Location, Landlords, Leases and Lawyers

 

Zankou

In “The Man Without Qualities,” an epic novel considered one of the 20th century’s most esteemed works of literature, Austrian author Robert Musil makes an observation that sums up the essence of the food we serve at Zankou Chicken: “The right thing and the time it takes are connected by a mysterious force, just like a piece of sculpture and the space it fills.”

That single sentence captures much more than a culinary truth. It also underscores the almost mathematical idea that customer loyalty is directly proportional to product quality. Yet, as any thriving entrepreneur can attest, business success has another key principle: to succeed at selling a great product, the business must be well located.

The location of a business, especially a restaurant, is so important that a cliché has evolved around the term. It consists of a single word repeated like a mantra: Location, location, location. Some people go so far as to say, only half-jokingly, that those are the three most important decisions an entrepreneur can make while starting a business.

Location is a big deal for the simple reason that unless a business is well located, it will attract few customers. The argument that customers will always seek out a great product regardless of location is more fiction than fact. While there’s no doubt that customers are attracted to good products, a business cannot hope to be cost-effective, let alone profitable, unless it pulls in a steady stream of customers. And the only way a business can do that is to build on its hardcore customer base—that old treasure trove—by attracting new customers every day.

Learning From Bees

It’s similar to the mechanics of a beehive. Bees not only follow one other but leave a trail of scents indicating where the hive is; no matter how far they venture to gather the nectar from flowers that eventually turns into sweet honey, bees do not get lost and remain faithful to their hive. In the same way, old customers bring in new ones by the “scent” they leave off. At Zankou, this comes in many forms. Office workers meet each other over lunch. Boyfriends bring their girlfriends for dinner. At huge family gatherings and corporate functions, people who have never before eaten our food thrill to the taste of Zankou Chicken for the first time.

It is a truism of entrepreneurship that a business cannot rely on established customer “loyalty” alone. To be truly successful, a business must constantly attract new customers—and then hope that they, too, will become loyal customers, thereby repeating the endless cycle of renewing sources of income for your restaurant.

Grow or Die

The nature of entrepreneurship in America is such that at any given time a business is either growing or it’s dying. Even if your business is growing, there are expensive fixed costs associated with running a business in a prime location.

Unless you happen to own the property where your business is located, you will have to cough up a high monthly rent. The vast majority of retail entrepreneurs, including restaurateurs, are renters. And whether they’re successful or not, they constantly have to deal with landlords. Landlords often do not care if a restaurateur succeeds or not, as long as they collect the rent on time every month.

Decent landlords are hard to come by. Every landlord wants to increase the value and reputation of his property. But the truth is that many landlords are greedy—they will try to squeeze every last penny out of you. That’s the capitalist way—you can hardly blame them for that. The harsh result, however, is a constant tension—a never-ending battle between landlords and tenants, especially in the restaurant business.

Dealing with Landlords

In any negotiation with a landlord, it’s well to remember that he (or she) usually has more cards than you at the beginning of the game. (After all, the landlord has the ultimate power to kick you out.) So the best advice for dealing with a landlord is this: Do your homework before signing the lease.

Generally, renters are in a highly advantageous position if the economy isn’t doing too well or is terrible; the location has been plagued with past failures; the property is not in a prime or sub-prime location. We would be foolish to not take advantage of these kinds of situations. Talking to your landlord is like playing chess: When your opponent makes a bad move, a good player doesn’t ignore it. Rather, every move, every moment, has to be taken full advantage of.

For.Rent

That’s why doing your homework is so important. You must know who the landlord is; how low he’s willing to take the rent; whether the building has—or has previously had—any structural problems; the average market price in the area per square foot; the amount of foot traffic and car traffic at the intersection closest to the location; etc.

After you sign the lease, remember that you are pretty much the landlord’s servant for the duration of the lease. The only thing landlords are usually responsible for is the roof and to provide reasonable access to the facility. That’s it. Many landlords are now creating leases where they are no longer responsible for the roof or air conditioning.

Negotiating a Lease

Adding to your anxiety is the fact that there are a million things to be aware of in negotiating a lease. Your landlord will never tell you outright, for example, that the property is surrounded by rude neighbors or that the parking lot is a refuge for homeless people or those who have been kicked out of apartments because they can’t pay their rents. Nor will your landlord volunteer information about semi-legal stores nearby, such as marijuana dispensaries, which are a magnet for drug addicts, the rowdy or plain losers who like to hang out at the liquor store next door.

If you’re not happy with the terms of the lease, seek a better location. It would be wise to plan this out 3-5 years before your lease ends. That way, the cards will be stacked in your favor because you will be in a comfortable position to negotiate especially hard with your landlord. Seeing that you have secured a new location, possibly one that you own, in a much nicer area that has much better parking, the landlord will now kiss your butt to try to get you to stay.

But staying would only make sense if you want two locations in close proximity to each other. If you do stay on, it’s well to remember that negotiations with your landlord may likely never end. Most landlords usually don’t want you to negotiate toward the end of a lease; instead, they want you to wait until the lease is up. They will fight hard to ignore your letters to negotiate and will do their best to avoid contact until the very last moment, thereby ensuring that you are at their mercy.

Typically, when your lease is up, you cannot take anything that’s yours except what is fixed to the ground or part of the restaurant’s construction. The rationale is that if you do so, you might damage the structure. So if there’s a walk-in cooler or freezer that’s especially precious to you, make sure you secure the legal right in the lease to take it back instead of “gifting” it to the next tenant (or worse, the landlord).

