5 Things to Know About a Restaurant Lease
Signing a restaurant lease can be both exhilarating and exhausting for commercial property investors.
That's because the thrill of owning a thriving eatery in the perfect location is balanced by the countless challenges of securing the right restaurant lease. From selecting an optimal location to negotiating lease terms that align with your business goals, restaurateurs must carefully follow each step for a smooth transition and long-term success.
The restaurant industry has hurdles such as high upfront costs, competitive markets, and stringent health regulations. As a savvy investor, understanding these details is key to making the right decisions about a restaurant space.
This blog post covers the most important things to know about a restaurant lease, including key factors to consider and actionable tips to overcome common pitfalls.
Keep reading to learn how you can turn the idea of leasing a restaurant into a dream come true.
Pros of a Restaurant Lease
Lower Initial Investment
Leasing a restaurant space requires significantly less upfront capital compared to buying. These savings allow you to allocate more resources toward other essential areas like marketing, equipment, and staffing, helping to give your business a strong start.
Flexibility in Location
Leasing offers the advantage of greater flexibility when it comes to location. You can choose high-traffic areas that might be unaffordable or unavailable for purchase. Additionally, if the location doesn't work out, it's easier to relocate at the end of the lease term.
Reduced Maintenance Responsibilities
Leasing offers the advantage of greater flexibility when it comes to location. You can choose high-traffic areas that might be unaffordable or unavailable for purchase. Additionally, if the location doesn't work out, it's easier to relocate at the end of the lease term.
Tax Benefits
Lease payments are typically tax-deductible as business expenses, providing potential tax advantages. Tax deductions can improve your restaurant's financial health by reducing taxable income, in turn freeing up cash flow for future growth.
Easier Expansion Opportunities
Leasing simplifies scaling your restaurant business. If you succeed in one location, you can lease additional spaces in new areas without the financial burden of purchasing property, making expansion quicker and easier.
Cons of a Restaurant Lease
Lack of Equity
When you lease a restaurant space, you're paying for the right to use the property without building any equity. Over time, these payments can add up to a substantial amount that could have contributed toward ownership if you had bought the property.
Limited Control Over Property
Leasing often comes with restrictions on modifying or using the space. Landlords may impose limitations on renovations, signage, or other changes. Limits like this can potentially hinder your ability to fully customize the restaurant to fit your brand and operational needs.
Potential for Rent Increases
Lease agreements typically include clauses that allow landlords to increase rent over time. These increases can sometimes come at inopportune times. Rent increases could strain your budget, especially if your revenue growth doesn't keep pace with rising lease costs.
Uncertainty of Lease Renewal
At the end of your lease term, there's no guarantee that you'll be able to renew the lease under favorable terms or at all. This uncertainty can disrupt long-term business planning and potentially force you to relocate, which can be costly and disruptive to your operations.
Obligation Despite Business Performance
Lease agreements are binding contracts, meaning you're obligated to make payments regardless of how well your business is performing. In the event of a downturn, this obligation can become a financial burden, making it difficult to sustain your restaurant through challenging economic times.
Buying vs. Leasing Restaurant Space
Whether you choose to sign a restaurant lease or buy restaurant space, it's important to weigh the following factors carefully. Doing so will help you make a decision that aligns with your business goals and financial situation.
Commitment
A restaurant lease requires a lower initial investment compared to purchasing a property. Leasing allows you to preserve capital for other critical expenses such as equipment, staffing, and marketing.
However, while leasing offers this advantage, remember that you won't build equity. The money spent on a lease agreement goes toward your right to use the property rather than owning it outright.
Optionality
The restaurant industry is dynamic, and your location requirements may change as your business evolves. A commercial lease provides greater flexibility, allowing you to relocate more easily if your current restaurant space no longer meets your needs.
Optionality is particularly important for new restaurant tenants who may still be determining the best market for their concept. On the other hand, buying a property ties you to a specific location, which can be a disadvantage if you need to adapt quickly to changing market conditions.
Control
When you own the restaurant space, you can make any modifications or customizations without needing landlord approval. This level of control allows you to tailor the space to suit your brand and operational requirements.
Conversely, a restaurant lease often comes with restrictions imposed by the landlord, limiting the extent of changes you can make. Additionally, lease agreements often include clauses for rent increases, adding an element of potential financial strain that property owners do not face.
Brokers
Engaging a commercial real estate broker who specializes in restaurant leases can help with the decision-making process. Brokers are well-versed in the ins and outs of leasing and buying commercial space and can provide invaluable insights based on your specific needs. They can assist in negotiating favorable terms for a commercial lease or a purchase agreement, understanding property taxes, and evaluating the long-term benefits versus the immediate costs.
5 Tips for Leasing a Restaurant
Leasing a restaurant space can be a strategic move that sets the foundation for your business's success. However, careful planning and consideration are required to avoid common pitfalls. Here are five essential tips to help you navigate the process and secure a favorable restaurant lease.
