If you are leasing restaurant space, you know the importance of your location and the lease. While there always were many factors to consider, leasing has become more complicated in today’s economy. For instance, during the go-go days many tenants did not consider the possibility their landlords might be foreclosed on — and now some restaurateurs are learning the hard way what the impacts of that can be.
Here are some key issues restaurant tenants should consider when leasing space:
1. Landlord. Understand the strength of your potential landlord, the particular property and the status of loans on the property. In most cases this information is available to professionals in the industry, so ask your broker. Even a strong landlord may let a property go back to a lender or otherwise curtail proper operations if the property is worth less than the debt on the property.
2. Lender. When negotiating letters of intent, ask for a contingency that an SNDA be signed by the lenders. This is a subordination, non-disturbance and attornment agreement. Properly drafted, this would require the existing lenders that sign it to honor your lease in the event of foreclosure.
3. Exclusives. Be aware of exclusive-use restrictions in shopping centers. Some centers have tenants that were granted exclusive uses that can limit your business. Coffee sales are an example. If Starbucks was granted an exclusive use to sell coffee and you want to open a breakfast diner, you may be in trouble in regard to selling coffee. Additionally, ask for exclusives to prohibit future tenants from selling your main items.
4. Tenant mix. A great tenant mix is important to restaurant and retail users. Adjacent restaurants may bring patrons who normally would have not visited the area to your use. A wide variety of food choices is best. Be aware of how other tenants in the center or area may affect your business.
5. Subleasing. Your lease as a sub-tenant is subject to the rights of the original tenant. So if the original tenant defaults, you could be at the mercy of the landlord. When you are negotiating a sublease, in some cases the landlord may agree to “recognize” your sublease. Then, if the original tenant does default, the landlord will honor your lease rates and terms.
6. Proper side. The side of the road for your restaurant could be very important. Breakfast concepts do better with a right-in, right-out for morning commuters. Lunch and dinner restaurants want the opposite side of the road. If your location is inconvenient, fewer people will visit.
7. Liquor license. Getting a liquor license can be time consuming and a complex process for restaurant owners. Not setting aside the appropriate contingency and time to achieve this could be costly.
8. FASB. Be aware of the possible effects of the upcoming Financial Accounting Standards Board lease-accounting changes, which are expected to cause tenants to have to include leases on their balance sheets as liabilities. Consider existing loan-covenant issues and investor confidence, especially if your firm is a public company with many leases or if you utilize long lease terms. Consider buying space if the model works for your business.
9. Anchor. Find out about the lease term and sales of the anchor tenant. If your restaurant will benefit from the traffic of an anchor tenant, such as a grocery anchor, find out the lease expiration of the base term of the anchor. Try to determine if the anchor’s sales per foot are such that they will not close the store. Ask for a co-tenancy clause allowing a rent reduction or cancellation at some point if the anchor is vacant.
10. Parking. Restaurants require more available parking per square foot than other retail uses. In dense, urban areas some owners have to pay for off-site parking to get the city to sign off on the use. This can be costly and an unforeseen expense. If a restaurant does not have sufficient parking, it could kill the business.
11. Controlling costs. Attempt to control property operating costs passed on to you in the form of common-area maintenance rent payments. Annual increase limits, excluding certain costs, limits on controllable expenses, right to audit and any controls you are able to negotiate are helpful.
12. Flexibility. Attempt to include lease clauses allowing flexible uses of the space, including sublease and assignment rights, and options to renew with definite rental rates. The flexibility to change uses, sublease and extend the term can prove very helpful.
13. Demographics. Locating in an area with both a dense daytime business population as well as a vibrant nighttime population can be helpful for most restaurants. Compare demographics of an existing successful location to new prospective sites.
14. Professionals. Engage a commercial real estate broker who specializes in representing restaurant tenants and a real estate attorney who specializes in representing retail or restaurant tenants. Landlords negotiate leases almost every day. Experience on your side of the table is extremely beneficial.
Michael Bull is the host of the Commercial Real Estate Show, a national talk-radio show about commercial real estate, and the founder of Bull Realty, a regional commercial real estate brokerage based in Atlanta. Bob Kane is retail tenant rep with Bull Realty.
