restaurant



5 Things EverY Restaurateur Should Know

Before signing that first lease...

Are you a cook with a lot of great ideas? After earning your bones through culinary school and kitchens you’re feeling ready to open up your own place. However, just because you know your way around the kitchen doesn’t mean that you know your way around the paperwork that comes with it, especially the legal, binding kind – like rental agreements.

Enter Craig Sweitzer, a commercial real estate broker and founder of Urban Works. Sweitzer founded the agency a decade ago in response to what he saw as a shifting commercial landscape in his hometown of Portland, Oregon: big chains were out and chef-driven local restaurants were in.

We asked him what first-time restaurateurs should know before signing that first lease. Take it away, Craig!

Get a broker to represent you, especially if the landlord already has a broker working on their behalf.

Ask the potential broker representing you how many restaurant transactions they have negotiated, and when was their last restaurant lease. Do some research and find out which brokerage company represents local restaurants and has experience negotiating restaurant leases. That firm will know the latest comps and will be able to ask for more tenant improvements.

My biggest pet peeve about commercial brokerage is that there are too many commercial brokers that will chase any potential lease without adding value to a client. A good broker specializes in their expertise like any other profession (you wouldn’t hire a divorce attorney for a corporate law problem), and will specialize in either retail, industrial, apartments, etc. Call the broker’s references from past restaurant deals, and ask those operators about their experience with that broker, both plusses and minuses. It is amazing how many restauranteurs do not follow this simple rule of checking experience or references.

Understand the “three nets” and agree upon a set of costs and expenses for the first year before signing your lease.

The “three nets,” or NNNS, comprise property taxes, insurance and maintenance. Most landlords negotiate the base rent for the property but do not always know what the three net expenses will be. Make sure the landlord or developer defines those additional monthly costs and that they are within your budget. If the landlord doesn’t know those expenses, then you should make extra sure that those costs will be within your budget. A good landlord has an idea of their property management expenses, insurance and approximate property tax expenses.

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Get an Additional Lease Option to match the terms of the lease.

Since restaurants cost more in tenant improvements than a standard retail buildout, it is important to be able to amortize those costs. A restaurant group should have control over their space for a minimum of 10 years. If you have a five-year lease, then get a 5-year option to renew the lease at either a pre-negotiated lease rate or at a market rate for that neighborhood at the end of five years. Control of a space is very important, and once that lease expires the landlord can turn around and lease those built-in improvements (grease trap, hood system, restrooms) to another restaurant.

Get an Exclusive Use Provision if you are selling a specialty item that your budget depends upon. 

If you are an ice cream, coffee, ramen or sushi restaurant, the last thing you want is the landlord leasing to another restaurant operator selling those same items. A specialty coffee operator should have the exclusive lease right to sell coffee-to-go and whole beans on the property.

If you are an ice cream, coffee, ramen or sushi restaurant, the last thing you want is the landlord leasing to another restaurant operator selling those same items. A specialty coffee operator should have the exclusive lease right to sell coffee-to-go and whole beans on the property.

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Vanilla Shell Condition: Define and detail the landlord’s tenant improvement contributions.

The landlord’s definition of a “vanilla shell condition” might vary considerably from your contractor’s quoted requirements. A vanilla shell condition is the state of your space — or shell — comprising a minimally finished interior, ceiling, plumbing, electrical, etc. Think of it as the bones and muscle of your space before the skin gets tried on. For instance, does that new electrical panel provide 200 amps or the 400 amps you will most likely need? Does the landlord-provided HVAC system adequately handle heating and cooling for your new space during the hottest summer months and freezing months? Who is paying for the city’s system development charges (SDCs) or Traffic Impact Fees (TIFs) from the city?

Often new restauranteurs get stuck for additional “upgrades” to the space and bust their capital reserve budget on unforeseen tenant improvements. Know what those costs are going to be before you sign a lease contract. A good rule of thumb: If the improvement stays with the building when you leave the space, the landlord should pay for it. Get everything in writing from a trusted and experienced restaurant contractor. Know when payments will need to be made and who will be paying for those expenses.

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