Rent for Restaurants- What is the right rent for restaurants?
Determining the acceptable rent for your restaurant is critical to your success.
Before you start looking at restaurants for lease you need to know how much rent your business can afford.
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 for restaurants should your restaurant pay?
You can benchmark the right rent for your restaurant by looking at the sales and occupancy costs for your competitors.
If they are publicly traded companies, the information is usually provided within 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 competitor’s 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.
Where can you find Rent for Restaurants?
You can determine the going rent for different areas by searching restaurants for lease on a website such as Loopnet.com.
Based on the going rents in the area you can reverse engineer the sales needed to operate at a profit.
For example, after conducting a search you determine rents are $4.00 per square per month or $48.00 per square foot annually.
The size of your ideal restaurant is 2,000 square feet.
2,000 square feet X $4.00 per square foot equals $8,000.00 per month. In addition, the NNN expense is $1,000.00 per month.
Your total estimated occupancy cost is $9,000.00 per month or $108,000 per year.
If you have determined the maximum percentage of gross sales you can afford to pay in rent is ten percent, you know that your restaurant needs to generate $1,800,000.00 in annual sales.
Can You Afford the going Rent?
Using the formula above can your restaurant generate the sales needed to pay the current market rate for rent? If not, you should continue looking in different areas or determine if you can reduce the size needed to keep the rent for your restaurant within the safe range.
Do you have questions about opening a new restaurant? I’m here to help and happy to answer your questions.
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Cheers!
Mark Chase
