For example, the business owner can offer a 5-year initial term with a 5-year renewal option or a 3-year initial term with two successive 3-year renewal options.
  • In any case, if the business owner plans to spend a material amount of capital to build out the space, they want to ensure they have flexibility over a long period (e.g., 10 years) to operate their business. At the same time, if the business fails the business owner needs flexibility so they are not committed to a long-term lease with no options to end it earlier.
  • If the business owner is receiving funding from a bank, they will need to check with the bank to determine if the initial lease term must be at least as long as the term of the loan they received from the bank.
  • Additionally, business owners may be able to include an early termination clause in the lease which will include providing the landlord with adequate notice and an agreed upon financial penalty to end the lease early.

2. Lease Commencement Date vs. Rent Commencement Date

  • The lease commencement date is the date the business owner takes possession of the space and can access the space. However, it does not need to be the date they start paying rent. Coffee shop owners will often need time to design and build out their space before they can open for business.  Business owners should request a rent-free period during their build-out phase or during their early months of operations to help with their cash flow when starting a coffee business.
  • The rent commencement date is the date the business owner will need to start paying rent.
  • Another option is for the business owner to ask for a reduced rent period in lieu of or in addition to a free-rent period.

3. Permitted Use

  • The permitted use provision will detail what the business can do in the leased space. It may also include things such as what hours the business is allowed to operate.
  • Business owners should aim to make this provision as broad as possible as their initial concept for their coffee shop or café may change over time or they may want to add another product line, and they will not want to be restricted in what they can or cannot do in the space.
  • A broad permitted use clause will also allow more flexibility should the business owner ever decide to sell the business and assign the lease to a new owner.

4. Build-out, Services, and Repairs (Tenant responsibility vs. Landlord responsibility)

  • A coffee shop often requires significant build-out costs for things such as plumbing needs (e.g., water lines, drains, filtration), electric requirements (e.g., voltage and amp equipment requirements), grease traps, and ventilation requirements.
  • Many of these improvements to the leased space needed to build a coffee business will benefit the landlord in the long run. As such, the business owner should either request that the landlord make some of these improvements at their cost before the business owner takes possession of the property or alternatively negotiate for a tenant improvement allowance (TIA) whereby the landlord will cover part of the build-out costs.
  • For services and repairs, ensure the lease spells out who is responsible for certain services and repairs such as HVAC, trash removal, and janitorial services. If the business owner will be responsible for HVAC repairs, have a professional inspect the HVAC system before signing the lease to avoid significant costs later.

5. Personal Guarantees

  • The landlord will often want a personal guarantee from new coffee shop business owners so if the business cannot pay the rent, the landlord can get the business owner to pay with their personal assets. In the negotiation, the business owner should try to either not be subject to a personal guarantee or alternatively limit the amount of the guarantee.
  • First off, the business owner should use their business corporation or LLC name and not their personal name in all written documents such as the LOI and lease to make it clear the lease is with the business entity.
  • The business owner can try to remove the personal guarantee clause by agreeing to other landlord concessions or providing landlord additional financial incentives (e.g., a high security deposit).
  • If the landlord is unwilling to remove the personal guaranty provision, the business owner can alternatively try to limit it by negotiating a fixed dollar amount or asking for reductions in the guarantee each year of the lease term.

Coffee Business Courses

Business owners can benefit by taking a coffee entrepreneurship class, specialized coffee business courses, or by seeking advanced coffee business training classes.  At the New Jersey Coffee School, located in Hoboken New Jersey, our Professional Coffee Business Training classes go into more detail about the topics mentioned in this guide and provide additional knowledge, strategies, and options that can further assist a business owner in effectively negotiating a coffee shop lease.

While lease negotiations is one of the critical topics we cover in our courses, our 3-Day Professional Coffee Business Class provides coffee and business knowledge, skills, and tools to help business owners holistically understand what it takes to effectively plan, open, market, brand, and profitably manage a coffee business.

Summary

In summary, it is important for coffee business owners to understand the different types of leases they may be presented with and some of the key terms and challenges that will need to be negotiated. While there are no guarantees, this guide provides strategies and tips that can be employed when negotiating a coffee shop lease to help mitigate some of those challenges business owners will face. Being thorough, prepared, and patient during the lease negotiation process can potentially save business owners significant costs and avoid problems later.

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