Latest / Franchise Conversations with Fexingo: Buying, Running, and Scaling Franchise Businesses / Why Franchisees Are Rent Negotiating Like Hotel Chains
Transcript
- Lucas: So there's this QSR franchisee in Orlando — runs six sandwich-shop locations under a national brand — and last quarter he got his landlord to cut his rent by 18 percent on a renewal. Not by threatening to move. By using a clause borrowed straight from the hotel industry. Luna: Wait — hotels have different lease structures than restaurants. What clause are we talking about? Lucas: It's called a turnover clause — or sometimes a percentage rent clause with a floor. Hotels have used these for decades: you pay a base rent that covers the landlord's debt service, and then a percentage of revenue above a certain threshold. The franchisee argued that his fixed rent was eating up 12 percent of sales when the industry benchmark for his concept is around 8 percent. Luna: Right, so he wanted to align rent with actual performance, not just a fixed escalator. Did he have leverage? Lucas: He did. The shopping center had lost its anchor — a big-box retailer — and foot traffic had dropped about 15 percent. His lease was coming up, and the landlord didn't want another vacancy. So they agreed to a five-year term with a base rent of 6 percent of sales, plus a 2 percent kicker if monthly sales exceed $45,000. That's the hotel model. Luna: So he effectively capped his rent downside. And the landlord still gets upside if the store does well. That's actually pretty elegant. Lucas: It is. And it's becoming more common. I've been tracking lease-renewal data from a couple of franchise advisory firms, and in 2026, roughly one in four franchisee lease negotiations in retail now include some form of percentage rent. That's up from maybe one in ten five years ago. Luna: What's driving the shift? Is it just the post-pandemic retail reset, or something structural? Lucas: Both. On one hand, you've got a lot of leases signed in 2016-2017 that are now up for renewal — those were peak rent years in many markets. Landlords are still trying to hold onto those numbers, but franchisees are pushing back. On the other hand, franchisees are getting savvier. They're hiring lease consultants, joining collective bargaining groups, and sharing comps across systems. Luna: And the hotel industry model — I think there's another element: co-tenancy clauses. Hotels often have clauses that let them break the lease if the flagship tenant leaves. Are franchisees adopting that too? Lucas: Yes, and this is where it gets really interesting. Co-tenancy protections — where a franchisee can reduce rent or terminate if a key adjacent tenant vacates — used to be rare in single-tenant fast-food leases. Now I'm seeing them in about 15 percent of new franchise leases, especially in smaller strip centers. Luna: That's a big shift. Because if you're a Subway or a Dunkin' and the only other foot-traffic driver leaves, your sales can drop 20, 30 percent overnight. A co-tenancy clause gives you a way out. Lucas: Exactly. And the franchisees who are pushing hardest for these terms are the ones with multiple units. They've got the data to show the landlord: 'In my other locations, when the anchor left, my revenue dropped by X. I need protection here.' That's leverage you don't have as a single-unit operator. Luna: So what's the franchisor's role in all this? Do they help, or do they stay out of lease negotiations? Lucas: Historically, most franchisors take a hands-off approach — they don't want to be co-lessees or have any liability. But that's changing in 2026. I've seen three major QSR brands launch lease-advisory programs in the last year. They'll review lease terms for franchisees, provide benchmark data, and even suggest language. Why? Because a franchisee that closes due to bad lease terms hurts royalty revenue. Luna: So it's self-interest disguised as support. But I'd imagine some franchisees are wary — if the franchisor helps negotiate, they might get access to the franchisee's financials in more detail. Lucas: That's the trade-off. The franchisee in Orlando — he did it on his own, with a consultant. But the brands that are offering help are framing it as a free service, and they're saying it's confidential. I think you'll see adoption grow, but there's a trust barrier. Luna: Let's talk about another hotel tactic: gap options. Hotels often negotiate options to extend at predetermined terms, even if market rent goes up. Are franchisees using that? Lucas: Yes. Gap options — basically the right to renew at a rent that's set now for five or ten years out — are becoming a standard ask. The franchisee I mentioned got a gap option for two additional five-year terms at a 2.5 percent annual increase, which is well below the 4 percent escalator he had before. That's a huge win over the life of the lease. Luna: And it protects against inflation. Because if CPI runs at 3 percent and your rent escalator is 2.5, you're actually gaining ground. Lucas: Right. And the key is that gap options are often negotiable even when you don't have a lot of leverage — because they cost the landlord nothing today. They're a financial instrument of sorts. The landlord doesn't have to book a loss now, but they're giving up future upside. And many landlords, especially REITs, are willing to do that for a credit tenant. Luna: So if I'm a new franchisee about to sign a 10-year lease, what