Discussion: To Buy or Lease – That is the Question? What’s the Strategy?

You inform Sally that you have read and drafted all of the documents related to either the purchase or lease of the property, you suggest that you have a discussion analyzing the available options and issues that might impede the operation or make the deal costs prohibitive. Sally agrees, “Hey, I am a bit perplexed. The purchase agreement appears to contain terms unfavorable to us. We should organize all of the issues we might dispute and develop a negotiation strategy to argue favorable conditions and options. These deals have a way of being great investments for the owners of the property. Often, leasing terms are designed to squeeze all of the profit out of the tenants’ operations.

You tell Sally that you developed a pro and con sheet for each document that you will present and discuss in the discussion assignment. This way, we can develop a Term Sheet (PDF) document attached (Example) and negotiation strategy to deal with the broker. But first, we need to calculate our potential operating costs to determine our potential income

Supplemental Material:

Buying a Restaurant (Web Restaurant Store)- This article covers how much it costs to buy a restaurant and the steps you need to take to purchase a restaurant.

10 most expensive restaurants in the world (USAToday) – Background to determine average per diner average costs in a Three-Star Restaurant

How Bob Chinn’s Crab House Became The Highest-Grossing Restaurant In The U.S (Forbes) (Links to an external site <link is hidden> )- Demonstration of potential gross revenue.

Figure out yearly income

Gross Revenue- ROI calculation determine: (2) Gross Revenue: (See Article Bob Chinns-crab-House) (Number of seats 259) * (average meal costs) = ($Y) * (365 Days of operation) = Gross Revenue. Determine an Average Meal cost using the rate charged by a Three Star Michelin restaurant comparison (See “B” Article: “10 most expensive restaurants in the world.” Fine dining at Michelin-starred restaurants around the world can come at a price

Module 6.1 Forms
The Importance of Developing a Term Sheet.
A Term Sheets is normally an unenforceable expressions of intent, but a useful tool in negotiating a favorable
property sales agreement or lease. A Term Sheet put emphasis on key elements of the sales agreement or lease.
Once the landlord submit the sales agreement or lease offer in writing, compare all of the offers you receive. In
negotiating term sheets, it is important to set limits. If you need expansion options or renewal options, be sure your
prospective landlord or property owner addresses your concern in its term sheet. Although not binding the Term
Sheet request may result in the owner retracting the offer. The Term Sheet is however a useful negotiating tool
because it clarifies the deal. Property owner can face a dilemma if there is a missed opportunity to close because of
their resistance to negotiate. The owner’s ability to turn over the space can be adversely affected the long term
prospects of closing if the owner gains a reputation for retracting or renegotiating term sheets.
Time investment in negotiate a Real Estate or Lease Agreement.
There is a mistaken belief that the deal is done after negotiating an agreed upon Term Sheet. A well-negotiated term
sheet can certainly streamline the process, but a term sheet cannot address all of the legal issues that arise under a
purchase agreement or a lease. The Term Sheet lacks specificity and often results in ambiguities that only a
negotiated purchase agreement or a lease agreement can determine.
FORM 1
ISSUES YOU OWNER
DESIRED OUTCOME:
What’s the want?
Need to learn more, Why?
What’s do parties value?
KEY INTERESTS:
What do the parties want?
What alternatives are available if no
deal is reached?
WHAT ARE THE WALKAWAY
ALTERNATIVES:
Why?
What happens will they do if we do
not reach a deal?
BARGAINING CHIPS:
What do parties have that other
party values?
POSSIBLE SOLUTIONS:
What solutions could work for both
parties?
AGREEMENT:
What could the parties agree to?
Term Sheet
FORM 2
Identify the advantages
and disadvantages of
buying the Property
Advantages:
Disadvantages:
Advantages:
Disadvantages:
Purchase less risky than
Leasing because?
High purchase costs?
Is buying a property the
best option for you?
Outright Sale – buying
property in full. Ownership
is transferred immediately.
Payment is expected right
away
Identify the advantages
and disadvantages of
Leasing the Property
Advantages:
Disadvantages:
Advantages:
Disadvantages:
Reduced startup costs?
Immediate cash flow?
Added inventory cost?
Identify the advantages
and disadvantages of
Leasing the Property
under the various Leasing
Terms offered
(Term Lease, N, NN,
NNN)
Advantages:
Disadvantages:
Advantages:
Disadvantages:
Existing problems?
Which deal does owner
feel good about?
Is Gradual Sale possible
through leasing?
Are there flexible option
transferring property,
which benefits individuals
who cannot afford to
purchase outright, but are
able to finance a longterm
payment plan?
Lease Agreement –
requires commitment to a
contract that details the
conditions and payments
you will make for
temporary rights to the
business.
Identify the resources
available to assist in
buying the Property
Consider period and costs
required before
Restaurant generates a
cash flow.
Transitioning starts before
the deal is complete, what
effect on new business?
Key Objectives:
Property Owner: Restaurant owners: Considerations:
Key Objectives and Considerations in the Real Estate Purchase or Lease Agreement
Table 1
Loss opportunity Cost Cost of Loss money
1. Unpaid or late rent 1. Security deposit forfeited
2. Search for better replacement Tenant 2. Damaged or bad credit
3. Paying Tenant’s delinquent utility bills 3. Unable to find a new business location
4. Unexpected shared costs
Unexpected repairs to property Unclear maintenance obligations
4. Permanent damage
5. Unnecessary replacements
5. Losing customers because common areas not
maintained
Expensive lawyer fees to Property damage caused by
6. Help with an eviction notice
7. Seek remedies for unlawful use of the premises
8. Clean up hazardous materials
9. Remove unpermitted liens on the property
6. Unsecured premises
7. Poor security of entryways
8. Other tenants businesses
9. Landlord’s failure to repair
10. Improper janitorial services
11. Burst pipes during the winter
Mental anguish of Mental anguish of
10. Illegal business activities taking place on your
property
11. Responding to complaints from neighboring tenants
12. Not being a “named insured” on tenant’s insurance
policy
12. Being unexpectedly evicted
13. Not placing an advertising sign of your choice
outside
14. Unfair competition from other businesses despite
promises to be the exclusive store
Benefits of a Term Sheet Agreed to by Landlord and Tenant
Table 2
Adjusted Purchase Price: Includes prorated items such as rent, utilities, and inventory up to the time of
closing.
Review of required Documents: The documents you need to review include a corporate resolution
approving the sale, evidence that the corporation is in good standing, or any tax release that may have
been promised by the seller. You may check with your local department of corporations, state corporation
commission, or Secretary of State for more information.
Signing Promissory Note: In cases where the seller has back-financing, have an attorney review any
note documentation.
Security Agreements: This lists the assets that will be used for security as a promise for payment of the
loan.
UCC Financing Statements (UCC): Uniform Commercial Code documents are recorded with the
Secretary of State, in the state in which you will be purchasing your business.
Lease: if you agree to take over the lease, make sure that you have the owner’s concurrence. If you are
negotiating a new lease whit the owner, make sure both parties are in agreement about the terms of the
new lease.
Bill of Sale: the bill of sale proves the sale of the business. It also explicitly transfers ownership of tangible
business assets.
Closing or Settlement Sheet: The closing or settlement sheet will financial aspects of the transaction.
Everything listed on the settlement should have been negotiated prior to the closing
Bulk Sale Laws: Make sure that you comply with sale laws, which govern the sale of business inventory