This post was updated December 3rd 2019.
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. Unless you’re a well-established restaurant with multiple locations, chances are you’ll be looking to lease a restaurant space rather than to buy a property outright. Because of the upfront costs of starting a restaurant, hiring and training staff, and performing any needed repairs or alterations to the property, most restaurant owners prefer to lease a property rather than deal with the upkeep of a privately owned space.
Finding a property to lease is one the most crucial steps in determining whether to open a restaurant, as location is often cited as a critical factor in the success of a restaurant. The right location in the right neighborhood will reap major benefits for a restaurant owner of any experience level.
But 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:
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.
Before You Lease a Restaurant Space
Ask the right questions
As with any long-term binding agreement, doing your homework on a potential restaurant space should be your first step in the process. First, find out why the space is vacant – what was there before, why their business closed, and if the landlord is reliable and someone you’d want to work with over a long period of time.
There’s also the matter of inspections. Is the building up to current code? How much work will be required to pass city and county inspections? Having a building inspector, the fire marshal, health inspector, and a building code officer as part of your search process could help you avoid costly headaches should you decide to go forward with the property.
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:
- – Public bathrooms and ADHA code: Expansion of bathroom facilities is a major obstacle for many restaurants.With certain requirements for stalls per seats (in some markets), the number of family restrooms, and any architectural changes necessary to adhere to ADHA-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. While most modern and freestanding buildings utilize adequate ventilation systems, older downtown buildings can suffer from inadequate ventilation and may require repair or replacement. Furthermore, garbage, cooking oil recycling, plastic and cardboard recycling, and composting pickup may all be required by your city and county authorities. If the building doesn’t have the capacity to meet these requirements, you may need to contact local waste management organizations to see if their service area covers the property.
- – 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.
If the property you’re interested in has been lying vacant for a long period of time, the landlord may be more willing to perform repairs and upgrades to attract your company as a long-term tenant. However, if its a major, heavily trafficked location, you may be on the hook for any costs required to bring the space up to your standards.
Permanent upgrades to infrastructure such as heating ducts, HVAC systems, and plumbing will stay will the building once the lease is complete, so if the landlord refuses to make these necessary improvements to bring the property up to code, you may need to look elsewhere.
Research Your Landlord – and Their Location
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.
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. Ask them about their relationship and experience with the landlord. Are they reliable and punctual in making repairs? How easy are they to work with? What’s the customer base in the area like? Would a restaurant be a good fit in the neighborhood and building? While their input would be a valuable insight into the future of your restaurant, it’s important to take their opinions with a grain of salt.
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.
How to Negotiate a Restaurant Lease Agreement
There are several factors that may influence your leverage when negotiating a restaurant lease. First, location is crucial. Landlords with properties in heavily-trafficked areas and high demand for commercial real estate may not be as willing to reduce monthly rent payments or perform repairs on your behalf.
Second, properties that are at or above market condition or rated A or higher will garner higher paying tenants, making it more challenging to compete for a location. Third, the vacancy term of the property is a major factor. If the space is not yet vacant, landlords may be willing to let the property sit empty until a suitable tenant comes along. If it’s been unoccupied for a longer period of time, landlords could expedite the leasing process to restore lost revenue.
When negotiating lease terms, keep in mind that it’s in the landlord’s best interest to keep the property occupied and businesses present. That said, these are common lease negotiation terms you should broach during discussions:
- – Tenant improvement allowances to help purchase upgrades, perform repairs, and make improvements to bring the property up to code
- – Including property repairs in the rent, allowing you to deduct costs required to bring the building up to code from your monthly rent.
- – Pro-rating rent during the first year, then increasing the monthly rent each year thereafter.
- – A waiver of rent until the restaurant opens and is operational.
During your lease negotiation process, be sure to factor in a plan for making unexpected repairs to the building should something arise soon after you take custody of the property. For example, should you encounter a plumbing issue during an upgrade to the space’s restroom facilities, you should have an agreement with the landlord dictating who would be responsible for a plumbing or infrastructure improvement to cover this unplanned expense.
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. Should the worst happen and your restaurant is forced to close, you don’t want to be locked into a long-term lease that you cannot pay. Since it’s a legally-binding document, the landlord is within their rights to pursue your company for the remainder of the agreed upon rent. If the property is only available for a longer-term lease agreement (think two or more years), you should think carefully before signing and the risk involved.
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.
While leasing a restaurant space for a new eatery provides plenty of benefits over purchasing or building a property, that doesn’t mean you should jump at the first opportunity that arises. Locking yourself into a long-term lease, taking on responsibility for repairs and upgrades, and compromising on monthly rent could cause severe headaches for your restaurant going forward. Instead, being patient and waiting for the right vacancy in your ideal location can reap many rewards into the future.