This post originally appeared on tBL member Mark Chase's blog Restaurant Real Estate Advisors Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
If you are planning to lease a restaurant, there are dozens of details that can go wrong. With a little planning and insider knowledge, you can minimize your risk.
How to lease a restaurant while avoiding the most common mistakes
The first problem most restaurateurs face in their journey to lease a restaurant is caused by unrealistic expectations.
Time is a Double Edged Sword
Time can be your biggest ally, or your greatest foe when you lease a restaurant. Most restaurateurs under estimate the time it takes to find the right location, negotiate a lease and build or remodel the space.
Give yourself more time than you think you need. A good rule of thumb is six months to find and lease a restaurant and another six months to permit, remodel and open for business.
Chance Favors Only the Prepared Mind
Louis Pastor said that more than a century ago and it remains true when you lease a restaurant.
When you do find a location you like, things start to move fast. If you are not prepared, you will find yourself scrambling to gather information and causing delays that can jeopardize the deal.
Prior to starting your search you need to have the basics in place.
Getting your Mise en Place
This French term, ( pronounced meez-on-plahss) means “everything put in It’s place”. Prior to starting your search for a restaurant location, it’s important to put everything in its place.
Your Business Plan is Your Recipe
Your recipe determines the main ingredients needed to successfully create your dish.
The main ingredients are:
Your Restaurant Concept Determines Your Location
Your concept and business plan determine where you will lease a restaurant.
Factors that determine where you lease a restaurant include:
The lower your prices the more your location will depend on convenience and access and less on income levels.
Does your concept rely on office workers for lunch or a water front location for special occasions?
The rent you pay is determined by your annual sales.
Measuring is Important
Add too much salt or cayenne pepper, and you will ruin the dish. Pay too much rent, and you will burn a hole in your wallet.
Your Business Plan determines where you lease a restaurant as well as your methods or options to acquire a site for your restaurant.
The general rule of thumb is your total occupancy cost (rent and additional fees for property taxes, insurances, etc.) should not exceed 6-10% of your gross sales.
The numbers that are right for your business may be lower or higher depending on other factors.
If you’re projecting sales equal to $1,000,000 per year, the annual rent you can afford ranges between:
$1,000,000 @ 10% = $100,000
$1,000,000 @ 6%= $60,000
Broken down monthly, you can pay between $5,000 and $8,300 per month.
Skip this if you want to look like a fool.
Balance Sheet and Business Plan
Prior to submitting any offers it’s important to be prepared to sell yourself.
Don’t wait until the last minute when you may be competing with other parties. Prepare in advance to provide the following:
- Executive Summary or Business Plan
- Personal Balance sheet listing assets and liabilities
- Credit report
- Bank statements
- (2) Years Personal Tax return
You may not need all of the above, but you should be prepared at a minimum to provide a credit application including balance sheet and a business plan or executive summary.
Now that the knives are sharp, time to shop for a restaurant.
How to find a restaurants for lease
There are three basic approaches to finding a restaurant for lease.
There are numerous free and paid services that advertise restaurants for lease.
Click here for a list of Internet sites that advertise restaurants for lease and restaurants for sale.
Commercial Real Estate Brokers
If you are going to lease a restaurant, there is a 99.9% chance a commercial real estate agent or broker will represent the landlord.
Whether you decide to hire your own broker or lease a restaurant on your own, it’s important to understand the role of the commercial real estate broker and how they are compensated. Read this article prior to contacting an agent.
Are you thinking about hiring an agent? Read this article to get the most value from a commercial real estate agent or restaurant real estate advisor.
For Lease Signs
Driving the neighborhoods that fit your concept is a great way to learn the market and determine important factors such as traffic patterns and which areas attract the most visitors.
Unfortunately, driving and calling “For Lease” signs is time consuming and frustrating.
If you want to know even basic information such as square footage, rental rate and if restaurant use permitted, you will need to leave a phone number and hope you receive a return call.
To make matters worse, you won’t know which property you called about unless you keep detailed notes.
Download this form to keep track of properties.
Contacting Landlord’s and Brokers/Agents
Questions to Ask:
When you speak with landlords or commercial real estate agents you will need to ask some specific questions.
1) Is there an existing hood system?
2) Is there a grease interceptor?
3) How much is the NNN charge?
4) How long has the restaurant been closed?
5) Are there any exclusive use clauses that prevent my use? ( for example, pizza, Mexican food, sushi)
6) How much parking is provided?
