Finding restaurant space for lease is an exciting journey and involves many steps along the way. Many first time restaurateurs have operational experience, but lack the understanding of the complexity of commercial restaurant space selection and restaurant lease agreements.
Mistake #1
The biggest mistake most first-time restaurateurs make is a lack of preparation. Prior to searching for restaurant space for lease locations, it’s critical to complete the following:
- Business Plan
- Financial Statements
Your business plan will define your concept, physical site criteria, trade areas that are suitable for your concept and determine how much you can pay in rent.
Prior to submitting any offers it’s important to be prepared to sell yourself. Don’t wait until the last minute when you will be competing with other parties and most likely lose the space to your competitors. Prepare in advance to provide the following:
- Executive Summary or Business Plan
- Personal Balance sheet listing assets and liabilities
- Credit report
- Bank statements
- (2) Years Personal Tax return
Mistake #2
Have realistic expectations. Many restaurateurs underestimate how much time is involved to find a good restaurant space location and negotiate a lease agreement. Be prepared to spend 6-12 months to secure a location for your business.
Getting Started
Your business plan is your compass. Based on the research conducted for your business plan, you should have determined the following:
Trade area or neighborhoods that you will target for your new restaurant space Site Criteria including the size of the space your restaurant requires and how much rent you can afford based on your projected sales.
Know Your Codes
One of the biggest time wasters is looking at properties that don’t allow restaurant use. In many cities, restaurant use requires more parking spaces than many properties can provide.
Prior to starting your search, contact the planning department for cities you are considering and determine how much parking is required for restaurant use. The parking required may be different depending on the size of your restaurant or type of restaurant.
For example, a take-out restaurant often requires less parking than a fast casual or fine dining restaurant. The parking requirement is typically stated as a ratio of parking spaces per square feet of space. For example, 1 space per 100 square feet. At this time you should also verify what zoning permits restaurant use. Most commercial areas should allow restaurant use, but certain neighborhoods may have additional restrictions.
What are Your Space Options?
The next step is to determine what type of space you wish to consider. Many first-time restaurateurs are looking for 2nd generation restaurant space for lease. These spaces are former restaurants and often have an existing kitchen and infrastructure needed for restaurant use that will save you time and money.
Prior to searching, determine if you are only looking for existing 2nd generation space or if you will build your own restaurant from a raw space. If you are willing to build out a space you will have more options. If you are looking for 2nd generation space, you can search for vacant former restaurant space or buy an existing operational restaurant and convert to your concept.
There are pros and cons to each:
Pros of Buying an Existing Restaurant
- Possibility to acquire below-market lease or less restrictive liquor license
- Time to open can be significantly reduced
- Ability to acquire property that would not be permitted today, “grandfather status”
Cons of Buying an Existing Restaurant
- Layout is not efficient
- Condition of equipment unknown
- Less ability to negotiate lease terms with landlord
How to Find Restaurant space for Lease and Sale
There are three basic approaches to finding restaurant space for lease:
- Digsy or DIY Internet Sites
- Commercial Real Estate Brokers
- Calling For Lease Signs
Digsy or DYI Internet Sites
There are numerous free and paid services that advertise restaurants for lease.
Some of the most popular sites include:
- Digsy.com (their free network of licensed commercial real estate experts do all the searching for you to save you time finding restaurant space for lease)
- Loopnet.com (you can search for commercial space for lease yourself, for a fee)
- BizBuySell.com (businesses for sale)
Commercial Real Estate Brokers
If you are going to lease a restaurant, there is a 99.9% chance a commercial real estate agent or broker will represent the landlord.
Whether you decide to hire your own broker or lease a restaurant on your own, it’s important to understand the role of the commercial real estate broker and how they are compensated. Read this article prior to contacting an agent.
Are you thinking about hiring an agent? Digsy can help you find restaurant space for lease by connecting you a proven agent like myself, free of charge — on-demand. Give it a shot here.
WARNING: Many Landlord brokers don’t return phone calls or do not like working with first-time operators. You will be taken more seriously if you work with an experienced and well known commercial real estate agent or broker.
For Lease Signs
Driving the neighborhoods that fit your concept is a great way to learn the market and determine important factors such as traffic patterns and which areas attract the most visitors. Unfortunately, driving and calling “For Lease” signs is extremely time consuming and frustrating.
