Leasing Vs. Owning

LEASING VS. OWNING YOUR RESTAURANT SPACE

Leasing space is the way the majority of restaurant owners get into their business.  Obviously, leasing is simpler and less expensive than owning property, and for the basic fact that there is more space available for lease in desirable high traffic areas than there is available real estate for sale.  Nonetheless, I strongly encourage an owner to explore owning if not at first, then after operating for some time as a hedge against  uncertainty, to control your destiny, to allow for future expansion, the ability to lease the property back to another operator if you no longer wish to operate the business, and most importantly to build both equity and appreciation value in real estate as a future nest egg… all food for thought in this most challenging of all businesses.

LEASING CHECKLIST

Leasing also holds many potential unforeseen pitfalls.  Go into a potential lease with your eyes wide open and Do Not allow yourself to become “jaded” with any particular space or the excitement of your new venture. 

Look at multiple locations for traffic, visibility, parking, necessary repairs or fit-ups, as well as the general appeal and feel of the space.  Do your homework, run the numbers, imagine worse case or unexpected scenarios, then negotiate your best deal on the best space. 

Prior to signing any lease obligation, remember that a lease document once signed is legally binding on the parties so make sure to consult your Attorney and have him/her review the lease document to ensure that it protects your best interests and all terms meet that which you understand and agree to.

The following are important but not exclusive considerations when evaluating a potential space:

Location, Location:   Possibly most important is to select a space with high foot and drive-by traffic, as well as high visibility.  Give yourself every advantage to build awareness and an established clientele.  Obviously, a high traffic location will cost more per square foot than an obscure location unless the space requires significant repairs.  Do yourself a favor and select the best traffic location you can based on your budget. 

Available Size of Space:   Size of the space is important in relation to how many seats you plan for your restaurant.  Remember that economics and number of seats have a huge influence on your profits and potential for success.  Initially, its better to have more space for seats than needed than too little space and keep future expansion in mind as you evaluate a space.  Once you have built a successful operation in a location, its difficult to move to a new location because you need more space and sustain that business (unless of course it’s a proven better location).

Parking:  Has a huge impact on business levels in your restaurant.  If you rely on drive-by traffic; even if your restaurant is highly visible, inconvenient parking challenges will cause potential customers to pass your restaurant by. 

Overall Condition of the Space:  Generally its easy to tell from the curb appeal and interior condition if the property is well maintained; however, under the surface pitfalls can still cause unforeseen problems.  I highly recommend hiring a qualified building inspector, contractor or off-duty code enforcement officer to inspect all vital systems and conditions including but not limited to:  plumbing, electrical, roofing, efficiency and operation of heating and cooling systems, insulation, ceilings and flooring, hazards, toxic materials or mold, pests, etc… 

Cost per Square Foot:  Obviously, this varies dramatically based on geography, demand, traffic, comparable market rents, vacancy rates, condition of the building/space, etc… Based on the size of space needed, I again recommend that you look at several potential spaces to compare total cost per square foot and all the other key-criteria before making a decision.  In this way, you’ll know you covered all the bases and that one space stands out as being best for your new restaurant.

NOTE:  Escalation Clauses are typical in a multi-year lease and provide that your rent is fixed only for the first year and then rises each year thereafter.  This may be a problem if your business does not grow rapidly and cash flow is tight.

NOTE:  Some landlords charge what is known as Common Area Maintenance (CAM) which is an additional cost per square foot to cover snow removal, landscaping, cleaning of shared public spaces, etc…  CAM fees add significantly to your overhead, so make sure you review your lease for any additional charges before signing.   

Subletting:  It is recommended that your lease allow you to sub-let your space based on reasonable landlord approval of a new tenant in case your business fails to succeed. Remember, you are obligated and liable to fulfill the entire lease contract no matter the term of the lease, whether you have a viable business or not.  It may also be prudent for you to try to negotiate a one year lease to start with right of first refusal to renew to a multi-year contract. 

Fit-Ups:  It is rare that a space needs no alteration to suit your particular needs, so make sure your landlord is amenable and consents to the extent of renovations that you propose.  Walls may need to be built, bathrooms and plumbing installed and the possibilities are nearly endless.  There becomes a gray area as to who owns a fixture once it is installed depending on permanency, value, etc. so this too must be negotiated. 

