Commercial Investment Real Estate

MAR-APR 2016

Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.

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40 March | April | 2016 Commercial Investment Real Estate franchisee (as assignee), so that all parties understand their respective obligations. Landlord Pitfalls Signage and Exterior Prototype. A land- lord should have the right to review the franchisee-tenant's signage requirements and exterior prototype to ensure that, espe- cially in a multi-tenant property, they are consistent with the general aesthetic of the center. Landlords should also negotiate a pre-approval condition to any renovations or material interior alterations. Length of Term. A landlord should either review the proposed tenant's fran- chise agreement, and/or include repre- sentations in the lease that the franchise agreement expires either at the same time or af er the term of the lease. Landlords should also review or seek franchisee rep- resentations as to any termination rights of either the franchisor or the franchisee under the franchise agreement. Use Provision. Because a franchise con- cept tends to evolve over time, franchisors direct their franchisees to seek f exibility in to the extended cure period, provided the franchisor serves notice that it will cure the default prior to the expiration of the franchi- see-tenant's grace period. A landlord should not be prohibited from taking action against the tenant for an extended period of time if at the end of that period the default will nonetheless remain uncured. Additionally, if a rider provides a franchisor the right to take over the lease af er a default, the landlord should include a provision that requires the franchisor to cure all monetary and non-monetary defaults as a condition to landlord's approval of the lease assumption. De-Identif cation. Franchisor lease rid- ers of en include the franchisor's right, to enter and "de-brand" or "de-identify" the leased premises, particularly if the franchi- see has vacated, been evicted, or the lease has ended. In connection with this move, a landlord should attempt to negotiate a time limit during which the franchisor has the right to enter the premises af er the tenant's occupancy ceases. Af er that time period, the landlord will either receive rent from the franchisor or have the right to remove and dispose of all branded items, at the franchi- see-tenant's expense, without any liability to franchisor. In addition, the franchisor must indemnify landlord for any and all activities performed on the premises by the franchi- sor, and af er de-branding, the franchisor shall restore the premises to the condition required in the franchisee's lease. Alternative Franchisee. In the event that a franchisor rider includes the franchisor's right to assign the lease to an alternative franchisee, a landlord should add the right for it to receive and review the proposed replacement fran- chisee's f nancial statements and approve or disapprove within its reasonable discretion. If a franchisor is not amenable to a reasonable discretion standard, the landlord can attempt to negotiate that any assignee must have the same or better net worth than the initial fran- chisee-tenant, or the franchisor must provide some form of a corporate guaranty. Finally, a landlord should require that a written assignment and assumption agree- ment be executed by the initial franchisee- tenant or the franchisor (as assignor), as may be applicable, and by the replacement 6 FRANCHISE RISING STARS Locations Blaze Pizza 103 Slim Chickens 30 Little Greek Restaurant 25 Cream 22 Famous Toastery 11 R Taco 10 Source: Technomics FRANCHISE UPDATE From April to December 2015, approximately 377 new franchise concepts were introduced, according to FRANdata, which collects information on franchising businesses. Here are most active business industry lines from that period: Industry Number of new concepts Lodging 16 Health and fi tness 52 Sit-down restaurants 58 Quick-service restaurants 41 Source: Franchising World their leases regarding signage, interior design, trade name, and most importantly, the use provisions. For example, if a restaurant fran- chise alters or adds menu items, or a cloth- ing franchise adds shoes to its inventory, the franchisor wants to ensure that all franchisees can comply with the new franchise protocol. A landlord should not be overly restric- tive in this regard, but should include lan- guage that it would have to be a global change imposed upon all franchisees of the brand, or at least within the region where the premises is located, and importantly, must be subject to all exclusive provisions in the leases of the other tenants in the center. Guaranty. T ere is a common misconcep- tion that a franchisee-tenant is directly related or backed by its franchisor, or that the land- lord will be receiving a franchisor guaranty. T e confusion can be bolstered when, as of en is the case, a letter of intent is accompanied by information and statistics regarding the fran- chise, as opposed to the actual franchisee-ten- ant entity. Assuming the franchisee is a newly formed entity having no value or assets other than its franchise rights, a landlord should request and review the f nancial statements of the principals of the entity and obtain a per- sonal guaranty, which provides the landlord with a reasonable level of comfort. T ere are many benef ts to having a fran- chisee-tenant; however, landlords and their lawyers should keep an eye out for these threshold issues. Jessica T. Zolotorofe is an associate with the Firm of Ansell, Grimm & Aaron, based in Woodland Park, N.J., specializing in commer- cial real estate transactions. Contact her at jtz@ ansellgrimm.com.

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