Are you crazy? Don’t you know most restaurants fail? You’ve heard this before and while the statistics may be correct, too many people jump into the restaurant business without the proper ammunition. Arm yourself with the power of knowledge and improve your chances of success by negotiating a good lease. Here are 7 Tips to help make your dream a reality:
- The Offer: Start out with a detailed Letter of Intent (LOI). This can be a non-binding offer in writing to the Landlord. The LOI should include the initial lease term, option periods, lease rate, rate increases, specific space and size, occupancy date, lease start date, etc.
- Time is on your side: While you are likely risk averse, it’s important that you are not too short sighted. If you sign a short term lease and have the success you are planning, you open yourself up to significant lease rate increases at the time of renewal. Restaurants should have a minimum of 10 to 30 years to control a space or building. You may have an initial lease term of 5 years with two 5 year options to renew which total 15 years. You are committed to 5 years but have the options to renew which allows you to control your destiny. The renewal periods should have the rate negotiated at lease signing and not be subject to a new negotiation later.
- Love Free Rent: Ask for a free rent period to allow you time to get your permits, complete construction, and install of your FF&E (furniture, fixtures and equipment). This is typically 3 to 6 months depending on condition of the space.
- Other Peoples Money: Request a Tenant Improvement Allowance (TIA) which is often provided when a long term lease is executed and the space is in need of work. A TIA is a negotiating tool for both landlord and tenant but remember, a TIA requires a Landlord to put money at risk, so be prepared to show financials strong enough for a landlord to make that risk. Financials and a solid business plan do go a long way. If the space is ready to occupy and the MEP (Mechanical, Electrical and Plumbing) is in place, then the TIA may be very low. If the space raw the TIA should be greater. Ensure that all MEP systems are in proper working order.
- Space Condition: Determine how the landlord is to turn the space over to you before taking occupancy. Create a Landlord Work Letter which will require the landlord to complete work in the desired space and outline specific construction elements that will be completed by the landlord. Ensure certain infrastructure elements are in or available to the space prior to signing a lease or this can become a major problem. Restaurants have unique systems such as hoods, Grease Traps, Sinks, walk-in Coolers and freezers, etc. Many items require roof mounted equipment which may pose problems for some landlords so get this approved in advance.
- Watch out for Impact Fees. Since restaurants are an intense business, many municipalities have impact fees which are imposed by a local government on a new or proposed development project to pay for all or a portion of the costs of providing public services to the new development. Many fees are minor but based on the municipality, can be so significant and can blow your budget.
- Protect your new business with an Exclusivity Clause. This clause will ensure the landlord doesn’t lease another space in a multi-tenant center to a competitor serving a similar type of food, offering a unique service style or specialty entertainment.
About the Author
Michael Carro, CCIM
Senior Advisor, Principal SVN | SouthLand Commercial
Michael Carro is a CCIM and Commercial Broker Licensed in Florida and Alabama. He is a Principal at SVN | SouthLand Commercial Real Estate with offices in Pensacola, Panama City and Tallahassee. Before starting SVN | SouthLand Commercial, he was the 2009, 2010, 2011 & 2012 Top Producer for NAI Halford. He received the NAIOP 2010 “Broker Deal of the Year” Award and the NAIOP “New Development of the Year” in 2014. He was the Top Producer for SVN | SouthLand Commercial in 2014.
- Founded The Restaurant Realty Network and TheRestaurantRealty.com
- Hosts “The Restaurant Realty Show” weekly on News Radio 1620.
- In 1999 and 2000 oversaw the acquisition of 120 Hardee’s Restaurant locations in Springfield, IL; Biloxi, MS; Pensacola, FL; Huntsville, Montgomery and Mobile, AL
- Was a member of the International Hardee’s Franchise Association (IHFA) and on the purchasing committee 2002-2006.
Memberships & Affiliations
- Former President of Pathways For Change, a faith based sentencing option for non-violent criminal offenders.
- Former President of the Northeast Pensacola Sertoma and “Sertoman of the Year” in 2012 and 2013. •2008 Received the National “President’s Volunteer Service Award”
Address: 120 East Main Street, Suite D Pensacola, FL 32502