The most important decision you'll make as a restaurant owner is deciding on the right location and space for your restaurant since this will normally affect your overhead expenditures, which will define your restaurant's future profitability.
However, before you begin searching for your ideal space, you need to evaluate whether you want to buy or lease a restaurant space. Because 95% of commercial spaces are available for lease, you're unlikely to discover a place for sale. That's why you need to know basic tips and tricks to make your life easier.
To help you navigate this critical process, this article will cover the following topics:
- How to Create a Restaurant Lease Budget
- Tips for researching your neighborhood in order to evaluate your location
- How to Measure and Assess the Potential of Your Space
- The key questions to ask when leasing a restaurant
- How do you negotiate a restaurant lease
Your restaurant lease impacts
Many people who want to start a new restaurant lack the large funds required to create a strong building. As a result, many wind up leasing their restaurant space. Leasing your restaurant's perfect spot has several benefits, especially because you won't have to worry about huge mortgage payments (you will, however, have to worry about rent), taxes, or the expense of maintenance. Although establishing your own restaurant space has its advantages, it is not always the best option, especially when you are just starting out. According to experts, obtaining your restaurant space or building will appear suitable just if you want to stay in the same area for more than 7 years. However, because new restaurants cannot anticipate their degree of growth and expansion in seven years, it is always better to rent or lease.
Most landlords stick to 1-2 year or 3-5 year leases to maintain a steady supply of restaurant tenants. In high-demand areas, they are unlikely to deviate from their contracts.
How to know if the restaurant location is the perfect lease
Not every accessible location is suitable for a restaurant. A good restaurant site is more difficult to locate than some people believe. What looks to be the perfect spot - such as a bustling pedestrian route in the heart of downtown, may turn out to be a flop.
Sometimes a restaurant in an unexpected setting, such as an old shoe shop in a run-down mill town, succeeds. Of course, cuisine and service are key elements in a restaurant's success, but the location is also important.
Thoroughly research the neighborhood
If you're looking at a certain area, you're probably familiar with the foot traffic and demographics of the people who live there. However, when leasing a restaurant for three to five years, it is imperative to study the details and the business plan for the future. Be patient and do not rush through this process. It might take months to thoroughly research an area and consider all possibilities of the location.
Remember, it's not just about how the area looks today. You need to consider other factors how it will change during the term of your lease and if there are any emerging trends. When an area becomes a primary dining destination, restaurant real estate prices may skyrocket.
Also, keep in mind that your restaurant may become so successful that you will need to relocate to a larger and better site, or you may decide to change your plans and try to target a different neighborhood or demographic.
Consider your competitors and complement businesses in the vicinity of your target area. For instance, if you're planning to open a smoothie shop, having a gym next door will help you generate more revenue. However, it may be difficult for you to stand out if there are already a dozen of smoothie businesses in the area. Boosting your marketing budget to attract more customers is one effective strategy you can do if the area is surrounded by comparable businesses that cater to the same demographic. Otherwise, if there are businesses that complement yours, you can organize a joint venture that encourages customers to visit all of your establishments.
Do businesses come and go, or are there a lot of well-established restaurants in the area? Be wary of spaces, streets, or areas where you've observed a lot of turnovers. If the street, building, or even area has a transitory business crowd, this is a significant red flag. Take your time in choosing a spot that will benefit your business in the long run.
Consider using a census explorer to discover more about who lives in the areas you're interested in and to see whether their demographic information matches the same of your restaurant's target market. The goal is to construct and define a clear vision of who you aim to target, with a focus on who will become your most loyal consumers.
Evaluate the following questions:
- How old is your target customer?
- Do they live alone? With roommates? With a partner or a family?
- What’s their income level?
- What do they do for a living?
- What do they spend money on?
- What do they do for fun and entertainment?
Foot traffic and Visibility
A little visibility may go a long way when you're the new sign on the block. You must promote to prospective customers that your restaurant is open for business. Ensure that cars and pedestrians can easily see your restaurant sign from the road or sidewalk. If your idea is to open a low-key subterranean bistro, you'll need a solid plan to attract your customers in other ways.
Any restaurant would benefit from considering a diverse set of customers. The more easily accessible a restaurant is, the more customers it will attract. Simple as that. Make sure your restaurant is appealing and accessible to your target customers, and that there is enough foot traffic to keep you busy throughout your operation.
Find out how much square footage you need
In the commercial property, you essentially get what you pay for, as rent is based on total square footage. When leasing a space, you should do your research to determine how much square footage you require so that you do not overpay. The larger space you have, the more money you'll spend. The less room you have, the fewer customers you can serve within the restaurant.
