I know this is a long reply, got this off the website: restaurant owner.com of which I'm a member. One of the authors of the article is Jim Laube, the creator of the website. I think there are many excellent points in this article for you to check out. Best wishes to you in your venture. Steve.
Leasing Essentials For Restaurant Operators: What you need to know to protect your business & get the best terms
by Jim Laube & Moe Shrikian
Every operator has two overriding objectives when opening a new restaurant. 1) Create a good restaurant and 2) build a successful business. These two objectives are not mutually exclusive.
The industry is filled with good restaurants that have fabulous food and outstanding service that are (or were) lousy businesses. They�re lousy businesses because they failed to make a profit or not enough of one to provide the owner a sufficient return on their invested time and money. One of the main reasons � a poorly negotiated lease that handcuffed the operator with excessive startup costs, high rent payments or other onerous terms.
In this article, we�ll examine some key lease issues, provisions and rules of thumb that can have a major impact on whether your lease becomes an asset or liability for your business. Remember, signing a building lease leads to a long term relationship between you and a landlord and it�s provisions will effect your business for years and maybe even decades to come.
Everything is Negotiable
In discussions with operators, leasing specialists and attorneys, a common theme regarding lease terms kept surfacing � everything is negotiable. Although there is a common framework or structure to most lease agreements, there is great variation in the specific terms. Don�t think that just because something is in the landlords standard lease form that it�s carved in granite. We learned of many operators who received concessions they never thought possible in the areas of personal liability, percentage rent, renewal options and more, essentially just because they asked for it. Although, what you can ultimately negotiate has a lot to do with supply and demand for lease space in your local market, landlords don�t like having empty buildings. They want and need to lease space.
Enlist the Help of Experts
Unless you�re very familiar with the conditions of your local real estate market, you�ll want to enlist the services of a broker, preferably one who specializes in retail/restaurant leases. These real estate professionals, called �tenant rep� brokers, work for you, not the landlord. Landlords typically have their own brokers who look out for the landlord�s interests. Tenant brokers can help you find suitable locations and offer insights on prevailing rental rates and other lease terms that exist in your local real estate market. Tenant rep brokers typically work on a commission basis and are paid by the landlord, not the tenant, when the lease is executed.
Once a potential location is found, tenant rep brokers can help you work on a �letter of intent� basis with the landlord to come to agreement on the economic aspects and major terms of the lease. Once these issues are agreed upon and noted in the �letter of intent�, it�s time for your attorney and the landlord�s attorney to �go to lease� and prepare the final lease documents.
In addition to a broker, you also want a qualified real estate attorney, experienced in �restaurant� leases to be on your side to hammer out the technical, fine points of your lease. To find the right attorney, obtain leads from your broker, other restaurant operators in your area and your state or local restaurant association.
Location, Location, Location
The first order of business in this process is finding the right location. What qualifies as a good location depends a lot on the type of restaurant you plan to open. Most concepts today require high traffic counts or pedestrian activity to thrive. In most markets, there are already a large number of eating and drinking choices for consumers so having good visibility, with easy access in a convenient location will be crucial to your success. Yes, you�ll pay more for a location in or close to high traffic generators such as a shopping center, employment complex, mall or at a busy intersection. However, thinking that people will discover your restaurant in an out of the way, lower rent location and then go out of their way to frequent your restaurant, is often a recipe for failure.
If your plan is to develop a fine-dining, dinner-only restaurant that is truly destination driven, you may be less dependent on adjacent high traffic generators. Some restaurants are able to draw a sufficient number of customers from less expensive, secondary locations but they almost always have a special or unique offering that people are willing to go out of their way to get. Beware - many operators seeking to save money on rent, have found themselves spending as much money or more on advertising to attract new customers to their out of the way location.
When evaluating locations, do your homework. Consider the impact of local population density, demographics and traffic counts. If you�re going into a vacated space, learn as much as you can about prior tenant history and why these operations failed or moved. Learn what the future may hold for the area in terms of new real estate ventures, public works projects, road improvements and other developments currently in the planning stages.
When investigating a specific location, get demographic information on the area from your broker, local municipality or Chamber of Commerce. Don�t limit your demographic information to just a 5 mile radius of the site or by zip code only. You need to know and evaluate population characteristics where your customers are most likely to come from, in your immediate area. Get demographic data within 1 mile, 2 mile and 3 mile radius�s of each location under consideration. Demographic data within a mile of a site may be very different from the population makeup in a larger, 5 mile radius survey.
Building Improvements
While there are exceptions, it�s common for the landlord to own and pay for the structural components of the building. On new construction this would include the walls, roof, floor, exterior walls, parking lot and landscaping.
Tenants normally pay for all leasehold improvements including interior walls, ceiling, floor and wall coverings and finishes, and exterior signage, and HVAC, plumbing and electrical within the space itself.
