Are QSR’s facing tougher terms from landlords?

Two franchises reveal how the tough business climate has affected negotiations on leasing rates, renewals and bank guarantees.

It’s a mixed bag, with one QSR reporting more accommodating landlords who seem willing to share in the financial burdens of renters, while another QSR reports heftier bank guarantees and rentals that are almost too much to bear.

Lenient Leasing Requirements

According to SumoSalad – a QSR franchise whose healthy salad stores are located in the Central Business District and in suburban shopping centres – landlords have become more lenient with their leasing requirements.

Some have refined their deals to attract more retail food tenants, since in an uncertain economic environment, mall goers tend to spend more on dining more than on other discretionary spending items like fashion.

“Over the past 12 months there has been a change by some shopping centre landlords who have become more flexible in negotiating deals to attract the desired usage in order to improve their retail mix and customer traffic,” said Graham Streeter, General Manager Business Development, SumoSalad.

“This has been done through reasonable occupancy costs and a combination of capital contributions as an incentive to enter into a lease. A number of landlords are beginning to share in the financial pressures being experienced by existing tenants by managing their rental expectations at the time of a renewal,” added Streeter.

Larger Sums as Bank Guarantees

But landlords have been more unforgiving when it comes to bank guarantees, according to Nashi Corporation, which runs a chain of healthy sandwich outlets also in the Central business District, landlords.

“Landlords seem to be demanding larger sums as bank guarantees when offering or renewing a lease. We used to always negotiate a 3-month bank guarantee. They are now demanding anything from 6 months to a full year bank guarantee,” said Sam Nash, Managing Director, Nashi Corporation Pty Ltd.

Bank guarantees basically function as security payments for landlords should tenants default on their lease obligations. As landlords impose larger bank guarantees – even on tenants with a good track record – then QSR’s are forced to hold off on their expansion plans as cash gets tied up on the bank guarantees.

“We are currently renegotiating an existing lease with a landlord that we have been with for the past ten years. They have requested an increase of $83,500 to $102,000 as our bank guarantee. We have never defaulted nor shown signs of defaulting our rent payments for the ten years of business with any
of our landlords,” added Nash.

“This creates pressure on the tenant as the bank guarantee is either physical money in a bank account or an additional bank loan facility that could have been used to invest into new stores,” said Nash.

Little Respite on Rising Rents

Despite signs of falling foot traffic among major urban centre malls, landlords seem to be pushing rentals upward, sometimes to even double their base rent. Some QSR’s like Nashi are balking at these skyrocketing lease rates.

“There has been a noticeable decline in foot traffic in certain areas of the Melbourne CBD. This seems to have been due to retrenchments in the larger corporations as well as the government departments. There are corporate buildings around our stores that have whole floors that are empty. Not a week goes by where there is word of another 300 or so staff that are finishing up from that location,” observed Nash of Nashi.

“Rents do not seem to be declining either. We recently were offered a site of 30sqm. The asking rental was $180,000. It just was not realistic. In one particular lease we are renegotiating, the base rent has doubled.
Basically, our turnover percentage rent will never be achieved again,” added Nash.

Streeter of SumoSalad, though, argues that landlords – or at least those the franchise has been dealing with – have restrained their rental increases to rates that the QSR can manage. “Landlords still seek increases in rentals but have in some cases agreed to single-digit percentage increases,” said Streeter.