Selection
A site package, then a committee.
Franchise systems increasingly select sites with geographic information systems that combine mobile-device mobility data, trade-area population density, median household income, traffic counts, access and co-tenancy with neighbouring retailers. The franchisee and a commercial broker assemble a site package from that analysis and submit it to the franchisor's real estate committee.
The committee checks the site against the brand's specifications and positioning, and against the question that matters most to the franchisor: whether it takes sales from an existing franchisee's territory. Approval means the site fits the system's rules. It is not a forecast of what the unit will take.
- Trade-area population density and median household income
- Mobility data and traffic counts, by time of day
- Ingress, egress and visibility from the road
- Co-tenancy with the retailers around the unit
- Distance from existing franchisees' territories
Letter of intent
Base rent is only part of the negotiation.
Once a site is approved, the franchisee negotiates a letter of intent with the landlord: base rent, triple-net (NNN) charges for the landlord's taxes, insurance and common-area maintenance, renewal options, rent abatement during build-out, and the tenant improvement allowance. TI allowances commonly run from $20 to more than $100 per square foot, paid against documented construction draws once a certificate of occupancy is issued.
Published operating benchmarks put total occupancy cost at 6% to 10% of gross sales for a healthy unit. That is a ratio, so it depends on sales as much as on rent: the same lease is affordable in a strong trading area and ruinous in a weak one.
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| Term | What it is | Why it matters |
|---|---|---|
| Base rent | Rent per square foot per year, with scheduled increases | Fixed for the term, whatever the unit takes |
| NNN charges | Your share of property tax, insurance and common-area maintenance | Can rise during the term; ask what is capped |
| Rent abatement | Free or reduced rent during build-out | Covers months in which the unit earns nothing |
| TI allowance | Landlord contribution to the fit-out, commonly $20 to $100+ per sq ft | Reduces the capital you must finance |
| Renewal options | Your right to extend on set or market terms | Protects the money you put into the fit-out |
| Lease rider | The franchisor's notice, cure and assignment rights | Usually a condition of site approval |
Lease rider
Three parties to a two-party lease.
Franchisors protect their network by requiring a franchise lease rider or a collateral assignment of lease. Under it the landlord must copy the franchisor on any default notice sent to the franchisee; the franchisor may cure a rent default; it may take over the lease and assign the premises to an approved replacement franchisee without the landlord's usual transfer penalties; and on termination its agents may enter to remove the brand's trademarks and trade dress.
Read what that does and does not do. The rider protects the franchisor's ability to keep a unit in its network. It is not written to reduce your rent or your obligations under the lease.
Then allow for the gap between signing and opening. Industry benchmarks count thousands of units sold but not yet open, held up in real estate and municipal permitting. Every month a unit waits, its franchisee spends working capital with no sales to replace it — which is why the Item 7 stress test in the FDD guide matters as much as the rent.