Rent

Opening a restaurant is an expensive proposition that can cost anywhere from $250,000 to well over $1 million. The last thing you want is to make the landlord’s “house” nicer by allowing him to keep your fixtures as well as the tenant improvements you had to do just in order to move in. Many landlords now offer tenant improvement “allowances,” meaning they agree to pay for part of what it costs to turn their dump into an amazing and beautiful restaurant. This is especially true in economic downturns. However,even during the worst of recessions, many landlords refuse to help pay for improving property in the most prime locations. The only upside in such situations is that the location is good and that it’s worth working hard to attract and cultivate new customers in a store where you are invested for the next 15  or 20 years.

Lawyers and Courts

The trick is to talk to a good lawyer who specializes in restaurant leases. But it’s a very rare and special thing to find a lawyer who not only knows the law but is also a great negotiator. In my experience, the most effective lawyers have Alpha personalities. They are born poker players and love to be dominant both in the game and in their relationships. They might be divorced assholes, but they know how to push—for your advantage. These are lawyers who love to win, and you want them on your team.

One such lawyer destroyed an opposing counsel for us in one particular case I won’t mention the details of. I will say this: He was especially smart, a vicious shark who scared the plaintiffs and pushed them into a corner. He was a football linebacker during college, divorced thrice, won millions in settlements for his clients over the years, and did not give a damn what the other side wanted. He made the plaintiffs an offer: $0, but we would not go after them for legal fees and would call it a day. They refused and they lost, having to pay the legal fees on top of losing their pathetic case against us. I loved him for that.

The best lawyer is someone who knows the law surrounding leases inside out—a person who looks at the law as if it were a long and strategic game. This is the kind of person who loves to win every time, and just as much as they love to win they hate to lose. They should want to win for you even more than you do. Now, I realize this may sound too good to be true, but there are lawyers like that out there—you just have to find them. Such a lawyer has the fire and is not afraid to use it as a negotiating tool. “Either you do this or were going to get the hell out,” he tells the landlord.

A good lawyer must have three other qualities: He must know how to get along with your entire team—not just with one person that’s the designated contact. He should charge a reasonable—and not exorbitant—fee. And he must be ethical. (While an unethical lawyer may deliver some short-term gains to his client, in the long run, the client will likely be the loser.)

I once dealt with some truly unethical lawyers. They were handling a case for me in which they had to sue someone who wronged us to the tune of thousands of dollars. We wanted to make an example of the scoundrels, not only to punish them for stealing from us but also to help rid the world of such vermin. (Notice that when you make legal decisions based on such a superhero mentality, you almost always lose because  your ego doesn’t get you very far.)

The case was fought long and hard. The scoundrels had their office near the Pasadena courthouse. Once, during a break in the case, I overheard my lawyers talking to each other about strip clubs and plans to go to Vegas on the weekend without telling their wives. Right away I said to myself, “If these losers aren’t afraid to lie to their wives, how the hell am I supposed to know if they’re not lying to me?”

I dropped the case that day and measured my losses as a small lesson in wisdom. I never did business with them again. The moral: Never work with someone who lies or cheats on his wife. If he is too stupid to treat his wife with the dignity she deserves, he won’t think twice about backstabbing you either.

And while on the subject of lawyers, it’s always good to remember that as far as possible, you don’t want disagreements and disputes with your landlord to get to a point where you are forced to go to court. That’s because courts overwhelmingly tend to side with the landlord (yes even in seemingly liberal California )—after all, he’s the guy who owns the property, and property is sacrosanct in the capitalist system.

Or think of it this way: A court is not any more prestigious than a Las Vegas casino. And what happens when you walk into a casino? The house always wins. That’s why you don’t want to go there. The lawyers and judges are the house, and we are the Guinea pigs in the arena. As businesspeople we don’t belong in court rooms. We belong out there in the field, hiring, creating, recruiting, cooking and cleaning, making great products and great money. Leave the law to the lawyers. Let them suck someone’s else’s blood for lunch, not yours.

DAVID DEL TORO MURDER TRIAL

Here is a useful list of the top 20 commercial real estate (CRE) websites:

• LoopNet (listings and research): www.loopnet.com

Commercial Real Estate Search & Information: http://www.commercialsearch.realtor.com

Commercial Investment Multiple Listings Service: www.cimls.com

CoStar (CRE research and resources): www.costar.com

CityFeet (CRE research and resources): www.cityfeet.com

Rofo (CRE search site): www.rofo.com

Realcomm (CRE news and advice): www.realcomm.com

Commercial Property Executive (CRE corporate news and commentary): www.cpexecutive.com

CoreNet Global (industry network and resources): www.corenetglobal.org

CREOpoint (global CRE network and consultancy): www.creopoint.com

Space For Lease (CRE marketplace site): www.spaceforlease.com

ChainLinks (CRE retail services and advice): www.chainlinks.com

REIS (CRE data, news and commentary): www.reis.com

BiggerPockets (CRE news and chat site): www.biggerpockets.com

CCIM Institute (CRE and investment network): www.ccim.com

Urban Land Institute (nonprofit research and education devoted to land use and real estate): http://www.uli.org

National Real Estate Investor (CRE retail news, data and analysis): http://www.nreionline.com

Arcestra (CRE software services): www.arcestra.com

CREW Network (networking organization devoted to the achievements of women in the industry): www.crewnetwork.org

Zstrata (global CRE network and consultancy): www.zstrata.com

 Photo credits: Top photo of Zankou Chicken in West Hollywood, by Ajay Singh. Second and third photos of a Los Angeles cross street near Fountain Avenue, by Ajay Singh. Last photo of Los Angeles Superior Court Judge Lance Ito, by Los Angeles Daily News, used with their kind permission.

Copyright 2014, Dikran Iskenderian. No version of this blog may be reproduced in any form without the author’s written consent. This blog represents the author’s views only and may not necessarily represent the views of Zankou Chicken, its board, its associates and employees, managers, and customers. Please do not reproduce without permission. Thank You.

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