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Restaurant Space for Lease

Restaurant Space for Lease

Renting an unoccupied restaurant space for lease may seem like an easy thing to do but we warn all restaurant buyers that in any negotiation, the landlord is not your friend.  That's not easy to see when you begin looking at restaurant space for lease but a landlord-tenant relationship shares a lot in common with a marriage. Both parties go in with the best of intentions and there’s a lot of love on both sides. Here are five of the most common mistakes (or blunders) you can make in leasing a restaurant. These will ensure that if the lessor/lessee relationship ends in a breakup, you have planned for the biggest issues in advance.   

We never recommend negotiating a lease on your own with a landlord for any restaurant space for lease.  The landlord (or his leasing agent) has done these hundreds of times.  For you, it may be the first time.  Here are some quick tips on leasing a restaurant available at this link that help you avoid disaster. 

Tip Number 1:  Assume the lease will be favorable only to the landlord and make sure you have both an attorney and another trusted resource review any document you sign on a restaurant space for lease. Attorneys typically only look at the legal terms.  You need someone like a restaurant broker to review the business terms of the lease including how you exit and how you assign it.    

Tip Number 2: The person on the restaurant space for lease sign in the window does not represent you.  He represents the landlord.  Get your own representation.  It is usually at no charge to you. Your representative should understand commercial rental agreements and be an expert in how to  understand landlord math when leasing a restaurant

Tip Number 3:  Use someone that specializes in restaurants to help you if you are leasing an empty restaurant space, especially if it is new construction. Only a specialist will know how much HVAC capacity is needed for a restaurant operation and whether the hood system will pass muster in a health department inspection.  Any second-generation (previously rented) restaurant space for lease can also benefit from the eyes of an expert. 

Should you buy or lease a restaurant?   

It is most common in the business to rent a restaurant space rather than buy a location.  In fact, nearly 90% of all restaurants occupy leased space.  There are a number of advantages to leasing rather than buying that include:

  • The ability to co-locate with other shops and businesses in high traffic areas
  • The landlord usually has responsibility for high cost items like the exterior maintenance. 
  • If you lease, you can move.  If you buy, you're stuck if the market changes against you.  

How do you get started if you want to lease an existing restaurant space?  That's easy.  While the competition for great restaurant locations is high, we're going to tell you how to do your homework, prepare your business plan and land that ideal restaurant space for lease.  The initial steps in leasing a restaurant include:    

Initial steps  

  • Develop a business plan and menu
  • Understand the size of your kitchen and number of seats to execute against your business plan
  • Make sure the trade area is right for your restaurant concept.  .

If you want to be truly amazing at leasing a restaurant space, read this article with valuable information and ideas.  You can learn important concepts like starting with a pop-up restaurant before making the decision to go all-in on a space over a long term lease commitment.  You can try on the restaurant business for size first.  

A pop-up restaurant is an idea that gained steam in the last few years.  Instead of a fixed space, an unused restaurant space may be used by a number of concepts for a short run of their concept.  Invest the time and money in building a following through a pop-up concept before you commit to the recurring cost of a monthly lease.  Take that valuable customer input and further develop the menu, build a social media following and then be ready to share that with any potential landlord.  It’s also a great way to build investor support for your new business before leasing a restaurant.

It seems simple enough.  You drive down the road and like the childhood game of “I Spy,” played with your sisters and brothers in the car, you spot the vacant restaurant for rent in the shopping center.  It’s the perfect location.  It seems like the right size.  There isn’t another pizza place in the shopping center (your concept).  Lastly, it’s close to your house.  Immediately, you whip out your cell phone, make a call and get connected to the leasing agent. STOP.  You just made your first mistake in leasing a restaurant. Here’s why.

The leasing agent who took your call works for the landlord. He or she is under contract for the landlord.  That means he or she has no interest in protecting your concern in the transaction.  His loyalty is to the person paying his bill and that isn’t you. 

Here’s what the Landlord’s Representative will tell you.    

  • Base rent level
  • CAMS
  • Size of Space

Here’s what he won’t tell you from our article, "Leasing a Restaurant is Harder than you Think."

Why the last guy left

If the last tenant was a pizza place that defaulted on the lease because the guy one shopping center over has a lock on the business for a three mile radius, he’s under no obligation to tell you this.

If he’s Overpriced

If the average rents in this area are $15.00 per square foot and they are charging 20% more because the landlord “wants” that number, he’s under no compunction to share that information.

If the Infrastructure is Sufficient for a Restaurant

If the HVAC unit is 2 tons for 1400 square feet (undersized for a restaurant) and the last restaurant shut down because the patrons couldn’t take the heat, he won’t feel the need to disclose this.  Likewise, if the electrical panel is a basic 200 amp one that shut down every Saturday night as soon as they brought on the extra pizza oven to handle the traffic, he probably won’t feel the need to reveal that information if you don’t ask.     

If Competing Properties are Available

If the restaurant space in the next shopping center (owned by a different landlord) in a better location is available for less rent, he will feel no requirement to share that since he doesn’t represent that shopping center.

