We're coming in swinging 🥊

Hi, it's Abby, and I'm back with part deux of my list of bones to pick with landlords. (Missed part 1? You can check it out here.) This particular grievance arises from several virtually identical conversations I’ve had over the last few months. After I’d given the exact same rebuttal three times in a row, I knew it was time to put it in a newsletter.

As a mother of a toddler and a baby, I’m learning to access stores of patience I didn’t know existed. I’ve learned to endure everything from slingshots of mashed potatoes to full-blown meltdowns about the injustices of putting on shoes to leave the house. But despite getting better and better at channeling my inner mom-zen, there’s one attitude that really gets under my skin…and it doesn’t even come from a toddler. It comes from landlords and their brokers.

It happens during the course of normal negotiations when I’m representing a Pedal Retailer. My job as a broker is to get the most favorable deal for my client. Landlords know this and expect me to act accordingly. 

So it really lights me up when I hear some version of: 

You’re a start-up negotiating like you’re a national credit tenant.

Translated into layman’s terms, that means: 

Because you’re a new, independent retailer, you’re asking for too much. You should expect to get worse lease terms than what we’d be willing to offer a national retailer. Be happy we’re even considering you.

I’ve heard it enough times now that I don’t have the epic meltdown I can feel simmering, but this kind of thinking is not only misguided, it’s perpetuating a circular doom-loop and self-fulfilling prophecy: 

⬇️ Indie retailers are hamstrung by unfavorable lease terms, and they fail. 

⬇️ Landlords see this failure and interpret it as reinforcement to the belief that indie tenants are inherently riskier than nationals.

⬇️ Landlords try to mitigate that risk by offering less favorable lease terms than they’d accept with an established business. 

⬇️ Indie retailers get hamstrung by unfavorable lease terms.

🔃 …and round and round she goes.

The whole thing makes me so mad I’d like to chuck ravioli at the next person who uses that line on me. 

Here are some of the deal terms we find ourselves fighting with landlords the most about:

1️⃣ Tenant Improvement Allowance

TI is one of the first places landlords get skimpy when they’re dealing with a mom-and-pop. The logic is straightforward, even sensible-seeming – if you’ve got a tenant you view as inherently riskier, you put less upfront capital into the deal. Makes sense.

🛠️ Here’s the problem: offering less TI doesn’t reduce the cost of a tenant’s buildout, it just shifts more of the burden to the tenant in a situation where that tenant already has more limited resources – an obvious recipe for failure.

New businesses don’t get “first time customer” discounts from their general contractor or promotional periods from their staff. Their operating costs are the same, if not higher, than national retailers’ with volume, so saddling them with more of the upfront costs makes it harder to succeed from the start.

2️⃣ Lease security

It’s common for landlords to require larger security deposits from smaller tenants. Also seemingly logical – when someone has fewer or less valuable assets with which to secure a lease, better to have a cash deposit you can easily access in the event they ultimately default.

Again, we’re bumping up against the issue of limited resources. When a local tenant is required to tie up more of their precious cash to sit in a bank as a security deposit, that money is usually coming straight out of any working capital they’d saved to see the business through the difficult early days and lean times. 

🩸Working capital is the lifeblood of any business, and as new businesses find their footing over the first years of operations, available cash is the difference between making payroll or not…between being in and out of business.

Undercapitalization – an underfunded capital budget before opening and insufficient working capital after opening – is the most common reason new brick-and-mortars fail. If a business is losing money, anyone can keep it alive indefinitely so long as they can keep pumping in more cash. But when the cash bleeds out, and there’s no more to inject, the business dies. 

Tens of thousands of dollars sitting in a bank to secure a lease isn’t helping anyone, but that money could be a vital lifeline for a struggling business.

3️⃣ Term of lease

Many landlords feel more comfortable with a shorter-term lease as a sort of “trial” for a new business. Sensible reasoning: if it’s successful, we can always extend the lease.

The issue with this idea is that it also doesn’t reduce the upfront cost of opening for business and building out a space… but it does reduce the amount of money it makes sense to spend on opening. 

There’s a baseline level of capital investment that just cannot be reduced, and attempting to pack recouping those costs AND making money inside a two year period is difficult if not impossible. For the savvy retailer, or really any retailer who can do simple math, the juice simply isn’t worth the squeeze.

🌀

Doom-loop aside, landlords are always going to seek to mitigate risk when leasing to an indie tenant – I have no objection to that. But when those mitigation efforts effectively stack the deck against the tenant, their consequences have the opposite of the initial intent. 

When a landlord leases a space to a tenant, it’s in everyone’s best interest for the tenant to thrive, and the lease terms should create conditions that facilitate (or at least don’t impede) success.

So how can a retail-savvy landlord mitigate their risk while leasing to independent retailers AND avoid triggering my postpartum rage? For that, you’ll have to join us for part three, friends.