Depending on the level of activity in a local real estate market, some operators are able to negotiate an allowance or credit on the tenant improvements they�ll make to the property. According to a broker in the Houston, Texas market, it�s fairly common for restaurant tenants to get a $12 to $20 per square foot allowance for improvements in newly constructed buildings. This means that in a 3,000 square foot facility, the landlord would fund $36,000 to $60,000 of the tenant improvements.
When negotiating a building allowance, be sure the lease specifies exactly how the allowance is going to be paid. If you need this money to pay your contractor for the improvements, be sure the lease provides for this. If payment terms are not addressed, the landlord may try to offer the allowance as credits on your rent payments, leaving you short of cash to pay your startup costs.
Remember, restaurants have special building requirements. Issues like capacity of ventilation systems, HVAC, water, sewer and gas lines, grease traps are among those items that need to be addressed up front in the lease. Make sure the lease specifies who pays for what if these items fall short of satisfying building code requirements or hamper the functionality of your restaurant.
So that you know exactly what you�re getting into, go to the local municipal offices and meet with zoning, building and even fire department officials to identify any special signage, permit, fire code and parking requirements. Also, find out if there will be sewer or water line tap fees, which in some areas can cost $10,000 or more.
Rent
Base Rent: Like the tenant improvement allowance discussed above, the amount of rent you�re able to negotiate is largely a function of supply and demand for restaurant and retail properties in your local market. While you don�t want to overpay for space, beware of letting a superior location get away because you felt it was a dollar or two per square foot higher than another site in a less vibrant or visible location. The extra amount paid for rent in a higher traffic area may be well worth it, if it enhances your visibility and accessibility to more potential customers.
The amount of rent you can afford is relative in relation to your anticipated sales volume. (For information on projecting sales for a proposed restaurant see �What the Big Chains Know Can Help You� in the April issue of RS&G.) A good rule of thumb is to keep your rent at or below 6% to 7% of gross sales. For example, you might balk at paying $7,500 a month for rent if your anticipated annual sales volume was under $1,000,000. However, $7,500 a month would be very affordable in most restaurants grossing more than $1,500,000 a year. As rent payments exceed the 6% of sales benchmark, a restaurant�s prospects for an adequate profit and return on investment begin to deteriorate.
Also, keep in mind that virtually all restaurant leases are triple-net. This means that the tenant, not the landlord, is responsible for the payment of property taxes, building insurance and common area maintenance (CAM). Don�t just evaluate rent by itself, also find out what your total occupancy costs are going to be. In some parts of the country, restaurants are paying in excess of $7 per foot per year just for their property taxes. Another rule of thumb is be very leery of signing a lease where your total occupancy costs are likely to exceed 10% of your projected sales.
Beware of common area maintenance charges becoming a profit center for your landlord. Refuse to pay excessive management or administrative fees that many landlords try to add on to CAM charges. Make sure that all expenses included in CAM are �reasonable� and �necessary� for the adequate maintenance and care of the common area property. You also want the right to audit and inspect the details of the CAM expenses.
Free Rent Period: Many restaurant leases allow for some period of free rent during the construction or pre-opening period. This commonly runs 60 to 90 days or even longer. Wayne Bridgeford, a tenant rep broker with Grubb & Ellis in Houston, Texas, says to try to negotiate the free rent period to begin at signing and not end until a certain number of days after obtaining the �construction permits�. Bridgeford says that sometimes �the permitting process can get bogged down and delayed by the local bureaucracy, which is totally out of a tenant�s control. You run the risk of starting out in a deep hole if you don�t.�
Percentage Rent: Many landlords try to participate in the upside potential of their tenants� success by charging a percentage rent in addition to base rent. This can run 5% to 7% of the tenant�s gross sales and typically kicks in after sales reach a certain level. Many operators adamantly resist percentage rent provisions and by holding firm, they have been successful at having percentage rent dropped from their lease. Morris Melchor, owner of three barbeque restaurants around Austin and Round Rock, Texas, is adamant about not paying percentage rent and has avoided it on all three leases. �With all the hard work and risk it takes to create a successful restaurant,� Melchor says, �the last thing I want to do is have to share it with a landlord.� He also mentioned that just three months ago he signed a lease for an 8,600 square foot meat market he is developing in Austin. The landlord, a major, national developer, finally gave in and agreed to base rent only with no percentage kicker.
If a percentage rent provision is unavoidable make sure it�s reasonable and does not exceed 6% of sales. Also, be careful how you define �gross sales� for purposes of the percentage rent calculation. �Gross sales� should be defined as your �gross selling price� for food and beverages sold on premises less all sales and beverage taxes, discounts, comps and credit card discounts. It�s common to also exclude sales from vending machines, off-premise catering sales and other non-food and beverage related receipts.
You may also be able to negotiate a �starting point� for percentage rent. If, for example, doing $800,000 a year in sales in a certain location would mean a very profitable restaurant, try to get percentage rent limited to only those sales that exceed $800,000. That way if your sales take off, you�re virtually assured of a healthy profit before the landlord begins to share in the spoils.