If you want to know even basic information such as square footage, rental rate and if restaurant use permitted, you will need to leave a phone number and hope you receive a return call. To make matters worse, you won’t know which property you called about unless you keep detailed notes.
Questions to Ask Landlords and their Brokers or Agents
If you are not working with your own agent and you are looking specifically for 2nd generation restaurant spaces, you should ask the following questions when you contact brokers and landlords:
- Is there an existing hood system?
- Is there a grease interceptor?
- How much is the NNN charge?
- How long has the restaurant been closed?
- Are there any exclusive use clauses that prevent my use? ( for example, pizza, Mexican food, sushi)
- How much parking is provided?
Viewing Properties
Prior to scheduling a meeting to see the inside of a prospective space, it’s a good idea to drive by the site and confirm this is a location and neighborhood that meets your general criteria.
If you are viewing a restaurant that is currently open for business, don’t ask any employees or neighbors’ questions. In many cases the employee’s are not aware. If you would like to see the interior act like a customer and order something to eat or drink. You will need to schedule a meeting to see the kitchen and areas not visible as a customer.
Leasing a Restaurant Space: The Lease Process
When you find a restaurant location you like, it’s time to negotiate. In most cases, you will be making the initial offer.
The most common process is to submit a Letter of Intent (LOI). The Letter of Intent outlines the major deal points to be included in the Lease Agreement.
Some of the terms the LOI should cover include:
- Address
- Size of Premises
- Term of Lease
- Rent
- NNN, CAM Charges or Operating Expenses
- Lease Commencement/Rent Commencement
- Tenant Improvement Allowance
- Rent Abatement
- Options to Extend
- Assignment Rights
- Landlords Delivery Condition
In most cases the LOI is non-binding on either party and used as an outline to prepare a lease. Negotiating a Letter of Intent can take anywhere from a few days to many weeks depending on the landlord and how hard both parties negotiate.
Lease Agreement
Once you have an agreed upon LOI, the landlord will prepare a draft lease for your review. The lease will include all of the terms outlined in the LOI in addition to additional legal language covering many more items that are typically not discussed during the LOI stage.
Lease agreements range from just a few pages to more than 150 pages in length. If you addressed the major business and economic issues thoroughly during the LOI stage, the legal issues in the Lease can usually be worked through. Lease negotiations can take anywhere from a few days to a month. Lease negotiations are either handled directly between the landlord and the tenant (sometimes with the broker or agent as the middle man) or between the landlord’s attorney and tenant’s attorney.
Lease Signing
Final lease agreements will be prepared for signature once all terms have been agreed upon by both parties.
The landlord or landlord’s agent or attorney will either send hard copies for signature to the tenant or arrange for both parties to meet and sign together. You can expect to sign two to four copies depending on how many parties were involved in the transaction. The landlord, tenant and brokers if any, each receive a fully signed copy for their records. At this time you will deliver a cashier’s check made to the landlord for the first month’s rent, NNN and security deposit.
In addition, the landlord will require you to provide proof of liability insurance naming the landlord as additional insured. You should arrange insurance during the lease negotiation period.
Delivery of Premises
If the space is vacant and the landlord is not responsible for any work prior to delivery the premises, you may receive the keys when you sign the lease. If the premises will be delivered at a later time, perhaps after the landlord completes the landlord’s work, arrangements will be made to deliver the premises.
It is a good idea to utilize an amendment such as a Letter of Lease Commencement so there are no discrepancies about the start date of the lease.
Summary
You can successfully find a restaurant space for lease If you follow the steps provided in this article:
- You have business plan and financial statements prepared
- Determined which trade areas you will search
- Know what size space you need and how much rent you can afford
- Have decided to hire a broker or search on your own
- Determined if you will buy, build or search for 2nd generation space
- Understand the key deal points for a Letter of Intent
- Are prepared to review a lease agreement
- Ready to accept the premises after signing a lease
About the Author: Mark Chase is the President of Restaurant Real Estate Advisors and a Digsy Expert specializing in helping businesses find Restaurant space for lease. Mark provides site selection, lease negotiations, real estate consulting and restaurant sales to fast growing brands and independent restaurateurs.
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January 11, 2016 at 3:46 pm
Great job as always Mark! Happy new year to you too!