When it comes to restaurant planning, the major concern isn't how much you spend on square footage...but how much square footage will profit you. After all, it's that space that accommodates the tables, that accommodates your customers, who buy your meals and pay your expenses so you can generate income.
Go see the space and measure it
Real Estate Agents have been known to overstate or sell "phantom space," which can cause rent to spike. It is highly important to take accurate measurements of your prospective restaurant space and make sure you're not paying for more space than you need.
Other restaurant owners spend around 40% of their budget on service and back-of-house operations. You must consider how much space you require for your kitchen, bar, and back-of-house facilities, as well as how much space you need for dine-in customers. This varies by restaurant type, with quick-service restaurants needing little customer space and fine-dining restaurants requiring up to 20 square feet per seated customer.
The amount of space required for your restaurant will be determined by its concept and service style. According to guidelines, you should dedicate 60% of your square footage to the dining room and 40% to the kitchen. A takeout area may only need a pickup counter, but a café or full-service restaurant may need plenty of seats.
Consider industry guidelines for sitting area per consumer as well. Fast-food restaurants, for example, use 11-14 square feet per seat, whereas fine dining facilities use 18-20 square feet per seat.
Large space facilities may eat into revenues and are often simply out of reach. Let your concept and budget define the amount of commercial space you need. It is essential to consider how to make the most of limited space in running your restaurant.
You'll always need to perform some work to transform a commercial space, although some demand less effort than others. You may want to consider either getting an almost turnkey space or creating your own business space. If the space is in disarray when you sign the lease agreement, you can save a lot of money if you can lock in a cheap rental rate and restore it for a modest fee.
Before you start looking for a site, you should have an idea of how you want your restaurant to look. These may be aspects of the site, such as a waterfront location or a harborside, but they may also include things such as an outdoor patio. Knowing what features you want ahead of time might help you narrow your search and guarantee that you meet your requirements.
Set a realistic budget and stick to it
Don't start looking for restaurant space to lease until you've decided on a budget you're comfortable with. When assessing various leasing sites, it is critical to establish a realistic budget to work with. You won't be able to make decisions or bargain if you don't have a clear grasp of the prices.
Once you have an estimate of your projected revenue, you can calculate how much you can afford to spend on rent, utility bills, and other expenses such as insurance, property taxes, and building maintenance costs. These fixed expenditures are often budgeted for roughly 5-10% of sales by restaurant owners. Spreadsheets for finances can help you keep track of all the numbers and automate computations.
If you've recently prepared a restaurant business plan, you'll be knowledgeable about how to conduct a market study, which involves extensively researching the restaurant industry to calculate how much income you may potentially bring in.
You can examine similar businesses and competitors in the area where you intend to open your restaurant. You can even interview restaurant owners to get a sense of what to expect throughout the process.
Would you be willing to extend your budget if your landlord's agent shows you a space that is out of your price range but fulfills all of your requirements? Can you sell enough food to a big number of your target customers at a high enough price to cover all of your expenses while still making a profit? These are some examples of why it is critical to forecasting how much income your restaurant will require to cover rent, occupancy cost, labor costs, utilities, and the cost of items supplied.
Prepare for the worst
The majority of business premises are leased for three to five years. Try to assess if you will be able to pay your rent if you have experienced a run of slowdown months or if the economy suffers a downturn. Do your study and save money before looking for a site for your restaurant. Make sure you have some money stashed away for when things got rough.
If you've done everything you can to put things right but are still unable to pay your restaurant rent, talk to your landlord about renegotiating your lease agreement. If your sales are hurting as a result of external circumstances such as street construction or economic difficulties, your landlord may be open to negotiating. Even if the base rent is cheaper, renters would choose steady, predictable revenue over the effort of finding new, viable tenants.
Assess the restaurant space potential
Talk to other tenants
If possible, talk to other tenants in the building to get an idea of the landlord’s integrity. Ask several questions about the reality of leasing from the landlord. You might want to find out who previously occupied the space. How long did they stay in the space, and what caused them to leave? If there have been many unsuccessful restaurants in the same area, it is worthwhile to investigate why. Current restaurant tenants can supply you with the most up-to-date insider knowledge. You can introduce yourself as a prospective tenant and inquire about the level of property care, rental rates, and their willingness to renew their lease term, among other things. Make good use of this knowledge in your inquiries.
Get your business plan together including your budget
A detailed restaurant business plan is the first step in every new venture, and one of the most critical points is location. It's where you demonstrate to potential investors that you've conducted your research on where you want to operate. Create site analysis and the consider related harsh realities of your budget an intrinsic part of the process of drafting your restaurant business plan, so you know what sort of lease space you can afford or even buy.