Prior to scheduling a meeting to see the inside of a prospective space, it’s a good idea to drive by the site and confirm this is a location and neighborhood that meets your general criteria.
If you are viewing a restaurant that is currently open for business, don’t ask any employees or neighbors’ questions.
In many cases the employee’s are not aware. If you would like to see the interior act like a customer and order something to eat or drink.
You will need to schedule a meeting to see the kitchen and areas not visible as a customer.
Leasing a Restaurant
The Lease Process
When you find a restaurant location you like, it’s time to negotiate.
In most cases, you will be making the initial offer.
The most common process is to submit a Letter of Intent ( LOI).
The Letter of Intent outlines the major deal points to be included in the Lease Agreement.
If you have been working directly with the Listing Agent, the agent will offer to draft this on your behalf.
“WARNING: The listing agent represents the landlord. You would be well advised to utilize a restaurant real estate advisor or real estate attorney familiar with restaurant leases to help you write the Letter of Intent.”
Need help writing Letter of Intent? Click Here
Some of the terms the LOI should cover include:
- Size of Premises
- Term of Lease
- Lease Commencement/Rent Commencement
- Tenant Improvement Allowance
- Rent Abatement
- Options to Extend
- Assignment Rights
- Landlords Delivery Condition
In most cases the LOI is non-binding on either party and used as an outline to prepare a lease.
“WARNING: Until both you and the landlord have signed a binding the lease, the landlord can lease the space to another party.”
Negotiating a Letter of Intent can take anywhere from a few days to many weeks depending on the landlord and how hard both parties negotiate.
Once you have an agreed upon LOI, the landlord will prepare a draft lease for your review.
The lease will include all of the terms outlined in the LOI in addition to additional legal language covering many more items that are typically not discussed during the LOI stage.
Lease agreements range from just a few pages to more than 150 pages in length.
If you addressed the major business and economic issues thoroughly during the LOI stage, the legal issues in the Lease can usually be worked through.
Lease negotiations can take anywhere from a few days to a month.
“WARNING: This is a legal document. Many restaurateurs cut corners at this stage to save money. Utilizing a real estate attorney specializing in commercial lease agreements and restaurant use can pay big dividends in the long run.”
“WARNING 2: Avoid using your family attorney. Most are not familiar with commercial leases.”
Lease negotiations are either handled directly between the landlord and the tenant (sometimes with the broker/agent as the middle man) or between the landlord’s attorney and tenant’s attorney.
Final lease agreements will be prepared for signature once all terms have been agreed upon by both parties.
The landlord or landlord’s agent or attorney will either send hard copies for signature to the tenant or arrange for both parties to meet and sign together.
You can expect to sign two to four copies depending on how many parties were involved in the transaction. The landlord, tenant and brokers if any, each receive a fully signed copy for their records.
At this time you will deliver a cashier’s check made to the landlord for the first month’s rent, NNN and security deposit.
In addition, the landlord will require you to provide proof of liability insurance naming the landlord as additional insured. You should arrange insurance during the lease negotiation period.
Delivery of Premises
If the space is vacant and the landlord is not responsible for any work prior to delivery the premises, you may receive the keys when you sign the lease.
If the premises will be delivered at a later time, perhaps after the landlord completes the landlords work, arrangements will be made to deliver the premises.
It is a good idea to utilize an amendment such as a Letter of Lease Commencement so there are no discrepancies about the start date of the lease.
The information provided above provides a high level road map of the steps required to find a restaurant and negotiate a lease agreement.
Mise en Place
Your journey starts when you create your business plan. Your business plan will determine what type of space your restaurant requires and where you will begin your search.
Being prepared with your business plan and financial information you will have the ability to move quickly when opportunities arise and position yourself as a successful business person.
You have all of the tools you need.
You don’t need to rely on real estate agents for information. You will learn a great deal by spending time in your target neighborhoods and speaking with brokers, landlords and restaurateurs.
You Are Not Alone
If you are searching for sites on your own, you’re not alone. Help is just a phone call or email away. If you have questions, need help writing an offer, or would just like a second opinion, shoot me a message here.
Manage your expectations
The process of finding a restaurant location is not difficult, but it does take time and work. Allow yourself enough time.
Leasing a restaurant is pretty straight forward if you understand the steps required and seek help from professionals such as restaurant real estate advisors, architects, attorneys and contractors if you have questions.
I hope you found this information helpful. If you would like to learn more or require more in-depth information regarding site selection, lease negotiations, permitting, construction, buying or selling restaurants send me an email with your questions.
Wishing you great success!