Corporate-guaranteed franchisee vs. corporate tenant
Los Angeles, CA · Member since 2017 · 73 posts · 56 votes
Corporate-guaranteed franchisee vs. corporate tenant
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
8yParent corporate guarantee you have to see if investment grade or credit grade. BBB- or better buyers can typically get the best loans with lenders when buying your property. If tenant is not rated then usually buyer has to put more down percentage wise to get the loan and interest rate is higher and amortization is lower on payments ( example 15 or 20 year amort. versus 25).
Location plays a factor as well. You could have a national tenant but in a small town where most lenders will pass to do a loan.
Least to most risk usually.
1.Yum brands parent corp guarantee for a Taco Bell - many thousands of stores backing the lease
2. Yum brands subsidiary- say half the stores across the U.S. backing the lease
3. Large franchisee - hundreds of stores backing the lease
4. Small franchisee - maybe 3 to 10 stores backing the lease
5. Not even a Taco bell concept but Joe's Taco's with one or maybe two locations.
It is key with a parent corporation to know under what terms they will step in if a franchisee fails and for how long etc.
Even with all those levels you have to watch out for how many units are giving the guarantee on the lease. If it's a single unit remote entity even if they own 10 stores and have no personal guarantee on the lease they can bankrupt that LLC and walk away.
I require tenants to have skin in the game or I do not want to do a deal as a landlord. If they want all this stuff from me but want to give nothing of themselves in return then it is no deal. It would be like a house flipper wanting a hard money loan and then want to put in little to no money in the deal and no guarantees. When the going gets tough they will be long gone with little to lose. If they have a lot on the line they will tend to give best efforts to make things a win.
4 Replies
- 8yRonald RohdePro MemberAttorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
A corporate tenant will typically be closer to the cash flow and more likely to pay vs corporate guarantees can be judgment proof.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes8y
Parent corporate guarantee you have to see if investment grade or credit grade. BBB- or better buyers can typically get the best loans with lenders when buying your property. If tenant is not rated then usually buyer has to put more down percentage wise to get the loan and interest rate is higher and amortization is lower on payments ( example 15 or 20 year amort. versus 25).
Location plays a factor as well. You could have a national tenant but in a small town where most lenders will pass to do a loan.
Least to most risk usually.
1.Yum brands parent corp guarantee for a Taco Bell - many thousands of stores backing the lease
2. Yum brands subsidiary- say half the stores across the U.S. backing the lease
3. Large franchisee - hundreds of stores backing the lease
4. Small franchisee - maybe 3 to 10 stores backing the lease
5. Not even a Taco bell concept but Joe's Taco's with one or maybe two locations.
It is key with a parent corporation to know under what terms they will step in if a franchisee fails and for how long etc.
Even with all those levels you have to watch out for how many units are giving the guarantee on the lease. If it's a single unit remote entity even if they own 10 stores and have no personal guarantee on the lease they can bankrupt that LLC and walk away.
I require tenants to have skin in the game or I do not want to do a deal as a landlord. If they want all this stuff from me but want to give nothing of themselves in return then it is no deal. It would be like a house flipper wanting a hard money loan and then want to put in little to no money in the deal and no guarantees. When the going gets tough they will be long gone with little to lose. If they have a lot on the line they will tend to give best efforts to make things a win.
- Lender · Los Angeles, CA · Member since 2015 · 278 posts · 78 votes4y
when a franchise intends to lease a property, does the parent company usually provide the corporate guarantee for the lease?
or does the responsibility of the lease fall on the franchisee? - Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes4yIt varies.
Sometimes only franchisee back the lease. You then need to know their experience level and personal and corporate financials for liquidity and net worth. You would want updated ongoing reporting in the lease at least once a year and preferably every quarter to 6 months to see ongoing health of the business and which way sales and profit are trending for the location.
Also with franchisee they could set up only single member LLC they can easily remote bankrupt if they have other locations. They could also bundle say 20 out of 100 restaurants backing your store's location but then all of those 20 are the crappy performing stores they can all dump at once if they do not turn around while not affecting the top diamond performers.
It's a game where tenants want the least risk on their side and the lower rent paid. Landlord wants least risk on their side and to have tenant paying close to market rents as possible. What you can do depend on desirability of the location. If location strong then likely multiple tenants have interest and you can play against each other with your leasing broker and see who wants the site more. If site is mediocre then landlord has limited leverage to negotiate the terms they want. There is a process and science to this for a hopefully successful outcome to the landlord.
You can have tenants where parent company back the full primary term of the lease and has a sub agreement with the franchisee. Have agreement where guaranteed by franchisee but if tenant goes dark parent corporate will step in and run the store until a suitable new franchisee can be put in place. Another option if parent company guarantees lease for say first 3 to 5 years of primary 15 year lease term and then it goes to franchisee. Day care are notorious for those and I do not like those and neither do lenders. They view it as a 3 or 5 year lease since strong guarantor can go away and leave them with a mediocre franchisee.
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