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:
The lower your prices, the more your location will depend on convenience and access and less on income levels.
Does your concept rely on office workers for lunch or a waterfront location for special occasions?
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?
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.
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.
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?
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:
- Size of Premises
- Term of Lease
- 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.
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
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!