Initial Lease Term and Options to Renew
Negotiating the terms of a lease can be a dicey issue and can pull you in two different directions. It may be advantageous to have a long initial term to effectively amortize your initial capital investment and guarantee continued occupancy, but at the same time, the longer the initial term the more exposure you assume.
One approach is to negotiate a shorter initial lease period. For example, you may have an initial lease period of five years, and then add to that several renewal options. However, many operators prefer a minimum initial lease period of 10 years with at least 2 five year options.
Keep in mind that when you lease your facility, the terms of the lease have a direct and major impact on the sales value of your business. For example, a restaurant with 12 years left on the lease (with options) is of significantly more value than the same restaurant with only 3 years remaining on the lease, with no renewal options remaining.
Personal Liability
While this may not be easy, try to avoid having to add your personal guarantee to any lease. If the restaurant fails and you�re a guarantor, you�re on the hook for the rental payments for potentially years and years down the road. Even if the space is subsequently leased, the landlord may still be able to come after you for shortfalls if the new tenant�s rent is less than yours was and on top of that, should the new tenant�s business fail you could again be liable for the full amount of the rent until your lease term expires.
If you have no alternative but to sign a personal guarantee, try very hard to negotiate a way to remove the guarantee provision after a certain amount of time or have it limited to just the initial lease term.
Exclusivity
The last thing you want if you�re a deli operator is for another sandwich shop or concept that�s in direct competition to open up next to you or even on the other end of the shopping center. Protect your market from more competition by negotiating a provision to restrict restaurant concepts in direct competition with yours. While traveling by car last year in New Mexico, we stayed in a Best Western Hotel and expected to have a free continental breakfast in the morning as is common in many hotels today. We were informed that there was no free breakfast at this Best Western due to a provision in an adjacent restaurant�s lease that prevented the hotel from offering anything other than free coffee to its guests. We weren�t thrilled to learn this but it was a smart move on the part of the restaurant.
Signage
Experienced operators recommend fully investigating the type of signage you�re allowed to place on and around your building and on a pole or pylon if you�re in a shopping center. Many cities and townships today have extremely restrictive sign laws and ordinances. Matt Loder, Directory of Operations, Crabby Bill's Restaurant in Florida, says, �We would not go into an area to open a new restaurant without investigating the sign laws.�
Make sure you understand fully the type of signage you can expect to have in a particular location so that you don�t get any surprises from the local officials or your landlord. Being in a great location with lots of traffic is one thing, getting noticed is quite another. Most restaurants need visible, distinctive signage to draw in customers.
Parking
It�s very difficult to prosper without sufficient parking. If you�re located in a busy shopping center where parking spaces are sometimes in short supply this will hurt your business. There are so many restaurants today, it�s unlikely that people will spend much time trying to find a parking space next to your restaurant. They�ll just go someplace else where it�s easier to park. Make sure your lease obligates the landlord to maintain ample parking next to your restaurant for your customers.
Assignment and/or Subletting
There�s always a possibility that a situation may arise that may give you reason to want to assign your lease to another party. For example, if you wish to sell your business to a qualified operator, you don�t want the transaction stymied because of an unreasonable landlord who may be withholding approval to extract more rent. While assignments are usually subject to landlord consent, be sure your lease sets forth parameters as to what constitutes your ability to transfer and that the landlord�s consent cannot be �unreasonably� withheld or delayed.
Dates You Can�t Afford to Forget
Once your lease is signed make sure you have a system in place to remind you when to renew your lease. Recently, an independent operator who had built a successful pizza business, lost the location to her landlord the day after the restaurant's 5 year anniversary. Even though she had 3 additional 3 year options on the lease, she failed to contact the landlord and execute the renewal documents before the initial lease period expiration date. The landlord wanted the space for another business so he issued a 30 day notice-to-vacate letter the day after the initial lease period expired.
Legally, there was nothing she could do but remove her equipment and other property and look for another location. Cases like this are more common than you might think.
Don't be blind-sided by missing your lease expiration/renewal option dates. At minimum, take the following 3 steps so you're well aware of when you need to take action to preserve your right to stay in your present location.
Prepare a "Lease Expiration Schedule" listing the expiration/ renewal dates on every lease you have, no matter how far into the future they are. Some leases may specify a �lease option� time frame in which the renewal option must be exercised for example, 180 � 90 days prior to the expiration date. If this is the case, be sure this is noted in your lease expiration schedule so you respond to the landlord during this time frame.
Put your lease expiration and renewal option dates into an electronic calendar like those found in Outlook or other email/contact management software programs. Enter reminders that give your plenty of lead time to respond appropriately.
Give a copy of your "Lease Expiration Schedule" to your CPA, attorney and other business advisors with instructions to notify you in advance of these dates.
Conclusion
A lease can either be an asset or liability to your business. Seek out a good attorney to help you identify potential pitfalls and obtain the most favorable lease terms possible. A good lease can give you peace of mind, help you stay out of court and enhance the value of your business. It�s time and money well spent.