Restaurant Lease Negotiations: Preventing Surprises to the Bottom Line
With rent being one of the most significant expenditures for a restaurant, executing a favorable lease is a critical business decision that can impact a restaurant’s success or failure. Restaurant operators must not only consider current needs but also future needs as the restaurant grows and matures over the lease term. Though every lease negotiation is unique, some key considerations include:
- Doing Your Research: Having a strong understanding of your business and the customers you want to attract will ensure you pick the right location. Spend time observing the location. Is there a regular flow of foot traffic during the time of day for the type of customers you seek to attract? Is parking readily available (though not too easy to find since customers do like to see signs of life as well)? Who are your neighbors? Will they have a positive impact on your business? If you pick your restaurant location because it is near another business that will be helpful in attracting customers for your restaurant, find out the lease term for that tenant. Also be weary of use clauses or local regulations which could prevent your restaurant from selling certain items. On the flip side, ask for exclusivity clauses which can help minimize direct competition from tenants near your restaurant.
- Dealing Direct: Find an agent who has your interests in mind. This can be challenging as listing agents are usually hired and paid by the landlords, and therefore their motivation usually sides with the landlord. Dealing directly with the listing agent means they will not need to share their commission with another agent, which increases their drive to consider your needs in the process of successfully executing a lease.
- Future Rent Increases: Free or low initial rent may seem attractive, however understanding future rent escalations and considering how it will impact your future cash flows is critical. Such an assessment can also be influenced based on how much tenant improvement amounts a landlord is willing to absorb.
- Common Area Maintenance Charges (CAM): Understand how CAM charges will be computed. Talk to your neighbors to learn about your landlord and their historical experience with these charges. Ideally CAM should be calculated using leasable space rather than leased space of a building. If CAM is based on leased space of a building you run the risk of facing increased charges if another tenant moves out. CAM (as well as rent) is also often based on square footage. Make sure the square footage per the lease agreement is accurate and that you are not paying for more space than you occupy.
What tips do you have to ensure a successful lease negotiation?
- Impact to Loan Covenants: If your business is dependent on debt financing, consider whether the lease terms will break your covenant compliance. If so, be proactive and discuss with your lender. Keep up with the changes being proposed on the lease accounting standards and evaluate how this may impact your ability to comply with future covenant terms as well.