How to Lease a Restaurant
If you are planning to lease a restaurant, there are dozens of details that can go wrong. With a little planning and insider knowledge, you can minimize your risk.
How to lease a restaurant while avoiding the most common mistakes
Be realistic and patient. Opening your new restaurant is exciting, but remember that you are making a multi-year commitment.
Time is a Double-Edged Sword When You Lease a Restaurant
Time can be your biggest ally or your greatest foe when you lease a restaurant. Most restaurateurs underestimate the time it takes to find the right location, negotiate a lease, and build or remodel the space.
Give yourself more time than you think you need. A good rule of thumb is six months to find a location, sign a lease and, another six months to permit, remodel, and open for business.
Chance Favors Only the Prepared Mind
Louis Pastor said that more than a century ago, and it remains true when you lease a restaurant.
Be prepared. When you find a location you like, things start to move fast. Being unprepared can cause delays that can jeopardize the deal.
Getting your Mise en Place
This French term ( pronounced meez-on-plahss) means “everything put in Its place.” Before starting your search for a restaurant location, it’s vital to put everything in its place.
The Recipe to Where You Lease a Restaurant
Your business plan is your recipe. The recipe determines the main ingredients needed to create your dish successfully.
The main ingredients are:
- Your Menu
- Your Pricing
- Your Target Customers
Your Restaurant Concept Determines The Location of Lease
Your concept and business plan determine where you will lease a restaurant.
Factors that determine where you lease a restaurant include:
Menu
The lower your prices, the more your location will depend on convenience and access and less on income levels.
Target Customer
Does your concept rely on office workers for lunch or a waterfront location for special occasions?
Annual Sales
Your yearly sales determine the rent you pay.
Measuring is Important
Add too much salt or cayenne pepper, and you will ruin the dish. Pay too much rent, and you will burn a hole in your wallet.
Determining Rent Before You Lease a Restaurant
The general rule of thumb is your total occupancy cost (rent and additional fees for property taxes, insurances, etc.). It should not exceed 6-10% of your gross sales.
The numbers that are right for your business may be lower or higher, depending on other factors.
If you’re projecting sales equal to $1,000,000 per year, the annual rent you can afford ranges between:
$1,000,000 @ 10% = $100,000
$1,000,000 @ 6%= $60,000
Broken down monthly, you can pay between $5,000 and $8,300 per month.
Note: Post COVID 19 determine how much rent you can afford if seating is suddenly limited or indoor dining is restricted. Can your business succeed and pay operating expenses?
Financial Statements
Balance Sheet and Business Plan to Lease a Restaurant
Before starting to search restaurants for lease or submitting any offers, it’s essential to be prepared to sell yourself.
Don’t wait until the last minute when you may be competing with other parties.
Prepare in advance to provide the following:
- Executive Summary or Business Plan
- Personal Balance sheet listing assets and liabilities
- Credit report
- Bank statements
- (2) Years Personal Tax return
You may not need all of the above. Still, you should be prepared at a minimum to provide a credit application, including a balance sheet and a business plan or executive summary.
Now that the knives are sharp, time to shop for a restaurant.
How to find restaurants for rent
There are three basic approaches to finding a restaurant for lease.
- Internet Sites
- Commercial Real Estate Brokers
- For Lease Signs
Internet Sites
Numerous free and paid services advertise restaurants for lease and sale.
Here’s a list of some popular sites that advertise properties for lease:
Commercial Real Estate Brokers
If you are going to lease a restaurant, there is a 99.9% chance a commercial real estate agent or broker will represent the landlord.
Whether you decide to hire a broker or lease a restaurant on your own, it’s essential to understand the commercial real estate broker’s role.
Read this article to get the most value from a commercial real estate agent or restaurant real estate advisor.
Calling For Lease Signs to Lease a Restaurant
Driving the neighborhoods that fit your concept is a great way to learn the market and determine important factors such as traffic patterns and which areas attract the most visitors.
Unfortunately, driving and calling “For Lease” signs is time-consuming and frustrating.
It often requires leaving voicemails and waiting for a return call for necessary information.