are the three things I should ask for that I probably wouldn't have thought of five years ago? Lucas: First, a percentage rent cap — a base rent that's no more than 6-7 percent of projected sales, with a ceiling. Second, a co-tenancy clause tied to the anchor tenant. Third, a gap option with a fixed escalation. And I'd add a fourth: a right to sublease or assign the lease to another franchisee without unreasonable landlord consent. Luna: That last one is tricky. Landlords hate giving up control over who occupies the space. Lucas: They do. But if you're a multi-unit operator, you might want to sell one location to another franchisee in the system. If the landlord can block the assignment, you've just killed your exit. So it's worth pushing for language that says consent can't be unreasonably withheld, and that the landlord must respond within 30 days. Luna: You know, this conversation is exactly the kind of thing that makes a real difference for franchisees. I mean, an 18 percent rent reduction — that's real money. If someone listening finds this useful, maybe they'd consider supporting the show? Lucas: Yeah, that's a good thought. Look, we keep the podcast ad-free because we want to talk about exactly this kind of specific, actionable stuff without any sponsor pressure. If today's episode helped you in your business thinking, the simplest way to keep it going is to buy me a coffee — literally. That's buy me a coffee dot com slash fexingo. Luna: It's a tiny thing. But it adds up, and it lets us keep digging into these strategies. Right — back to leases. You mentioned that some franchisors are now offering lease reviews. Is that a trend we'll see more of? Lucas: I think so. The economics are compelling: a franchisee that saves 2 percent on rent effectively adds 2 percent to the bottom line, which means higher royalties for the franchisor. And with lease-renewal volume spiking this year, it's a natural moment for brands to step in. Luna: Are there any downsides? I'm thinking about the franchisee who relies too much on the franchisor and doesn't build their own negotiation skills. Lucas: That's a real risk. If the franchisor's advisory program is just a template, you might get a generic lease that doesn't capture your specific market dynamics. The best approach is to use the franchisor's data as a benchmark, but still hire your own local broker or attorney who knows the landlord and the submarket. Luna: So the franchisor gives you the map, but you still need to walk the terrain. Lucas: Exactly. And one more thing: the landlord concentration issue. In many markets, a handful of REITs own the best retail real estate. If you're negotiating with a national landlord, they have standard forms and they're less willing to bend. But the franchisee with multiple units can sometimes leverage their portfolio to get better terms across all locations. Luna: That's a big shift from the old model where each lease was negotiated in isolation. So the multi-unit franchisee has a structural advantage. Lucas: They do. And that's partly why we're seeing more franchisees consolidate — they're buying out neighboring franchisees not just for the customer base, but for the lease portfolio leverage. A franchisee with 10 locations in a market can go to a landlord and say, 'I want to renew all five of my leases in your centers on these terms, or I'll start looking at non-renewal on the weakest one.' That's real power. Luna: And the hotel industry has been doing that for years — using portfolio leverage to get chain-wide deals. So franchisees are essentially adopting a hospitality playbook. Lucas: Exactly. And the next frontier, I think, is revenue-sharing leases where the landlord takes a variable rent that's directly tied to the store's top line. We're already seeing this in some mall-based food-court concepts. If it works, it could completely change the risk profile for franchisees. Luna: That would be a fundamental shift — from a fixed cost to a variable one. It aligns incentives better, but it also means the landlord has a stake in your success. They'd care about foot traffic, marketing, even the menu. Lucas: Right. And that could lead to more collaborative relationships. But it also means more scrutiny. The landlord would want audited sales data, maybe even POS access. Some franchisees won't want that. Luna: It's a trade-off. But given how tight margins are in 2026, I think more franchisees will take that deal if it means lower fixed rent. Lucas: I agree. And that's the theme here: franchisees are becoming more sophisticated about their single biggest fixed cost. They're borrowing from other industries, using data, and negotiating as a bloc. The days of signing whatever the landlord puts in front of you are ending. Luna: So for someone opening their first franchise next quarter, what's the one piece of advice you'd give them about the lease? Lucas: Don't sign a personal guarantee if you can avoid it. And if you can't, negotiate a sunset — a date after which the guarantee expires. That's a hotel trick too. Most first-time franchisees don't realize they're on the hook personally for 10 or 15 years of rent if the business fails. Luna: That's huge. And it's the kind of thing that doesn't come up in the franchise disclosure document. Lucas: Exactly. And it's why we do the show — to surface the stuff that's not in the glossy brochure but makes the difference between a good deal and a bad one.