You Ask | We Answer: Why is Franchise Site Selection so Important and What Are LOI, TIA, LLWL, Etc.?
Updated: Sep 26, 2022
When owning and maintaining a franchise, one of the most essential decisions franchise owners must make is the location.
Location, Location, Location!
Choosing a location for your future franchise is one of the most important tasks you will work on throughout your buildout. We highly recommend working with a real estate broker to work on your behalf as it makes the process much smoother overall. When working with a broker, they will cast a wide net and show you what is available in your market. As you view sites, they will narrow down the options to areas you want to be in. It's important to know where you want to be, otherwise you might end up settling for a location. Keep in mind that the more specific area you want to be in, it may take longer to find your ideal space.
What is an LOI?
You have narrowed your site selection down to a few options so now what? The next step is to submit a Letter of Intent (also known as an LOI) for the potential locations. In commercial real estate, the LOI is a preliminary non-binding agreement that is negotiated between a tenant and landlord or buyer and seller. The LOI states the primary economics and deal points with proposed terms. They are intended to outline the most important items that both parties can evaluate in order to decide if each wants to proceed to an official contract.
What Should I Look For In the LOI?
While most of the information in the LOI is straightforward, such as space square footage, rental rates, usage, term, and more, we look for three key items. Those three items are rent commencement, tenant improvement allowance, and landlord work. We look for these three items because they are intimately tied to your overall construction budget.
Rent commencement is the date upon which monthly rent begins for the space. We often are asked by clients "Is 120 days from lease signing good?" The short answer is no. When we review LOIs, we want to see the rent commencement tied to receipt of permits. Permitting typically takes 4 to 6 weeks, but in some hotter markets like Austin, TX, it can take 3 to 4 months. This has essentially taken away all of your free rent and you'll be paying rent before your store is even open and under construction. This is why we always want to have the rent commencement tied to the receipt of permits. You'll have ample time to complete construction and even be open before the rent commencement date in some cases.
Tenant Improvement Allowance
Tenant improvement allowance (TI or TIA) is money given from a landlord to a tenant to help pay for the improvements to the space, or sometimes other expenses associated with moving into a new space. The number for TI is per square foot and can vary depending on the condition of the space. For a space that is 2nd or 3rd generation, we typically want to see $30 to $35 per square foot in TI. In some cases you may find a 1st generation space where TI can be $50 per square foot. While we do know what we like to see for construction and can provide suggestions, we are not real estate brokers or real estate attorneys.
Landlord work is work performed by the landlord prior to delivering possession of the premises to the tenant. This could include walls, demolition, ceiling, lighting, restrooms, flooring, HVAC, electric, plumbing, sprinklers, storefront, and more. Every landlord is different and will offer to complete different items. These items are often negotiated in the LOI and Lease and they drive the cost of your project. If your landlord offers to cover HVAC and electric in their work, you will get less TI for your location. Working with a qualified commercial real estate professional is highly recommended for this portion of your project.
How Rollout Connection Can Help
Our construction team is more than happy to provide feedback from a construction perspective on any LOI and Lease. We look at rent commencement, tenant improvement allowance, and landlord work to determine if you are getting a fair deal and starting off strong. If you are working with a real estate broker, they can also advise you on solid terms. The difference between our feedback and the real estate broker is that we will perform the work and know exactly what to look for. Our experience and knowledge not only will save you money, but we will also save you time. The three items mentioned above are incredibly important and can make or break a deal. We're here to promote success and get you under construction sooner than later while not break the bank.