Keep a list including the address and contact information for each property.
Contacting Landlord’s and Brokers/Agents
When you speak with landlords or commercial real estate agents, you will need to ask some specific questions.
Questions to Ask:
1) Is there an existing hood system?
2) Is there a grease interceptor?
3) How much is the NNN charge?
4) How long has the restaurant been closed?
5) Are there any exclusive use clauses that prevent my use? ( for example, pizza, Mexican food, sushi)
6) The number of parking spaces?
Viewing Properties
Before scheduling a meeting to see the inside of a prospective space, it’s a good idea to drive by the site and confirm this is a location and neighborhood that meets your general criteria.
If you view a restaurant that is currently open for business, don’t ask any employees or neighbors’ questions.
Act as a customer and order something to eat or drink to view the interior.
You will need to schedule a meeting to see the kitchen and areas not visible to a customer.
Leasing a Restaurant
The Lease Process
When you find a restaurant location you like, it’s time to negotiate.
In most cases, you will be making the initial offer.
The most common process is to submit a Letter of Intent ( LOI).
The Letter of Intent outlines the major deal points in the Lease Agreement.
If you have been working directly with the Listing Agent, the agent will offer to draft this on your behalf.
“WARNING: The listing agent represents the landlord. You would be well advised to utilize a restaurant real estate advisor or real estate attorney familiar with restaurant leases to help you write the Letter of Intent.”
Some of the terms the LOI should cover include:
- Address
- Size of Premises
- Term of Lease
- Rent
- NNN/CAM
- Lease Commencement/Rent Commencement
- Tenant Improvement Allowance
- Rent Abatement
- Options to Extend
- Assignment Rights
- Landlords Delivery Condition
In most cases, the LOI is non-binding on either party and used as an outline to prepare a lease.
“WARNING: Until you and the landlord have signed binding the lease, the landlord can lease the space to another party.”
Negotiating a Letter of Intent can take a few days to many weeks.
Lease Agreement
Once you have an agreed LOI, the landlord will prepare a draft lease for your review.
The lease will include all of the terms outlined in the LOI and additional legal language, which cover many more items that are typically not discussed during the LOI stage.
Lease agreements range from just a few pages to hundreds of pages in length.
Lease negotiations can take anywhere from a few days to a month.
“WARNING: This is a legal document. Many restaurateurs cut corners at this stage to save money. Utilizing a real estate attorney specializing in commercial lease agreements and restaurant use can pay big dividends in the long run.”
“WARNING 2: Avoid using your family attorney unless experienced with commercial leases.”
Lease negotiations are either handled directly between the landlord and the tenant (sometimes with the broker/agent as the middle man) or between the landlord’s attorney and the tenant’s attorney.
Signing a Lease
Final lease agreements will be prepared for signature once all terms have been agreed upon by both parties.
The landlord or landlord’s agent or attorney will either send hard copies for the signature to the tenant or arrange for both parties to meet and sign together.
You can expect to sign two to four copies depending on how many parties were involved in the transaction. The landlord, tenant, and brokers, if any, each receive a fully signed copy for their records.
At this time, you will deliver a cashier’s check made to the landlord for the first month’s rent, NNN, and security deposit.
Also, the landlord will require proof of liability insurance naming the landlord as an additional insured. You should arrange insurance during the lease negotiation period.
Delivery of Premises
If the vacant space is vacant and the landlord is not responsible for any work before delivering the premises, you may receive the keys when you sign the lease.
If the premises are delivered later after the landlord completes the landlord’s work, a Letter of Lease Commencement defines the lease commencement date.
Summary-How to Lease a Restaurant
The information provided above provides a high-level road map of the steps required to find a restaurant and negotiate a lease agreement.
Mise en Place
Your journey starts when you create your business plan. Your business plan will determine what type of space your restaurant requires and where you will begin your search.
Being prepared with your business plan and financial information, you will have the ability to move when opportunities arise and position yourself as a successful business person.
You have all of the tools you need to lease a restaurant
You don’t need to rely on real estate agents for information. You will learn a great deal by spending time in your target neighborhoods and speaking with brokers, landlords, and restaurateurs.
