Key Restaurant Leasing Issues
If you are leasing restaurant space — you know the importance of your location and the lease. While there are always many factors to consider, leasing has become even 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 about leasing space related to today’s marketplace:
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. Being 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 regards 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 would have not normally have 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 all morning commuters. Lunch and Dinner restaurants want the opposite side of the road. If your location is inconvenient to auto traffic, less people will visit your restaurant.
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 FASB 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 typically utilize long lease terms. Consider buying space if the model works for your business. Location choices are good now, prices in some cases are below replacement costs and interest rates are low.
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, ask for or uncover the lease expiration of the base term of the anchors. Also try to determine if the anchors sales per ft are such that they will not go dark / close the store. Ask for a co-tenancy clause allowing a rent reduction or cancelation at some point if the anchor is vacant.
10) Parking. Restaurants require more available parking than other retail uses per square foot. 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. Patrons want convenience when selecting a lunch or dinner spot.
11) Controlling Costs. Attempt to control property operating costs passed on to you in the form of CAM rent payments. Annual increase limits, excluding certain costs, limits on controllable expenses, right to audit, and really 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, uses of the space and options to renew with definite rental rates. If business turns bad or does well, the more flexibility you have to change uses, sublease and extend the term can prove very helpful down the road.
13) Demographics. Locating in an area with both a dense, vibrant daytime business population as well as a vibrant nighttime population can be helpful for most restaurants. Compare side by side demographics of an existing successful location to new prospective sites. A concept that captures what the patrons in the area are looking for – a niche they can’t find in the area is helpful for a successful restaurant.
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. Experienced representation on your side of the table is extremely beneficial.
Your ability to negotiate lease terms to protect your interest in this market will vary depending on the vacancy in the submarket and the particular property, as well as the strength of your financials and size and term of your lease. It’s important to understand the most important issues for your business and what’s reasonable in your situation. The knowledge and talent of your tenant rep and real estate lawyer can also affect the outcome.
In the event property you lease space in is foreclosed, your lease document and the existence or not of an SNDA is critical. How the SNDA and the lease are worded will control the lender and tenants rights. Review your lease with a real estate lawyer and broker. With a full understanding of the market and your goals, contact the lenders representative.
Michael Bull, CCIM 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 firm with three offices, headquartered in Atlanta GA. Bob Kane is retail tenant rep with Bull Realty.