Ensure you have the startup funds
Take another look at the business plan. Does it say anything about how much time you have to pull this off? If not, go back and crunch some numbers to ensure you have the necessary start-up capital to even lease a space. Like many other businesses, if you don't have all of the necessary cash on hand, start researching your restaurant financing alternatives and pursuing the path that makes the most sense for your business.
Calculate estimated sales targets to cover expenses
The commercial space you pick has a major significant impact on your overall operations, including daily and recurrent expenses, and the number of customers you can serve. Therefore, you should target that your food sales must be strong enough to cover those expenses.
To determine how much you need to sell per seat in order to afford a commercial space, first complete the following:
- Find the commercial space’s cost per square foot
- Calculate your square footage per customer
How to find a commercial space's cost per square foot
The cost per square foot of an area affects the number of people you can serve and how much you must charge for meals in order to be profitable.
Commercial leases utilize various price per square foot pricing techniques depending on the city and kind of commercial lease (e.g. retail, office, warehouse, etc.). The method of commercial lease computation you utilize is often linked to the type of business you operate. For example, the average price per square foot for commercial space in New York, and its trendy neighborhoods like Manhattan or Brooklyn is $120-per-square-foot, while in Los Angeles, the average price per square foot is $52.
How to calculate square footage per customer
Dining areas account for around 60% of most restaurants' overall square footage. The remaining 40% is allocated to your kitchen, storage space, service stations, and so forth.
The amount of square footage allotted to each seated customer is determined by the type of establishment you want to operate, however, here are some general guidelines:
- 18 to 20 square feet per person for fine dining
- 12 to 15 square feet per person for full-service dining
- 18 to 20 square feet per person for counter service
- 11 to 14 square feet per person for fast food dining
Now, let's put this into effect by calculating how much you'd need to sell per seat, per service, based on the cost per square foot and seating capacity of your commercial space.
Let's have an example here.
Assume Suzette finds a 1,800-sq.t commercial space in California for $52 per sq. ft. She surveyed the area and determined that there is a market for her high-end, full-service Mediterranian restaurant concept. She believes the place has potential for her business, but how can she assess if it's a financially sensible long-term investment?
How many people can Suzette seat?
Let us now figure out how many persons Suzette can comfortably accommodate in this commercial space. She wants to provide 15 square feet for each individual.
Remember that the eating area generally accounts for 60% of the overall square footage of commercial space.
- Available dining space: 1,800 x 0.60 = 1,080 square feet
- Total seating capacity: 1,080 / 15 = 72 seats
The commercial space can accommodate 72 persons (or 36 tables for 2).
What percentage of sales should go to rent
In most situations, the restaurant industry collective experience suggests that the occupancy cost should not exceed 5% to 8% of a restaurant's gross sales.
Add only 2% to 3% to the basic rental expense, with a total occupancy cost of 8% to 10% of gross sales. The occupancy cost of your restaurant's food and labor will typically consume 60% to 70% of earnings or roughly 2/3 of the total.
How much does it cost to rent a restaurant space and other payments?
The monthly cost of your retail space is determined by where you are located as well as the type of lease terms available.
Based on the aforementioned example, the calculation for how much Suzette has to earn per month to meet her rent is shown below.
- Annual lease cost: 2,800 x 52 = 93,600
- Monthly base rent cost: 93,600 / 12 = 7,800
Suzette wants her monthly rental to be only 8% of her total monthly sales.
- Monthly sales target: 7,800 x 100 / 8 = 97,500
In order to meet her projected food, labor, and utility expenditures she needs to sell for $97,500 every month.
What is the average monthly rent for a restaurant?
According to a survey of 496 restaurants across the country conducted by RestaurantOwner.com, the median cost of monthly rent is $5000.
Negotiating Your Multi-Year Restaurant Property Lease
There are a few things to keep in mind when negotiating a lease location to guarantee you get what you want. Here are a few points to consider when negotiating a lease:
- Determine the length of your lease. A short-term lease allows you to relocate if you need more lease space, but a long-term lease saves you from having to incur the expense of moving soon after settling in. Landlords will usually give you a fair price if you sign a long-term lease.
- Is there an annual rent increase included in the lease? If this is the case, make sure there is a limit on how much the landlord may raise the rent each year, otherwise, you may end up with inflated overhead costs that eat into your earnings.
- Who will pay for renovations if the space has to be modified?
- Will you be able to sublease the space if you need to withdraw before the end of your contract?
Determine your bargaining power
A commercial real estate agent or broker is almost certain to represent the landlord if you lease a restaurant space.
When negotiating a new restaurant lease or a lease renewal, several factors will determine your bargaining strength such as the overall vacancy rate of the building, recent tenant turnover, and the size of your restaurant in proportion to the total property.