Is it becoming apparent why you should STOP before calling the number on that sign?  Want to know what to do instead?   

Contact a restaurant broker to represent your interest in the transaction.  There is no additional cost to you for this effort (at least not from We Sell Restaurants).  When our restaurant brokers represent your interest they will:

1)      Give you an overview of other operators in the area and any information available on how they are doing

2)      Review comparable and/or nearby centers for lease rates and availability (even if listings aren’t publicly known).

3)      Ask the landlord to provide HVAC, Electric, Grease Trap and Hood information/capacities so you can verify with your contractor, electrician or architect whether they will handle your equipment and/or cooling needs.

Prepare Yourself for Leasing a Restaurant

The landlord will want to understand your concept, experience and financial picture.Do not be surprised if he requests all or the information listed below. This preparation can help you avoid the three most common reasons you don't get that restaurant for lease space.

  • Personal Financial Statement
  • Menu
  • Business Plan
  • Lease Application
  • Maximum Rent
  • Maximum Personal Guarantees

A strong Restaurant Broker should have seen all of these requests before. He or she will have the forms, documents and templates to prepare you for submission to the landlord including personal financial statement forms, business plan templates and applications.  He or she should also carefully review the data before it is submitted so it puts you in the strongest negotiating position.

Here’s what the Restaurant Broker will negotiate to get FOR you

  • Best Base Rent Rate
  • Best CAMS deal including locks, fixed levels or maximum increases
  • Minimal Personal guarantees
  • Exclusivity for your concept
  • Vacancy clauses

Before undergoing that search, consider the SMART approach to leasing a restaurant to define your search and get the best results.  Leasing a restaurant is a little tougher than simply driving down the road playing the childhood game of “I Spy” and making a phone call on the space. 

Restaurant Lease Terms to Understand.  

The language of leasing can be a bit daunting.  As you read the online ads for leasing a restaurant space, you'll run across industry terms that are just not that well known.  Common terms like  "cold dark shell," "vanilla box" and "TI money" can seem like a foreign language.  We'll get you comfortable with basic terms you encounter in the process of leasing a restaurant so you're prepared to understand what's being offered, what you will be required to build out and what type of support the landlord will provide. 

The first thing to understand is the condition of the space being offered to you. There are standard terms that refer to the build out of the space ranging from a closed down location to a brand new build out.  These range from least developed to most developed in this order:

Three Types of Lease Space

  • Cold Dark Shell
  • Vanilla Box
  • Second Generation Space

The most expensive form of build out is for a new shopping center where a restaurant space for lease may be advertised as a "cold dark shell."  What does that mean?  It's very close to the actual words used.  This term refers to brand new space that's never been developed.  There is no heating or air conditioning (thus cold).  There is no electric installed (thus dark) and it typcially consists of just exterior studs to define the space (thus, the shell).  You will have to bring in all the mechanical, electrical and plumbing elements and it's the most costly form of build out.  It will require drawings, engineering, permitting and in many cases,  an additionsl cost for impact fees as this new space is joining the public utilities for the first time.  For space that is a cold, dark shell, it is common for the landlord to contribute tenant improvement or TI money for the build out. 

A restaurant space for lease called a "Vanilla Box" is still new space but the landlord has already invested funds to (typically), provide a defined set of walls along with HVAC, plumbing to basic bathrooms, basic electric to code and in some cases, a ceiling.  This is much more 'built up" than the prior version but will still require money invested to outfit the space with all the front of house and back of house design and equipment.  This is less costly for a tenant than a cold dark shell but not as inexpensive as finding the third category of space, second generation.  It would typically not include additional HVAC to handle the load of a hot kitchen and busy restaurant and would not include necessary elements to prepare food like walk in refrigeration and a vent hood system. 

The least expensive form of build out for a new restaurant tenant is to take over a previously operating location.  A restaurant space for lease that was previously operating as a eatery in that location is called 'second generation' space.  The first generation user (original tenant) has already invested the funds to build this out to code for operation as a restaurants. This is by far the least expensive as the walls, ceilings, equipment (in many cases), 

Gross Rent -

Triple Net Lease -  Another lease term you may hear is “Triple Net” which is frequently advertised as an “NNN” lease. In a triple net lease scenario, often associated with a free standing buildings, you will be responsible for all exterior upkeep to the restaurant space for lease. If the driveway needs paving, it’s your responsibility. In addition, you will have to keep insurance in full effect and pay all taxes.

CAMS -  CAM is an acronym for “Common Area Maintenance.” Common area maintenance refers to expenses for the common good of the shopping center which are distributed among those who benefit on a square footage basis. CAMS can include anything from garbage pickup to landscaping, security and exterior lighting.

Finding a restaurant space for lease is often the simplest part of the equation.  Negotiating the terms and getting an agreement you can live with for five, ten, or even more years should be undertaken with caution. The restaurant brokers warn all buyers of the same thing.  Unfortunately, the landlord is not your friend.  For more tips,understand these winning tactics for leasing a restaurant or download our full ebook on leasing a restaurant, a free guide to restaurant leases

For our full Ebook on leasing a restaurant , just click the link to download.

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