For over 20 years I have been negotiating commercial real estate leases throughout CT, many of them restaurants. The knowledge I have acquired from this negotiating leases process is invaluable.
Quite often you hear when it comes to commercial real estate sites, it’s location, location and location. I beg to differ. I will take the side street almost every time rather than the more visible frontage or end cap assuming the concept is not fast food a la McDonalds or a Chipotle, or Starbucks which totally relies upon impulse convenience buying which is propelled by visibility and easy access rather than the dining experience driven by quality food, competitive pricing and an overall great dining experience.
Why? For starters, landlords tend to be more open to negotiating lease terms if they don’t think they have the best location in the market, shopping center or trade area.
The lease terms are as critical to the success and long-term viability of the restaurant as a talented chef, sourcing of quality food at competitive pricing and hiring a great staff. You can do everything right as it relates to operating a restaurant but if your lease is one sided to the landlord the profit tends to be extremely elusive, so if you want to work for the landlord then the lease negotiation is not that important, if you prefer to reap the benefits of your hard work then I offer you a few thoughts. Your landlord is your partner whether you acknowledge it or not. Below is what you should expect from your “partner landlord.”
% rent vs. rent, CAM, Taxes
A good formula to follow is your total rent, taxes and Common Area Maintenance (CAM) should not be more than 7% of your gross volume. The single best way to insure this reality is for your rent to be just that. Lease rent is 7% of the gross with a small minimum rent to cover the landlord’s taxes and insurance. This % rent insures that your relationship with your landlord is a partnership. The better the restaurateur does the more rent the landlord collects. That’s a win-win.
TI. (TENANT IMPROVEMENT ALLOWANCE)
If the landlord is expecting the tenant to fund the entire fit-out or renovation of existing space or new space this will inevitably siphon the restaurateur’s profit to investors or lenders. The landlord should be contributing at least 50% of any fit-out in the form of cash or free rent.
Co-tenancy: If the desired space is in a center anchored by a Macy’s that’s about to close it still may be a viable option. There does however need to be a formula negotiated in advance to insure that during the lease up time to find a new tenant that there is some abatement of the rent.
So often I see restaurateurs that want to sell their successful restaurants with two years left on their lease with no option to renew. It’s nearly impossible without the ability to extend the lease to sell a restaurant. Remember if your landlord is your partner, then options to extend are a given. The landlord should also expect to receive some compensation for this grant of options. Options should also be a fixed rent not “market rent” as the latter is a recipe for litigation. The landlord and tenant hardly ever agree on what the market rent is.
I have seen more than one restaurateur negotiate a starting date for the rent to be due fully expecting the restaurant to be open for a couple of months prior. Unfortunately everything relating to construction fit out, site work, permitting, liquor license always takes longer than anyone anticipated. Rent commencement should be tied to the opening of the restaurant, not an arbitrary date picked by the landlord, as that may have no correlation to the opening and needed cash flow generated to actually pay the rent.
This is always a contentious part of any lease negotiation. The operators with no assets and no track record and virtually nothing to loose usually have no problem personally guaranteeing the lease. It’s the successful restaurateur with other restaurants and personal assets that don’t want to risk everything if the new location doesn’t work out as intended. If you need to close the restaurant prior to lease expiration there needs to be a “good guy clause” and a formula for reimbursement for any unamortized construction fit out by the landlord that needs to be negotiated prior to lease signing.
So often the only hard fought negotiation is the base rent. How much a square foot will I be paying? That is a very short-sided approach. If it’s a NNN lease and the tenant is responsible for taxes and common area maintenance (CAM) then the tenant needs to be very vigilant to protect themselves from any number of scenarios. ex; If the taxes doubled because the building was sold for a very high price based on a redevelopment opportunity and the taxes are the responsibility of the restaurateur/tenant the tenant needs to protect themselves in the lease. It’s not fair for the tenant to bear the brunt of the tax increase for a building he/she did not sell or benefit by the increased value.
Most of the national tenants have % caps in their CAM charges. Restaurateurs tend not to look at this carefully. The only time is when the landlord sends them a year-end reconciliation statement and the money they counted on for their investors or for a well-deserved vacation is now owed to the landlord.
Demographics and Trend
It’s so important to know your target audience, where they live and work and how they will find you now and in the years to come. There are various sources to spot trends, anticipated construction and street widening and closures that may affect the visibility of your location, access, parking that you need to be aware of prior to committing to a long term lease obligation.
Last but definitely not least, hire a really good commercial broker with restaurant lease experience to represent you. That means if the landlord has a broker that is not a restaurateur broker, then their job is to get the best possible deal for the landlord, not the tenant. A good tenant broker is invaluable to the long-term success of the restaurant.