Determine your ownership status (are you starting a restaurant on your own or joining a franchise?); Your company and credit history, are also important factors.
Don't Always Accept the First Offer
Because the landlord expects a counteroffer, first bids are sometimes inflated. By starting with a higher rate, they enable themselves to decide on a rate they prefer rather than conceding.
Negotiate (ask) for more than you expect to get
Free-rent is frequently one of the simplest concessions a landlord can make. As a general guideline, always ask for or negotiate for months of free rent than you require or desire. This is especially important if other establishment spaces on the grounds have been unoccupied for some time. Aim for at least one month of free rent for each year of your lease's initial or renewal term. But keep in mind that you should start your negotiations at a higher level. If you start your negotiations with a five-month free rent offer, you may be counter-offered with three months’ free rent.
Don't broadcast buying signals
Avoid too much excitement that would interfere with your ability to negotiate. Some purchasing signal phrases are likely to weaken your bargaining power such as:
- "I'd have the carpet changed when I moved in."
- "This vast area is well suited to larger gatherings or private occasions."
Don’t let your words work against you.
Prepare to Walk Away
Negotiate to acquire what you want, and if you can't come close to meeting your demands, both physically and financially, walk away. Don't get off to a shaky start.
Consider the pros and cons of brokers
It may be tempting to hire a real estate agent or broker to assist you in finding the ideal site for your restaurant, but keep in mind that they often work for the landlord. They mostly target to get the landlord the highest potential percentage rent rates and secure a big commission in the process, not to get you, the tenant, the best deal possible.
Remember that the more space you agree to lease, the higher the base rent and the longer your leasing term, and the more money the real estate agent receives.
If you're looking at several properties, try working directly with each listing agent rather than allowing one to show you other agents' listings. They eliminate commission-splitting by conducting business with each property's agent, making your tenancy more favorable.
As a restaurant tenant, you should keep your intents and desires hidden from the landlord. Saying phrases like "this area could easily hold our tables" or "I appreciate that the room has its original moldings" show that you have a strong interest in the place and are already planning to set up shop there.
Avoid sending out clear purchasing signals since they reduce your bargaining power.
Have Your Lease Documents Professionally Reviewed
Examine every line of your restaurant lease agreement and verify if it includes everything you agreed on. If a landlord or leasing agent just informs you of the terms of a commercial lease, get anything in writing confirming the terms before submitting the counter offers. If they are hesitant to provide a letter, request an email or a copy of the space listing (which will contain at least the basic leasing information). Then have a lawyer or someone else who is familiar with contract leasing laws evaluate it. These individuals can guarantee that you receive what you pay for, allowing you to get a fair deal.
Leasing a Restaurant
After you've decided to lease your restaurant space, you'll need to examine the various types of lease agreements. There are several types of restaurant leases. Each lease type specifies which costs your obligations and which are the obligation of the commercial owner. Before meeting with the landlord's attorney, you should be aware of the two most frequent lease types: gross and net leases.
A gross lease requires the tenant to pay a fixed monthly current rent and is not liable for maintenance, utilities, or any other operational costs. Instead, these fees are included in the monthly percentage rental rates, protecting the lessee from any unexpected charges.
A net lease has a lower base percentage rent rate, but unlike a gross lease, the tenant is liable for some of the operating costs. Property taxes, janitorial services, utilities, and insurance are examples of these expenditures. It is important to clarify your specific financial obligation when negotiating a net lease so you don't get surprised with unanticipated fees after signing a contract.
Furthermore, net leases are classified into three types:
- Single: The renter is responsible for both property taxes and rent.
- Double: The renter is responsible for paying property taxes, insurance, and rent.
- Triple: In addition to rent, the renter is responsible for the net amount of property taxes, insurance, and upkeep.
Due diligence research is required to ensure that you rent a restaurant that can thrive with your business.
When searching through restaurant real estate listings, it's vital to know what's legitimate and what isn't. Working with an expert commercial realtor to lead you in the right direction is a good idea if you can afford it. When you find a good spot that meets your requirements and vision, make sure to get images and videos from the property owner. These will give you a decent indication of whether or not the space is suitable for your restaurant concept. Make an appointment to visit the property in person if it still appeals to you. Before agreeing to anything on paper, you'll need to see and feel the area in person.
Choose your restaurant location carefully
Finding the ideal restaurant site might take months or even years. But there's a reason people spend so much time looking for the ideal site: the location can make or fail a new business. When looking for a restaurant site, take your time and examine all of the aforementioned aspects before deciding on the perfect location.
See your ROI thrive as you navigate the world of restaurant space rental. This strategic approach ensures that you're not just selecting a location; you're building a foundation for long-term financial success.