Downtown Business Lease Roulette

brew stationCorvallis has a wonderful downtown full of historic charm, modern amenities, and a classy collection of small businesses. Not coincidentally, Corvallis has also boasted a thriving and welcoming business environment for many years. However, while we have seen many places come into being, we have also waved goodbye to a fair share as well.

Businesses can fail for myriad reasons, but the hardest to witness and undoubtedly the hardest to endure is the failure that could have been avoided.

Some of the most public and decisive failures in the downtown core have occurred when an otherwise popular business loses its lease, sometimes after many years in operation. Think Brew Station, Young’s Kitchen, and Sunnyside Up. The reasons a business loses its lease can certainly be financial, but in some instances you also find personality conflicts or even just a failure to communicate.

So what can be done to help avoid these situations? Local commercial property insiders share their tips.

First, Negotiate Your Lease
You have done your homework. You know your target demographic, your customer base, your budget has been estimated… all systems are go—only thing left is the building. After spending a few weeks pounding the pavement, you have found a few options to consider. Here is where it starts getting tricky.

Dale Kern, co-owner of Commercial Associates full service commercial real estate firm, explains that negotiation starts with a letter of interest basically summarizing the four or five main deal points: price, terms of use, modifications, who the tenants are, etc. Once the lease is prepared, reviewed, and agreed upon by both parties, it is signed and becomes a legally binding contract.

“The best way to do it, I would say, is to negotiate on the front end during your lease preparation some options to extend [your lease] that are already built into your lease agreement,” he said.

There are many variables that go into determining the duration of a lease term. While it is possible to find month-to-month and yearly lease terms, often a landlord may require a longer commitment. Kern explains that if renovation or remodeling is part of the contract, especially if the landlord contributes to the cost, a lease term of three, five, or even seven years may reflect that investment.

However, if it takes your business two to three years to start generating the kind of returns you imagined, the expiration of your lease could be right around the corner and counting on your landlord to renew your lease is not a safe bet.

“It could be that the market changes and you are way below market and the landlord wants to get you out because they could get more rent,” explained Kern, “or it could be that another tenant likes your space and contacts your landlord before you do and enters into an agreement to give that space to them.”

“If you negotiate it into your lease prior to signing, then it’s a contractual right [to extend your term] that you have should you choose to exercise it,” he said. “If you think about it, if you sign a five-year lease with three five-year options, that gives you the right to be in that location for 20 years, even if the landlord doesn’t like you.”

We have seen similar situations here in Corvallis before. Having written a short eulogy for the late Sunnyside Up in 2016, I witnessed the confusion a 30-day eviction notice can have on an established restaurant.

Former owner Jon Gold told me he felt personal motivations were afoot when he received his lease termination letter. For the past 13 years he had paid his rent on time and grown his business into a cornerstone of the community. Suddenly his landlord, Copper-Gutter Properties Inc., pulled the rug out from under his feet. Despite offering to pay higher rent or even purchase the building, his landlord would make no deals.

“The law does not really protect commercial tenants who don’t protect themselves through negotiating their lease agreements,” said Robert Mauger. As an attorney operating a two-person practice in Corvallis, Mauger handles civil transaction and litigation for landlords and tenants as well as business real estate and probate matters.

Mauger explained, “Once your lease runs out, and your landlord for whatever reason doesn’t want to renew the lease, you’re relatively out of luck.” He elaborated, “Obviously a landlord couldn’t discriminate based on a protected status like race, gender, disability, or sexual orientation, but personal animosity—your landlord just doesn’t like you anymore—that would be a perfectly valid reason to stop renting to someone.”

Mauger echoed Kern, suggesting, “One of the things a tenant can do to protect themselves is make sure they provide a base term that is adequate for the length that they want to run their business and the right to renew their lease at the expiration.”

However, Jonathan Kurtan, owner of Foundry, a co-working space for creative professionals, has a different perspective on what to look for in a lease agreement given his unique clientele and service. At the time of this interview, Foundry had been in operation for almost four months—and there has been a bit of a buzz.

“I think a lease can definitely aid in the idea of how long can I try this or experiment with this before I have to make a decision as far as is this going to work or is this not going to work,” he said. “Will I be able to give this a shot, but also get out of this if I have to? Especially in the times we live, things could turn on a dime.”

Kurtan also pointed to the clarity of obligations within a lease agreement. What is required of you to hand the space back over when you do leave, who is responsible for repairs, what can you be held liable for?

“I think legal language can be quite vague, and so you might sign the lease not understanding completely what you are signing,” he explained. “I would say that is what stresses me the most about leases, and that goes for residential leases as well: ‘What does this mean?’ and ‘What am I signing?’”

Disaster Recovery
In the final weeks of Sunnyside Up, Gold told me he estimated that if 500 customers donated $100, he could afford to move his kitchen. It was ambitious and despite lots of community support, Gold never raised the $50,000 needed to pick up shop. He needed a disaster recovery plan.

