Key Points of Real Estate Negotiation

Mark Whittle, SVP, Global Development, Hooters

Seth Goldstein, Dunkin’ Donuts/Baskin Robbin’s

Site Quality

• Focus on A Quality Sites FIRST

– Brand dynamics, what works for your concept

– Long term success is worth potential cost in rent for A sites

– Higher sales units from A sites drive down fixed cost of the business

Deal Structures• Deal Structures

– Purchase• Build asset value for the business on the balance sheet• Low interest rates extremely favorable today• Con – ties up capital that could be used to grow faster if capital is constrained

– Building/Center lease– Ground Lease

• Highest cost of capital to build (can’t SLB, ground up construction)• Should consider only as last resort if site is AAA quality

– Purchase and SLB flip• Extremely favorable on cash/cash returns today with low cap rates• Strong market out there with 1031 investors• Could be a fairly short window on the favorable caps dependent on interest

rates• Must be A sites to drive sales to get the maximum funding from the rents

established

Negotiation Points

• Key Negotiation Points

– Purchase

• Pricing, diligence time, cost of survey, soils, environmental and title

• Non competing uses by seller

Negotiation Points

• Key Negotiation Points– Building/Center Lease

• Rent, free rent and TI – make up the economic proposition• Term – have control via term and options for at least term of

FA• Use and Exclusive• Diligence timing ---permit period, fixturization period – work

to have rent commence at or after opening of business• Anchor contingencies• Assignment – to other franchisees’, franchisor, and inter-

familia entities without LL consent• Personal guarantees – avoid if possible, otherwise due

rolling or burn off guarantees

Negotiation Points

• Key Negotiation Points

– Building/Center Lease -Continued

• Purchase Option and/or ROFR

• Casualty/Condemnation

• Common Area Contributions – Exclusions – Cap on management/admin fees

– Capital improvements, depreciation on same, replacements

– Leasing commissions

– Leasable versus Leased for denominator

– Annual cap on increases

Negotiation Points

• Key Negotiation Points

– Ground Lease

• Similar to above on most points

• Ability of LL to subordinate to Tenant financing

• Typically longer term and options due to investment

Negotiation Points

• Key Negotiation Points– Purchase and SLB Flip

• Diligence and timing in the purchase agreement to obtain clearances and permitting– Title, geotechs, Phase 1, Phase 2 if necessary, Permitting,

Liquor if needed

– Lease terms on the SLB should be comparable to B above.

– Know the market going in for the SLB flip-current and trends on CAP rates

– Structure forward sale lease back as potential to fund project during construction

– Today’s market trends – franchisee cap rates tend to run 75 to 125 basis points higher than corporate credit

Negotiation Points

• Other Key Points

– What value does the proposed business bring to the center?

– What is the time of day use?

– Is this a use that can add value to the landlord

– Does this tenant add to the landlords cap rate value

Needs for Franchisees

• Ability to transfer to approved franchisees of the system or the franchisor

• Rent and renewals that will allow for remodels, if contractually obligated in offering

• Ability to finance, landlord will need to subordinate

• Right of first refusal to purchase if single use property

Needs for Franchisees

• Clear understanding of who is responsible in lease for current code compliance issues at space

• TIME, Time, time…

• Signage to meet brand expectations and needs

• Hours of operation that meets or exceed FA

• Knowledge of any proposed road/other projects that could impact the site

Closing

QUESTIONS AND WRAP UP