You’re looking to lease a downtown building for your business? Here’s some things to consider.
When downtown Olympia restaurant Hart’s Mesa closed in June, the owner explained his decision to The Olympian.
Owner Joel Hart talked about the cost of moving from west Olympia to downtown, as well as the cost of equipment failures, staffing issues and major weather events.
He also explained that he had to deal with electrical and plumbing problems, followed by another round of electrical problems.
“The loss of revenue combined with the expensive repairs put us in danger of not being able to pay our staff,” Hart said in his email to the paper. “We therefore chose to honor all outstanding payroll and small vendor balances with what was left in the bank and suspend service until we could secure funds to properly address the infrastructure problems.”
The business ultimately closed.
But after the story was published, some readers wondered why Hart needed to take care of those repairs in the first place. Isn’t that something the landlord is supposed to handle? they asked.
Experts in commercial real estate say those types of repairs might be something the landlord is expected to address — but not always.
Business closures downtown and elsewhere are harsh reminders that it pays to read your lease carefully, or to seek advice about it, especially if you’re about to lease space in an older building.
Cameron Wilson, a commercial real estate broker with The Rants Group in Olympia, said landlords want to see their tenants succeed.
“But at the same time, many landlords, particularly owners of older buildings, may not have the resources to do the infrastructure upgrades in advance of a tenant coming in, so they count on the tenant to absorb some of those things over time.”
What kind of lease do you have?
Rants Group President and Chief Executive Pat Rants said there are generally three kinds of leases: triple net, modified gross and full service.
▪ Triple net: Lower monthly rent, but tenant is more responsible for the costs associated with the space or building.
▪ Modified gross: Tenant and landlord share expenses. For example, the landlord might pay taxes, insurance and maintenance, while the tenant covers utilities and the cost of janitorial services.
▪ Full service: Landlord pays all expenses. However, this lease typically is found in an office environment where the operating hours of the building and expenses are more uniform. You wouldn’t find a full service lease with a restaurant because they have long operating hours and require more water, power and heat, Rants said.
The triple net lease is common for retailers, he said. However, there are variations of all three and details are often negotiated.
Some things to consider: If you want to open a hair salon, it requires a lot of plumbing, Rants said. If you want to open a brew pub, it requires a lot of plumbing and electricity. If you’re leasing an older space, check the roof and the HVAC system, which can be expensive to replace, he said.
Also, the commercial real estate market, which was slow to emerge from the recession, has improved to the point that demand has put the landlord, like the residential home seller, in a better bargaining position for many spaces.
Rants can recall when there were about 30, 2,000-square-foot spaces on the market. Now, there are about three, he said.
Running a restaurant
Having a third party — a commercial real estate broker, an attorney or the Center for Business & Innovation in Lacey — look over the lease is especially important when profit margins in the restaurant business are a slim 4 percent, said Anthony Anton, president and chief executive of the Olympia-based Washington Hospitality Association.
Prospective restaurant owners should go into business with their eyes wide open. “If you’re taking the risk, know that you are taking it and not discovering it later,” he said.
Look at the lease with that in mind, Anton said.
“How much control are you giving the owner (landlord) and how much are you protecting yourself,” he said.
The owner of Hart’s Mesa could not be reached for this story, but Bonnie Elsey, former owner of the popular Fifth Avenue Sandwich Shop, shared her recent experience.
The longtime restaurant operator was known for her business on Fifth Avenue downtown, but facing a lease renewal and wanting to do more frying and grilling, she moved the business one block south to a larger Legion Way space once occupied by The Urban Onion.
“I really wanted the space,” she said. “I remembered the days of the Urban Onion and I wanted to be there.”
But once she got a closer look at the space, it needed a lot of upgrades.
“Nothing had been maintained,” she said, which led to $100,000 in expenses redoing the electrical, fire system and plumbing.
She said the landlord was good to her and helped out with expenses. At the same time, she acknowledged that she had signed off on the lease on her own and thinks that was a mistake. She recalled being told that she could back out, but soldiered on.
The space had “good bones,” she said.
As it had been on Fifth Avenue, business was good at the new location. But starting out with those debts was too much. The business closed at the new location in less than a year.
“I should’ve stayed where I was, in retrospect,” she said.