NOTE:  Certain Fixtures may become permanent expensive attachments to the space making it very difficult if not impossible to remove without damage to the fixture or the space. 

Many years ago, I spent $20,000 for a wood-burning brick oven made of steel, concrete and masonry that was impossible to remove once installed in my leased space.  Thankfully, my first restaurant was successful, as I did not renew the 3 year contract upon expiration and had to build another more expensive oven in my next property which I purchased. 

To my knowledge, this very expensive original oven is still a fixture behind a sheet-rock wall, despite numerous different tenants occupying the space since. 

Repairs & Maintenance:  Find out if building repairs, landscaping, snow removal and basic property upkeep are included without cost in the lease, as some leases charge additional for it (CAM fees). As for repairs, make sure your lease protects you from business threatening situations such electrical hazards, leaking roofs, septic issues, etc..

Inclusions: If you are fortunate, you may find a space that was a prior restaurant.  This was my case with my first lease as an operable walk-in refrigerator and freezer, range hood, commercial dishwasher, icemaker and some tables and chairs were all in place and went with the lease.  Find out from your landlord if anything useful to your restaurant may be included in your lease. 

Ventilation:  If the space housed a former restaurant, chances are that ventilation equipment may already still be in place.  If not, you must determine if suitable outside walls in your kitchen area can accommodate large ventilator fans. 

Multi-story buildings pose their own challenges to ventilation.  Make sure you consider the potential impact odors, grease and smoke may have on your neighbors or other tenants.   

NOTE:  “Make Up Air” is important to maintaining a air pressure balance in your space. When ventilator fans are running, air leaves the space in high volume and must be replaced by other sources of air (windows, doors opening, refrigeration compressors, etc..), This causes a constant push/pull of air and if the inflow/outflow equation is out of balance, your ventilation equipment may not function properly and excess smoke in the dining room is likely. 

HVAC or other Ventilation specialists are able to easily test air pressure and should be consulted before opening for business. 

ADA Compliance:  State and Federal laws require that all areas of a space available to any patron be fully accessible to those with disabilities.  Have all bathrooms inspected for wheelchair accessibility, grab rails, etc… and make sure all dining and public areas are free of impediments or other hazards.  You may have to obtain approval from your building inspector, code enforcement officer or state fire marshall. 

Exits/Egress and Fire Suppression:  Some states and municipalities may require that a space be sprinklered depending on the new Occupancy Certificate, number of exits, age of the building, etc… Check with your state fire marshall’s office to determine if your building/space is compliant, “grandfathered” or if a fire suppression system for public areas will be required. 

Utilities:  Are the utilities shared amongst tenants and fairly charged by each space by the landlord or individually charged by the utility company? Evaluating a few months of past utility bills show the operational costs of heating and powering the space (make sure to request bills during winter if in a cold climate).   

Dumpsters:  Make sure that there is adequate space (hopefully hidden from patrons and neighbors) for trash and cardboard dumpsters.  Due

Diligence Clause:  It is prudent to request a due diligence clause in your proposed lease that allows you the “right of first refusal” on the space, as you proceed in evaluating fit-ups/ repairs and seeking zoning, licensing or other local ordinance approval. 

Municipal Ordinances/Zoning:  Check with your municipal business office to determine any limitations of the space you select or if the zoning will allow for a restaurant.    

NOTE:  Many states and local municipalities will Not issue a liquor license to premises located in close proximity to schools or churches.

Landlord(s):  Do you like and trust this person?  Can you imagine yourself working in a business relationship with this person?  What does your gut instinct tell you?   Always try to speak with other tenants in the building to assess their honest input on their lease relationship. If there is more than one property owner, make sure that your landlord (lessor) has the legal right to sign contracts on behalf of other owners without their signatures required.    

WORD TO THE WISE:  When I signed my first lease, there was a dispute of the lease by another co-owner who was in conflict with my landlord and wanted to sell the building. It had to be proved in court that my landlord had the right to negotiate and sign contracts without prior approval of his partner.

NEGOTIATE:  The time to get concessions on your lease is during negotiations prior to signing.  This is when you have the most leverage (especially if the property has been vacant awhile) so remember “You Don’t Ask, You Don’t Get”!  Begin your negotiations by asking for a month or two of free rent, while you complete your renovations/fit-ups