An endeavor into the restaurant business is, needless to say, a challenging one. Establishments come and go like the direction of the wind, leaving business owners reeling and skeptical. Despite these challenges, finding the right location in the right neighborhood will reap major benefits for a restaurant owner of any experience level.
Before you start searching for the ideal spot, there are some things you need to know about leasing a restaurant space. This guide will transform any aspiring restaurant owner into a well-equipped and savvy commercial real estate expert so you and your partners can find the perfect location for your dream establishment.
Finding the Right Space for Your Restaurant
There are three popular options in locating commercial real estate zoned for restaurants:
- Online listings
- Commercial real estate brokers
- ‘For lease’ signs
While it’s always a good idea to start your property search by doing some initial research on your own, securing a commercial real estate broker is an invaluable asset to any business owner seeking to streamline their property search.
Before You Start Looking for a Restaurant Space
When beginning your search for a restaurant space, you’ll want to consider the following aspects of your new business endeavor and make decisions based on the outcomes of your research:
- Market Analysis
Identifying the competitive landscape of your desired area is incredibly important. Are there other establishments catering to the same audience? Will you be directly competing with a long-standing, neighborhood-friendly restaurant with a similar menu? What about pricing? Will you be entering a saturated market targeting the same customer base, or will your restaurant fill a gap in the food landscape of the potential area?
- Flexibility in Available Space
Restaurant spaces come in a variety of shapes, sizes, and styles, requiring flexibility on the part of enterprising restaurateurs. From tiny, hole-in-the-wall style establishments to huge facilities catering to large groups and volume customers, you may have to adjust the scope and scale of your ideal restaurant depending on what’s available in your intended area of operation. It’s often said that a great restaurant doesn’t necessarily make a location; a location often makes a great restaurant.
- Budgeting for a Potential Restaurant
Just like you wouldn’t over-extend yourself with an apartment or house you couldn’t afford, you shouldn’t overshoot your budget for the “perfect” or “ideal” spot. The restaurant business is volatile, but not as much as other service-based industries, with about 17% of all restaurants closing up shop within the first year of operation. Beyond the semi-variable finances like employee salaries, utility and maintenance costs, and supplies/food sourcing, you should have a pretty solid expectation of your fixed costs like rent, insurance, and licensing.
Considering Necessary Changes and Alterations to a Restaurant Space
There are several aspects you should consider before investing in a restaurant lease. First and foremost, consider any alterations you’ll need to implement to bring the building up to code and to your specifications. It doesn’t really matter who (whether it be you or the landlord) will perform the initial build out; any large-scale changes will push your timeline considerably down the road.
You’ll want to build close relationships with the following officials: the fire marshal, health inspector, and building code officer. These three people will be as much a part of your initial process as your construction foreman and the landlord. Because of the upfront work, you’ll likely need to implement the following changes well before you finalize the menu:
- ADA-accessible Restrooms: With certain requirements for stalls per seats (in some markets), the number of family restrooms, and any architectural changes necessary to adhere to ADA-factors, you and your business partners may have a considerable amount of work to even pass the initial inspection process, let alone open your doors to the public.
- Outside Ventilation Systems: Understandably, restaurants tend to produce a lot of smoke and burn-off from cooking, so if your desired space isn’t rigged for proper ventilation, you’ll need to invest a considerable amount at the outset to bring the building up to code and ensure safety for both your customers and your employees.
- Fire Exits: A no-brainer for a public space, having the proper fire and emergency exits installed in your facility is a must-have. While most restaurant and commercial spaces have these built into the original design, the need to configure your space to ensure proper safety requirements is paramount.
- Garbage and Food Waste Pickup: Depending on your desired market, the requirements for garbage and waste disposal may require a reconfiguration of your space. In some cities, Seattle and Portland, for example, composting and recycling are requirements for attaining and maintaining a restaurant business license. Planning ahead and ensuring your potential space will accommodate proper waste disposal will be a huge benefit when it comes time to invite your first customers through the door.
Research Your Landlord – and Their Location
If possible, ask each potential landlord for a list of tenant references so you can get an idea of their process and behavior toward current tenants. While most property owners are willing and able to make repairs and upgrades as needed, you’ll want to do your homework before settling into a more permanent space. Because the restaurant business is so focused on location and environment, securing a long-term lease in a property owned by a troublesome or frustrating landlord won’t do you – or your business – any favors in the long-term.
Consulting a previous tenant will also provide insights into the location itself. You can ask about their pros and cons, their thoughts about a new restaurant in that facility, and how the neighborhood would respond to your unique ideas and menu offerings.
Negotiating a Restaurant Lease Agreement
Rule of thumb: opening a restaurant in a busy, popular neighborhood, like a downtown corridor, won’t always afford you the same flexibility as would a building further off the beaten path. Your monthly rent payment will be considerably higher in a higher-density area of your market where foot traffic is high, but creating a destination establishment in a different neighborhood may reward you with more loyal customers and more lenient lease terms.
Depending on the specifics of your lease agreement, you may experience the following terms during the negotiation phase:
- Pro-rated rent for the first year of business.
- Commission-based monthly rent terms contingent upon sales.
- Free or deferred rent until the restaurant opens for business.
- Build-out, repairs, or upgrades free of charge (with a clause dependent on a solid open date).
As with most legal agreements, it’s strongly recommended that potential tenants have a lease agreement in place to cover unforeseen expenses during the build-out phase. Certain, and unexpected, problems can always arise in a remodel, so if your ventilation installation should run afoul of building code, encounter unexpected ductwork, or require specialized installations, tenants should be prepared to incur further costs – unless covered under the terms of the commercial real estate lease agreement.
Broker or No Broker?
For some, finding the right restaurant space is a thrilling, energetic endeavor. But those with other business obligations may have trouble juggling the logistics of tracking down potential properties, contacting listing agents, setting up tours, and walking through each location with you and your business partners. That’s where a tenant representation broker could come in handy. Because most commercial lease agreements have a predetermined commission and commission split set by the landlord, the benefits of having a qualified real estate professional on your side won’t cost you anything on your end. Plus, should you require alterations to the initial lease agreement, need to modify the terms of the agreement as your business matures, or expand your space and make upgrades, your broker will be there to assist beyond the initial property search.
Restaurant-Specific Lease Terms
Because of the volatility of the restaurant industry, securing a long-term lease agreement is only beneficial to one party – the landlord. Should your restaurant fail, locking yourself into a 4-5 year lease will only hurt on the backend. Commercial real estate lease agreements are legally binding and could expose you and your partners to unforeseen expenses should the establishment go belly-up.
That said, most business-minded landlords and property owners should be flexible and understand the nature of your business, allowing 1-2 year lease agreements, perhaps at higher rates, in order to fill their vacancies.
And while many business owners may look at the commercial real estate market and consider purchasing an establishment outright, the benefits of leasing a commercial real estate property – especially a restaurant – are clear. Avoiding mortgage, insurance, and property tax costs during your first few years of operation are critical to maintaining a consistent overhead, so think hard before making a huge investment in commercial real estate so early in your restaurant’s operation.