You Are Not Alone. Get Help to Lease a Restaurant
If you are searching for sites on your own, you’re not alone. Help is just an email away. If you have questions, need help writing an offer, or would just like a second opinion, shoot me a message.
Manage your expectations
The process of finding a restaurant location is not complicated, but it does take time and work. Allow yourself enough time.
Leasing a restaurant is pretty straight forward if you understand the steps required and seek help from professionals.
I hope you found this information helpful. If you would like to learn more or require more in-depth information regarding site selection, lease negotiations, permitting, construction, buying, or selling restaurants, send me an email with your questions.
I wish you great success!
Thanks for the tip about how to lease a restaurant. I didn’t realize it could be so simple. A friend of mine is running a local chain. I’ll have to show him a copy of this post. Thanks for sharing!
Thanks Joel. Most of business is helping chains expand. I’m happy to answer any questions your friend may have about expanding their brand.
Anything for new landlord need to know about lease for sport bar& restaurant ? Thanks
You should be aware it can take a while to permit and build the space. Also be very clear about having tenant maintain the drains and grease interceptor. Hire a knowledgeable attorney to negotiate the lease. Best! Mark
We are are looking to lease a space. As far as building maintenance and repair, is the tenant or lessor usually responsibe for things like roof and incoming water lines?
Typically landlord covers roof, but you will be charged back your pro rate share in the CAM charges. If landlord needs to install a new roof, the cost should be amortized over the useful life of roof and you would be charged pro rate share of that amount.
Waterlines outside of your space should be covered by landlord. If you had a line break inside of the space you would typically be responsible.
A good real estate attorney should be able to limit your exposure on some of these items.
Best
Mark
Hi Mark,
Great article. I am currently looking at an existing restaurant space that has been in business for 27 years but hasn’t remodeled anything in that time. Would there be any issue with the existing grease trap and hood system/fire suppression system where i may have to replace it that i should consider? I know I’m doing to have to remodel the dining room because it is outdated as well as update the bathrooms to ADA compliance.
Hi Ricky,
Is the restaurant still operating? Where is the property? In Los Angeles if the remodel costs more than $100,000 you will most likely be required to install grease interceptor. If its an operating restaurant and you are only doing a light remodel front of house you can probably avoid major upgrades.I would have an experienced architect/contractor inspect the space and review proposed remodel to determine if major upgrades or code upgrades will be required. I would ask Top Round what was required for their location on La Brea. It was a conversion of an older fast food restaurant. Feel free to email me directly if you need referrals of architects, etc. Best of luck!
Hi Ricky,
I have been offered an opportunity to open a small 35 seat restaurant in a Bed & Breakfast. The kitchen, servers area and dining area are all equipped.
The restaurant area in total is 420 sq ft. Breakfast & Lunch is served and it will be open to the public from 8 am – 2:30pm.
The owners have not set an opening date for the Rooms. we are opening the restaurant first. Once renovations are done opening should be mid Feb of 2017.
I have owned 2 restaurants and both I had my own equipment etc.
I’m not exactly sure how the leasing works when using their equipment.
Any formula for this type of restaurant leasing?
Thank You, Dewilla Goldate
Typically if landlord already has the equipment in kitchen its included in the lease. In some cases they may charge you some money upfront to buy the equipment. Anything attached such as hood always becomes landlord property. They will probably just have language that its as-is and where is and you are responsible for repairs or replacement. I would include language that if you replace anything that is not permanent you have right to remove at end of lease. Best of luck!
Thanks buddy for sharing this informative blog with everyone and also explaining that how important it is to make the things clear before leasing a restaurant or any other property.
I am also looking forward to buy a restaurant but I have never think before like this earlier! After reading your blog , many things came in mind which I am going to follow.
Great job!
magiclampinn.com
Thanks for your feedback!
Mark, I just came across this blog post from you. Its Great. Very informative. I will add in something that just occurred and I think it could be helpful. But first I wanted to say it was a pleasure working with you on that Larry Holmes Property. You can’t win all the fights. But we went the distance.
