Negotiating a lease- especially in the restaurant business- involves a lot more than simply asking, “How much?”
First, we need to understand that as a real estate professional, your landlord speaks in receiving “dollars per square foot.” We, are retailers, pay the rent in dollars and cents (sense?!). Though similar, they are not the same thing.
For instance, lets imagine two restaurants of the “same size”- first, a 2,000 sq. ft. space in a mini mall- Exhibit A- with a rental of $20/sq. ft. and a CAM (Common Area Maintenance) $5 sq. ft. space where the landlord provides toilet facilities in the common area.
Compare this to another restaurant property of 2,000 sq. ft. that is independently standing-Exhibit B-and a rental of $15/sq. ft with a Triple Net (building insurance, utilities, taxes, etc.) that is estimated to be about $16,000 a year.
On the face of it, it looks as if the second example-Restaurant B-is 25% less expensive for the property. But, when we investigate the “whole deal” and do the math, the two properties take on a different look- and outcome.
The first thing to remember is that restaurant revenues are driven by the amount of people who can be served- i.e., the number of seats for dining. The more seats, the more customers can be waited on, the more income and potential for greater profits.
Keeping this in mind, when renting out a property, you must count how many people you can serve at one time. It is not necessarily true that the larger the property, the more people can be seated. This is clear for Restaurant A versus Restaurant B.
Bathrooms are a necessity in restaurants, almost every customer will use them and they are regulated by building codes, but they do not bring in revenue. A handicapped bathroom could be the equivalent of 7-8 seats! So, if your restaurant doesn’t need two handicapped bathrooms- i.e. it’s in the common area- you can have 15 more seats than an equivalent sized restaurant. Besides paying “per square foot” and “total dollars” for rent, insurance, taxes, etc., you need to count up how much the business will pay per year in dollars per seat.
*If you don’t have floor plans or an existing restaurant on the property to count the seats, then you can look up industry standards for seating per square feet in the dining area according to the relative concept.
It winds up that the lease for Restaurant A is a much better deal than the one for Restaurant B. Lets do the math:
“A’s” rent and CAM fee would total $50,000/year for the restaurant space. Not needing to take up valuable square footage with two bathrooms (one being handicapped), this property will have an estimated 80 seats. This means it will be paying $625 for seats in rent per year.
“B’s” rent and Triple Net fee would also total $50,000/year. But, having to put in two bathrooms- in this instance the municipality requires two handicapped bathrooms- the seating capacity is reduced to 65 seats. Yes, you will lose nearly 20% of the seating capacity. (The square footage needed for the bathrooms will come out of the space allocated for dining). This means “B” will be paying $770 for seats per year, nearly $150 more than “A”.
“A” will produce a greater revenue than “B”! If the two businesses have the same concept, with the same price points, the revenues can fall short by up to 20%. If the “check average” of the business is $30/per person and the business is open 350 days a year and has one “turn” of the seating each day, then the seats in both restaurants will be $10,500 for each seat. Since “A” has 80 seats, then the annual projected sales revenue for the dining room is $840,000. Since “B” has only 65 seats then the annual projected sales revenue for its dining room is $682,500.
The percentage costs of operations for the rent of “A” would be 5.9% of sales- a good solid industry standard for profitability. The percentage cost of operations for the rent for “B” would be 7.33% of sales- if coupled with a significant debt service (loan to open and operate the restaurant).- would create a very high property cost percentage that could make the restaurant’s profits- even if it is controlling its entire operational expenses professional- marginal.
You, as a restaurateur, are not very often called upon to have expertise in real estate matters. Lacking the experience necessary in negotiating with a real estate professional can have momentous significance for many years- for a long term lease it can impact negatively for over a decade. For this reason you need to contract with a professional in the field, most often a lawyer/business advertiser with real estate leasing experience and knowledge.
Another major non-rent sq. ft. issue of significant importance to the success of most restaurants- especially outside of New York, San Francisco and a few downtown areas of major cities- is PARKING.
Whether your restaurant is located in a strip center or has access to a municipal parking lot or the property is owned by a landlord or the near-by parking property is owned by others, you the restaurateur must have a clear understanding of the parking availability (and cost) for you and/or your customers. If this asset has some relationship to the landlord, then it is critical to define it in the lease. You don’t want to have parking for your customers one day, and then have the availability diminish.
Some municipalities will demand that the restaurant define where its customers can and will park. Often times, with limited identified parking, seating capacity will be restricted.
This is part of the negotiating process and if not included in the CAM fee, the cost of parking for your customers becomes another business expense that should be considered either as part of the “rent” or “marketing”.
Another non-monetary aspect of the lease is zoning. I advise all of my clients to insist on a zoning contingency in the lease, because if your business is not a “conforming use”, the legal costs of a variance and the time lost getting “zoning use approval” can be unexpected and devastating. The process of use variances by its very definition of being “public” must take the months needed for hearings, meetings, response periods, etc. Even if the landlord, lawyer and/or broker tell you that your business is a conforming use, insert this clause.
If they are so certain that what you intend to do is “legal”, then why would then have a problem with its insertion? If they insist on not including it, then there may be something fishy about their assertions that your intended use is legal, and I would suggest you walk away from a suspicious deal.
Additionally, in any lease there are many, many more costs involved in complying with the terms besides rent payment. Oftentimes it is a long document. You will also note that a lease is written in “legalese” to the point that only a few “laymen/laywomen” without a law school background can understand. I include myself in the category of those who would need help with interpreting this language.
An example of these operational costs required in the lease is the amount of liability and fire insurance. These requirements will vary from lease to lease, and location to location. More often than not, these are very significant ongoing expenses.
Finally, there is the term of the lease, which can take on a number of structures with various options, etc. However, the one thing it cannot do for the leasee (i.e. you, the tenant) is take on the structure of a short-term lease. To me, a short-term lease is an aggregate of 5 years or less. I have a saying about short-term leases, “There are only two things that can happen. Both are bad. You don’t do enough business and go out of business. Or, you do a lot of business and the landlord raises the rent so high that you can’t afford it and you go out of business.”
The moral of the story: When looking at a property to rent, don’t just ask “how much?”… ask these instead:
What about the term?
What does the CAM fee include?
What is the zoning use?
Where do my customers park?
What are the signage restrictions by the landlord? The municipality?
By: Harris Eckstut, Restaurant Consultant, Eckstut Consulting
