Need a recommendation for a commercial real estate attorney in CA

[Ed Lopez]

Hello all.  We've decided to change things up from real estate and invest in a franchise.  We have found a location to rent in the city and have a proposed lease from the owners.  This has all been through our commercial broker.  I would however like to have an attorney lay eyes on the lease before I sign on the dotted line.  Any recommendations?  We are in central CA, (Fresno/Clovis area) though I don't know that it matters.  The lease looked ok to me, just want to make sure I didn't overlook any caveats so to speak.  Thanks. 

[Joel Owens]

Just pay special attention to the franchise costs. Rent paid with landlord and any franchise royalty fees can suck away most of your profits.

You also need to look at what your expected return is. Most small businesses are OWNER OPERATORS meaning you are working to earn a wage.

You generally have to buy businesses that generate 150k to 200k or more in profit per location to have full time managers and assistant managers in place where you can scale. I look at businesses as a investment that has to stand alone on their own as an absentee owner and generate a nice return.

Anything where I have to BE THE BUSINESS is not an investment but a job and is not generally scale able.

Biggest thing if this is a new location you do not know how it will perform. It could perform under average, average, or above average for all stores nationwide. Even if it is outperforming your higher rent could offset that.

Example say an Applebees does 2 million average per year in sales and average rent is 28 a foot. If an existing Applebees to buy does 1.8 million but rent is 18 a foot then even with less sales they are likely making better profit. So everything is a balance. You need to analyse your total net worth to liquidity ratio and monthly regeneration of capital without this business in place. 80% of businesses fail in the first year for many reasons.

The build outs can cost a lot. Example Papa John's pizza might cost over six figures for a build out. I can instead buy an existing store with management and employees trained up and know what sales have been and trending for years. I have cash flow day one and can buy the store cheaper and refresh the inside if needed.

Franchise companies love new operators with good net worth as they make money on the franchisee fee, the build out package, royalty fees off of gross. They basically suck you dry as they know many will fail so want to get that profit on the front end.

You might want a kicker clause in your lease that sales if XX sales are not achieved in so many years that you can terminate the lease and walk away with no personal guarantee. Another variation is to have if XX sales are achieved for the next 3 years out of the 10 year lease then the personal guarantee goes away.

If a landlord is really not smart the only guarantee you give is a remote single entity LLC that can be bankrupted and you walk away with no personal assets on the line. As a landlord I want the personal guarantee because if your net worth is good then if the business fails I can negotiate a termination fee. So if 500k was owed as an example for next 5 years I could negotiate you pay today 150k to terminate the lease early and I use that money for TI's,LC's, attorney costs, months without rent for a dark space, months free rent credit for new tenant. The hope is I break even with no money out of pocket to get the new tenant in, operating, and paying rent on time.

No legal advice given.