The story starts with a medium neighborhood strip center, is a very quaint but well-traveled area.
There was a Pizza shop, Bravo’s and there was Beer distributor, both in line but in different locations to the center, The pizza shop was in a visible, yet tired location, too many years in place and no continued modifications by either the landlord or the tenant. There was a Wawa at the corner next to the pizza shop; they went out of business there four years now. The beer distributor was not doing well, wrong location.
The landlord was able to offer this relocation opportunity to each of these tenants, offered to absorb some of the cost and spread the additional costs over the course of each respective term.
Now, the Beer distributor is in a very visible and easily accessible location.
In most relocation clauses the cost of the relocation is absorbed in total by the landlord. Both should do very well. The landlord thought outside the box.
Hi Jack..nice to hear from you. I agree if the both parties work together things can work out better for both sides.
People state that home purchasers do not pay their agents – agents get compensated a commission through the seller. In either case, a house buyer’s agent is going to be compensated 1000’s of dollars to assist that buyer find the correct home.At more
Hi, Mark I have read you blogs thanks for so much useful informations. I am currently buying a still operating restaurant to remodel into a different type of restaurant and requires a big investment, I want to know if I purchased the business and put a great amount of money for remodel, in this case will the landlord give TI or free 6 months of rent?
The one downside about buying an existing restaurant is you are buying the existing lease.
Most landlord’s won’t provide TI’s or free rent unless they are excited about your concept and willing to provide a new lease.
If you are buying a lease with below market lease rate, the landlord will be more willing to provide TI’s/Free rent if they can increase their rent.
I would approach landlord about writing a new lease and see if they are open to it.
If not, I would extend escrow to give you enough time to secure any permits you may need to start your remodel. This will minimize lost rent during remodel.
I hope this helps let me know if you have any questions. Where is the restaurant located?
Are there any industry “rules of thumb” regarding outdoor seating options. For example, if the lease is $20.00 per SF for the indoor space, is there a logical discounted percentage to be considered for outdoor dining area? I suppose it would depend on if a canopy would be allowed, otherwise it would be more of a seasonal consideration. I have heard that 1/3rd of the finished indoor space lease amount is a good starting point. Thanks for any insight and I enjoyed your article very much!
Thanks
Greg
I think it really depends on the market. I negotiate free use of patios on most sites. I’m selling a restaurant and the breakdown for interior of 800+- sf and patio of 250+- sf is $4,137.00 +$1,222 ( patio)=$5,359.00. Some cities will lease space on public property in front of the restaurant.I believe Culver City, CA charges $250.00 per month for 250 sf. Best, Mark
Looks good.
I was made aware of an up and running restaurant advertising that they are leasing themselves for $90,000.00 + rent. Does this mean they are selling the business for that price and those interested can buy it for that amount? Thank you for your time and information.
It sounds like they are selling the business and you will assume the lease.
Hi
I’m in restaurant business the landlord send me a lease extension for five years to sign and return to him to sign after a while he canceled the deal and said the first deal is not on the table anymore
Is this legal thing he can do
Please advice.
I appreciate your help.
Hi Mark,
Love the tips… I have a question.. I found a great location for my new dinner theater and just from talking to the listing agent it sounds like the property owner is pretty flexible. The owner has requested that I write up a proposal and submit it to her and we can then sit down and negotiate. The place has been sitting empty for almost 9 months now with very little interest from what I understand. It is going to require quite a bit of work with the remodel to get it up to par for doing business. I have already stated that I am willing to do the repairs and remodel myself which is going to be a big expense and most likely take me a couple months if not more to complete. My question is would it be asking to much to go rent free for at least 6 months to give time for the remodel and for business to get rolling. It is most likely going to be about a $30k investment on my part to get the work done. The owner is also willing to do a land contract for me to buy the property and or a 3 to 5 year lease. I’m just worried about shooting myself in the foot by not asking for enough or scaring the owner off my asking to much. Any input would be great.. Thanks much.
What it be possible to ask the landlord to upgrade the heating and cooling system and lighting rolling the cost into the purchase price at the end of the lease?
