Rent for Restaurants- What is the right rent for restaurants?
Determining the acceptable rent for your restaurant is critical to your success.
The general rule of thumb is your total occupancy cost (rent and additional fees for property taxes, insurances, etc.) 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.
How much rent should your restaurant pay?
You can benchmark the right rent for your restaurant by looking at the sales and occupancy cost for your competitors.
If they are publicly traded companies, the information is usually provided within the Form 10K which can be found on their website under investor information.
The chart below from Chipotle Mexican Grill’s Form 10 K, shows occupancy costs equal
to 6.3% of revenue.
If your competitors are not public companies you will need to dig a little deeper. Ask your competitors neighbors how much they pay in rent and you should get a good idea for rents on a per square foot basis.
Based on your research, the occupancy costs for your primary competitors range between 6% and 10%.
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
Assuming you need 2,000 square feet to run your restaurant, you can pay between $5,000 and $8,300 per month including NNN charges.
The Market Rent for Restaurants will Determine Where you Open
If your budget is $6,000 per month for a 2,000 square foot space ($3.00 per square foot per month), it does not make sense looking for space in a neighborhood where restaurant rents average $10.00 per square foot.
Now that you have determined your maximum rent, you have a starting point to determine which neighborhoods fall within your budget.
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Cheers!
Mark Chase
I liked the tip you gave about asking a competitors’ neighbors about their cost for rent, then using that info to get an idea what your competition is paying. Also, good advice about not looking in areas where you know you can’t afford. It may be nice to look at the high-end offerings, but if they aren’t reasonable for you, then look at what’s actually worthwhile.
It can take some digging around, but worth the extra effort.
Thanks so much for your tips. It’s definitely useful to ask your neighbor about the rents they are paying, but i just doubt how many of them would be willing to tell you about that.
Do you have some tips on how to ask your neighbor about the cost of rents?
The rent your neighbors pay is not that useful unless they recently signed a lease. It’s more important to find out their sales numbers so you can determine how much rent you can afford to pay. You can determine asking rents for the neighborhood by checking sites such as loopnet or calling for lease signs.
Mark Chase,
I just recently bought a building and rented out a 3300 SF resturant and a 5000 foot basement bar to a medical perfessional. My building is in a small town in Okemah Oklahoma, I am in nyc, my tenants set up a facebook page “The Brick Bar & Event center”. I gave the guy a great deal. To good a deal.
how much per square foot can I charge him when the lease come up for renewal? the town is 4000 population.
I would ask a local broker the going rental rates. Your property is in a very small town. Restaurant rents need to stay below 10% of sales for most restaurants to survive. If you raise the rents too much you risk them going out of business and sitting on a vacant building. Ask them to provide income and expenses for past year or two and determine how much they can really afford.
Hello, a good client with mostly single family homes has asked me to sell a restaurant he has leased out. I sell mostly residential real estate and don’t know where to begin with pricing. He has a five year lease starting at $1380.00 per month. In one year the rent goes to $1580.00 per months and after that the rent increases 5% per year. Can you lead me in the right direction on how to price this business? We are in a small city and most larger commercial real estate is handled by out of are brokers. Thank you in advance.
Hi Anita,
Is the restaurant profitable?? typically a profitable restaurant will sell between 1.5 to 3 times net profit. You can also base pricing on percentage of annual sales. I don’t know where you are located so can’t advise proper percentage, but maybe 20-30% of annual sales. Pricing also depends if there is a below market lease, liquor license, etc. I hope this helps.
Best
Mark
Hi Mr. Chase,
I have a slightly different situation, although it is still a lease product in progress. I have a 2014 enclosed concession type fully equipped one axle food trailer (flat griddle and 2 burners, deep fryer, 2 steam warmers, smoke extractor, a small fridge w/freezer, 3 deep sinks, plus small hand wash sink, slide double glass vending window, A/C unit, registration, inspections and licenses to lease, option on electrical power connection or generator usage, generator not included) the working area is 7ft wide x 10ft long x 7ft tall, outside measurements of 8ft wide x 15.5ft long x 8.5ft tall including towing tongue w/stabilizing jack. located in Midland, Tx. currently I am offering 3 plans, a 6, 9 or 12 months. a discounted 2 month entry, then it jumps to regular price plus a one time security deposit of $2,800, fully returnable at end of term. I am trying to restructure my plans to offer a reasonable plan to people so they can start their own small business and at the same time protect my investment on the equipment. what is the proper way to come up with a decent plan and still make it a business for myself? what I did was get the number of working days in the year, plus half of the total weekend days in the year and came up with around a fee of $60 – $65 per day for the year at 313 days total. All I am doing is doubling the price of my investment basically, but although many people has seen the add, very few have responded and none has come to see it yet. I must be doing something wrong. I have also heard of a system using a lower base fee per day of $35 – $40 and a 25% – 30% of their profits or something like that, I did not really understood well, nor know what I can do or not do pertaining the books of my client. perhaps you can explain to me a better plan to come up with attention catching, so I don’t have my equipment just sitting down in my yard. hope you can help with my situation, thanks in advance. attached is a link in facebook marketplace
I would ask each potential tenant for a business plan showing projected sales. Base your rent on 5-10% of their projected sales. Percentage rent may be difficult to collect since many independent operators don’t keep good books.
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