Opening a restaurant is a challenging and costly endeavor. One of the most significant factors that can impact the success of a restaurant is how much of your profit goes towards covering your fixed costs (e.g., rent, insurance, and property taxes). While insurance and taxes are unavoidable, a properly negotiated lease can increase your bottom line. To help understand the world of real estate, we’ve asked Henry Henderson from Marx Realty for some pointers and insight on what to look out for before signing a lease.
How/where can restaurant owners find commercial spaces near them?
You can always look for yourself at available storefronts. However, it’s best to enlist the help of a retail broker. A good broker will put together a site survey of available and soon-to-be-available spaces in a specific neighborhood for you. The landlord pays the commission should you sign a lease, so to the restaurant owner, there’s no downside to working with a broker.
What makes a retail space ideal for a restaurant? What features should restaurateurs look for in a space?
Along with visibility, parking, size, and surrounding businesses, having the existing infrastructures already in place, like a kitchen or venting, are always helpful for mitigating your initial buildout costs.
What are some key lease terms that every restaurant tenant should know?
They should be well aware of additional costs like real estate taxes and common area maintenance charges (CAM). Often, first-time restaurateurs don't take those additional costs into account and they can add up over time. Do your homework to make sure you are aware of those charges in advance and be sure to include them when calculating your gross occupancy number (i.e., your out-of-pocket costs).
What fine print should restaurateurs be mindful of before signing a lease?
There are two important sections that you should be aware of when signing a lease -- the guaranty and the assignment/sublet.
Guaranty: A personal Guaranty will declare that you are personally liable for the lease or loan obligations of your business and may also say that you are responsible for default interest, legal and other fees. Be careful about signing a personal guarantee if you do not have a full view of the company’s finances.
Assignment: An assignment of a lease is the transfer of the entire lease without alterations. This section of a lease is important if there is a chance that you may sell your business in the future. Landlords will often require approval before you can transfer a lease; meaning your buyer will need to meet the landlord's financial qualifications.
Sublease: A sublease is a transaction in which you can transfer all or part of the leased premises for a different rent or different terms and conditions.
What tips do you have for negotiating a restaurant lease? What parts of a lease are landlords willing to negotiate?
Restaurants can be a great asset to a landlord’s building and a good landlord will recognize that asset and be willing to contribute to tenant improvements and construction during your initial buildout. In addition to landlord work and contributions, rental rate (the periodic charge per unit for the use of property) and free rent period are essential points to negotiate and should be ironed out well before drafting the lease.
While real estate is price sensitive to its location (e.g., city, prime location) how much you should pay for occupancy?
With margins being thin in the industry, a general rule of thumb for occupancy is 8-12%, with most restaurateurs trying to stay around 10% of your sales. Which is why it is important to run all of your pro formas and know how many covers per day you can realistically turn out of a given space.
What do landlords review to make sure you are a viable tenant (i.e., you can pay your rent on time)?
While your previous successes, awards and accolades matter, landlords rely heavily on reviewing your financial stability. Expect them to do a thorough check of your investors, your audited financial statements as well as credit checks and bank statements.
About Henry Henderson:
With nearly two decades of national leasing experience, Henry Henderson is the Vice President of Leasing for Marx Realty & Improvement Co., Inc. Henry got his start in real estate in 2002 working for Robert K. Futterman & Associates, as a retail broker, before transitioning to the ownership side of the business. He then moved to Brookfield Properties as Director of Retail Leasing for the retail space in Brookfield’s office towers in the Mid-Atlantic and Northeast regions. During his time at Brookfield, he worked on high-profile projects including the re-development of the World Financial Center, as well as the re-development and re-tenanting of the iconic Grace Building on 42nd St. Prior to joining Marx Realty & Improvement Co., Inc., Henry was Director of Urban Leasing at Acadia Realty Trust where he oversaw Acadia’s nationwide, urban portfolio, working on large transactions in New York, Chicago, Washington D.C and Miami. Henry is a member of the International Council of Shopping Centers, as well as the Real Estate Board of New York. Henry received his Bachelor of Arts from Hobart and William Smith Colleges.