I need your feedback on a problem I bought a restaurant and redid the space as it was 20 years old it is in a short strip of three buildings owned by one land lord. When I opened the next door rennet was a bakery now after three years of building a burger specialty business the landlord closed the bakery and put in a burger specialty restaurant , this has stolen business and what recourse do I have to terminate my lease?
Does your lease have an exclusive use clause to prevent landlord from leasing to another burger use? Without an exclusive use clause you don’t have the right to cancel the lease. I would contact a good real estate attorney and see if they can get you out of the lease. Can you change the concept? Did you sign a personal guaranty? Best Mark
HI can I talk to you about organizing a Lease . I am acting as Agent for both
Buyer and Seller in a Ground Lease. My Client has made me Liaison for a
existing parcel in which a Village is planned to be built .the family is asking me to go get a Key Restarauntuer -which I have the connections…Now how should I protect myself or right my self in
Meaning should I just get a lease agreement ?
What If the two parties develop an entire village..? can I write in that I will
be paid X or pct of Agreement or other on a long term basis ?
thanks Darin
818 802 1971
Los Angeles
How can you negotiate a lease for a restaurant that hasn’t even been built they want a LOI before the demolish and build the building
Yes most developers will negotiate at least some of the leases prior to breaking ground. The most important thing to negotiate is the landlords work and delivery conditions. Make sure the landlords work letter is very clear about how the space with be delivered. How much electric, HVAC, etc. Will landlord bring power from main panel to a sub panel in your space or just provide a conduit and your need to pay for and install your own panel? Feel free to contact me if you need help. Best…Mark
Mark looking to buy a restaurant in San Diego, but is not much available, find a restaurant that is for lease, what the difference between lease or buy a restaurant how a lease work? It’s a good idea lease a restaurant?
When you buy a restaurant you are assuming the existing lease. If the lease is good it ca be a good deal. Downside of buying existing lease is if the original lease was not negotiated well you inherit the sellers lease terms.Buying a restaurant often saves you the time and expense of permitting and building out a new space.
What advice will you give to someone who has wanted to open a restaurant. But to do so means giving up their current jobs. I been with my current job for over 15 years and have invested aggressively in my stock and 401k plan – I plan on keeping in/rolling over. And, I never worked in a fast food/restaurant environment.
I would keep your job and work part time at a restaurant similar to the type you wish to open. Once you learn the business and decide you like the business you can consider opening your own restaurant. Hope this helps…
Yes, that you
Thank*
I appreciate that you listed the factors such as menu, target customer, and annual sales which determine where you will lease a restaurant. My friends and I are eyeing this commercial space downtown for this cafe we have been planning. I’m looking to hire a professional consultant who can do a commercial space competitive analysis. This could help us have higher chances of having a successful cafe. Thank you for this informative article.
Thanks James!
Excellent post. I want to thank you for this informative read, I really appreciate sharing this great post. Keep up your work.
Really very interesting and informative article. thanks for sharing your knowledge on ‘infographic tips for real estate content marketing’. keep sharing.
Thank you very much for this blog.Here there is lot of information for the beginners. This will helps me a lot to increase our market in real estate field. Keep on writing and share your knowledge for the beginners.
I think I’ll try to hire a real estate agent to help me look for some properties for lease. Thanks for adding that it’s best to drive by the location and see if this fits my future restaurant’s concept, so I’ll be sure to do that once I have a list to choose from. Since my husband is encouraging me to open my own restaurant because he thinks that my dishes taste great, I might try to see if this will fit our budget first before we proceed with his suggestion.
You made a good point that even for food establishments, it’s best to have a target market. I’d like to open a pizza place someday that can also be somewhat considered a family restaurant. Perhaps I should consult a restaurant lawyer about all the legal documents that I’m going to need to lease a restaurant for a business like that.
Thanks for the tip about how real estate brokers can also help me find a good retail space for rent. I’d like to look for one soon because I’ve been thinking about opening a pastry shop someday. Being able to offer customers a dine-in experience would be great for that.