1. Choose the Right Location
Consider factors such as foot traffic, visibility, and proximity to complementary businesses when selecting a restaurant space.
A prime location can significantly improve your restaurant's chances of success by attracting more customers and strengthening brand visibility. Conduct thorough market research and site visits to verify the chosen location matches with your target demographic and business goals.
You can gain insights into customer flow patterns and local dining habits by visiting multiple prospective sites. Additionally, consulting with a commercial real estate broker who specializes in the restaurant industry can provide valuable data on market trends and help you identify the most promising locations for your business.
2. Negotiate Favorable Lease Terms
Pay attention to the length of the lease, renewal options, and clauses related to rent increases. Ask for concessions such as rent-free periods or landlord contributions toward renovations, also known as TIs (Tenant Improvements).
Consider how rent adjustments will be handled over the term of the lease. A cost of living increase, tied to the Consumer Price Index (CPI), can provide predictable rent hikes based on inflation rates. But, it also means rents could rise significantly during periods of high inflation.
Another option is negotiating percentage rent, where the rent is based on a percentage of your restaurant's sales. The primary advantage is that rent expenses tie into your revenue, offering relief during slower periods. However, it may result in higher overall payments during peak sales seasons and requires detailed reporting of financial performance to the landlord.
Hiring a commercial real estate broker can give you an edge in lease negotiations. A good CRE broker specializing in restaurant leases can help make sure that the terms are clear and favorable, and match your financial constraints and business objectives. Additionally, try to negotiate exclusivity clauses to prevent direct competition within the same retail space.
3. Understand Your Total Cost
Beyond the base rent, leasing a restaurant space involves additional costs like property taxes, maintenance fees, and utility expenses. It's important to clearly understand all these costs to budget effectively and avoid unexpected financial strain. Request a breakdown of Common Area Maintenance (CAM) charges and expenses from the landlord and factor them into your budget.
CAM charges are shared among tenants in a multi-tenant space and can cover expenses such as landscaping, security, and upkeep of shared facilities. For restaurant leases, you might also encounter industry-specific costs like grease trap maintenance, pest control, and specialized waste disposal.
4. Check Zoning and Permits
When leasing restaurant space, it's crucial to understand that zoning and permitting requirements can be more stringent than those for other types of commercial leases. Restaurants must often comply with commercial space regulations that address food preparation and service, such as obtaining health department permits, liquor licenses, fire safety approvals, parking ratios, and noise levels.
Additionally, some locations may have restrictions on exterior signage, outdoor seating, and hours of operation, which could impact your business model. Verifying that the leased space meets all these criteria from the outset will help you avoid potential legal issues and help your restaurant business run smoothly.a
5. Plan for Future Growth
Look for flexible terms that allow for expansion or relocation if needed. Consider negotiating options to expand into adjacent retail or commercial space if your restaurant outgrows its current location. It's also wise to include provisions in the restaurant lease that offer protection if the business doesn't grow as planned.
Negotiating a subleasing clause can give you the ability to rent out the space to another tenant if necessary, providing a financial safety net. An early termination clause can also be helpful, allowing you to exit the lease under specific conditions without incurring significant penalties.
These terms can provide the flexibility needed to adapt to changing circumstances by ensuring your restaurant lease agreement addresses all possible scenarios.
FAQs About a Restaurant Lease
What should be included in a restaurant lease agreement?
A restaurant lease agreement should include rent, lease terms, renewal options, and specific clauses related to the usage of the restaurant space.
How can a commercial real estate broker help with leasing a restaurant?
A commercial real estate broker can help you find the right restaurant space, negotiate lease terms, and navigate the entire commercial lease process.
What additional costs should I consider when leasing a restaurant space?
When leasing a restaurant space, consider property taxes, maintenance fees, and utility expenses in addition to base rent.
How can I negotiate favorable lease terms for my restaurant?
To negotiate favorable lease terms, seek rent concessions, buildout allowances, and exclusivity clauses. Enlisting a commercial real estate broker can also provide leverage.
Why is location important for a restaurant's success?
Location is crucial because it affects foot traffic, visibility, and proximity to complementary businesses, all of which can significantly impact a restaurant's success.
What are the differences between retail space and commercial space for restaurants?
Retail space typically caters to consumer-facing businesses and is located in shopping centers or high-traffic areas, while commercial space may include office buildings and industrial zones.
What common pitfalls should I avoid in a restaurant lease?
Avoid pitfalls such as unclear lease terms, excessive rent increases, and inadequate understanding of zoning laws and permits.
How can I smoothly transition from one restaurant lease to another?
To smoothly transition from one restaurant lease to another, start negotiations early and secure the new space before the current lease expires. Make sure there are overlapping periods to allow for any necessary buildouts and relocation.
How can I smoothly transition from one restaurant lease to another?
When you're ready to find a restaurant space, look no further than Crexi.