“A disaster recovery plan says, if we lost our lease or our building was damaged and needed repairs for a prolonged period of time, what do we do?” explained D. Scott Smith, a local strategy consultant, motivational listener, and business coach.

He told me the story of Equine Exchange, which used to be in town near the train tracks in an old building. At one time it was a commercially zoned property; however the zoning changed and they were forced to leave the building. Luckily they were able to relocate to East Gate Plaza on Highway 34.

“Here is an example where the landlord didn’t want to kick them out, they had a tenant that was happy to be there, but the laws changed,” he said. “A lot of things happen in and out of your control, there has got to be some preparation beforehand.”

To put this in perspective, Kern suggests considering what kind of business you have. A small insurance company could be moved across town by hiring some movers to collect desks for around $500, while moving a kitchen into a building that was formerly a restaurant might run you some basic remodeling costs.

“If you are moving it into a building that was never a restaurant, then that’s going to be grossly expensive because you have all the health department codes, the hood, and the gas lines to bring in,” said Kern. “That could cost $100,000.”

For Gold the disaster was not having extensions built into his lease nor the cash on-hand to up and move on 30 days’ notice. However from Kurtan’s perspective, maintaining the reserves necessary to move an entire business on short notice is easier said than done.

“I definitely think that is a good practice for any kind of business, especially for startups,” said Kurtan. “But at the same time, I don’t think it is very viable for a lot of businesses in the early stages, especially in the stages where certain businesses aren’t making profits for a year or two. Where is that money going to come from?”

“While it is great in theory, I think it’s probably out of reach for most businesses, especially ideas that are more unique,” he said. “For me specifically, I have considered the risks involved in starting a business that is new to an area.”

Business Relations
Business is known for the dog-eat-dog mindset, but it is also very much a balance of relationships as well. In a small town like Corvallis, your reputation and word of your deeds can spread fast. Maintaining a good relationship and healthy communication with your landlord, professionals, and other business owners is crucial to success in downtown.

For Gold, it came as a shock when he received an eviction notice a month before he had to vacate. Kern explained that typically if a lease has no built-in extension options, a landlord requires at least six months’ notice of your interest in renewing the lease.

“The sooner that you talk to your landlord, the better off you are because now your landlord knows you would really like to stay and might be more willing to engage in a conversation about extending that lease,” he said. “The landlord’s goal is to get a good tenant in the building and a tenant that is successful—one that builds a good business and pays the rent and maybe even pays small increases annually, so the landlord makes more money and has surety that income stream is coming in for years and years.”

However, one must be mindful that most commercial landlord-tenant law is contract law in Oregon. In other words, nothing you agree upon during a friendly chat is legally binding until the ink is on the paper.

On a similar note, Cap Berri suggests bringing a qualified professional into your service. Berri is the Chief Operating Officer and the Head of Brokerage at NAI Global, a global network of owner-operated commercial real estate brokerage firms located in Portland. NAI Global also manages some properties in Corvallis.

“In terms of the market, for them to get a fair deal their best bet is to retain a qualified real estate broker who can advise them,” said Berri. “It’s the broker’s job to know what the market is, they are going to know the market because they are doing deals between landlords and tenants all the time and it’s part of the research they do.”

Berri believes that the best relationships are long-term, attesting that in some cases a landlord may even pay the commission of a broker for the tenant, and that a broker familiar with your business venture can better serve its needs.

“I think the key thing to be aware of, and you’ll hear this consistently throughout the industry, is that landlords don’t kick out or terminate leases on good tenants,” said Kern. “Landlords often times go out of their way and spend more money than they have to, to do what they think they need to do to help their tenant be successful.”

From Kurtan’s perspective, one of the most important aspects of starting up in our area and penetrating the Corvallis business culture is contacting people directly and learning from their experiences.

“You might save yourself time and money by just on-the-ground talking to people, but at the same time get in touch with people who have started similar ideas, if there are similar ideas out there,” he said. “Everybody, same industry or not, will have some insight to share.”

Checks and Balances
Entrepreneurship is a life-changing experience, so would-be businesspeople should make sure it changes their life in a good way. Double- and triple-checking lease agreements before signing off—making sure they understand and actually agree to everything in the contract—and importantly, negotiating for the opportunity to renew. Planning a recovery strategy is good business; it helps one expect the unexpected and provides an idea of steps to take. Finally, entrepreneurs need to make nice with not only the landlord, but all the professionals and community members they can. These are the people that can help you through the tough times.

Corvallis boasts a warm and inviting downtown business environment. For many, this has been the case but for some it has been a cold landscape devoid of compassion. The reality is likely somewhere in the middle, but until we find a way of making business more fun for everyone, consider these simple tips before you take the plunge.

Kurtan leaves us with this last tidbit to consider: “When you are making your calculations, whatever you budget for in the beginning, you might as well double that.”

By Anthony Vitale

Be Sociable, Share!