Truth be told, a novel could probably be written on this subject alone, and not a flimsy little book but a hefty, borderline encyclopedia-sized one! Since we don’t have that kind of time together let’s start with 5 Rules that are going to be invaluable to the success of negotiating your new restaurant lease.
Rule #1: Get Representation
Make sure that your representative is smart, savvy and most importantly, experienced in your particular industry of business. You truly want someone that is an expert in the field as it will save you a lot of time and money in the long run. Talk to your lawyer or broker and ask as many questions as you can. Do not be afraid to push for explanations! I have personally secured multiple legal clients simply because they know I also own and operate restaurants. It is safe for many of these clients to assume that my understanding of the particulars in the restaurant field will result in their securing the best possible deal. Avoid having a broker that works both sides as it is very difficult to represent both interests fairly without eventually making unwise concessions for one.
Rule #2: Use a Fine-Tooth Comb
Don’t take your landlord’s word for anything. Request verification of all representations in writing. I have seen the stated square footage of a location vary by as much as 10% from the actual square footage. You can imagine how grievous this type of error can be on a large footprint, but realize that even on a smaller venue a 10% discrepancy can have a crippling effect on your business. The other area where I have seen this be very problematic for a tenant is in terms of the zoning for the particular location. As you may or may not be aware, in most cities restaurants require specific zoning or entitlements in order to to operate. Furthermore, there are often additional restrictions on a state level from the respective ABC (Alcohol Beverage Commission). Your broker or lawyer should be able to help you navigate this but you can also do your own due diligence by going to the city’s planning/zoning website and search online for your state’s specific ABC requirements. Ask your landlord for the prior year’s tax and utility bills. A significant percentage of leases are “triple net”, meaning that you are required to pay your percentage share of the landlord’s property taxes and utility bills in addition to your base rent. It’s also not a bad idea to ask the landlord if they are planning on selling and or refinancing the property as this can have a dramatic effect on your share of the taxes. I am not sure how honest they will be but it can’t hurt to ask!
Rule #3: Mull Over the Term Again
Take the extra time to consider, then reconsider the length of your lease term. If in doubt, go shorter. Your landlord is going to want you to take a long lease because it’s in their own best interest to keep you there as long as possible. For a budding restaurant, you want the option to be there for a long time but it’s also very important to not be chained to a losing proposition for eternity. I have always felt that a five-year initial lease term with two five year options works well for most concepts. The option renewal is a grant to the lessee that enables them to continue the lease at a specified rate for an extended period of time. Two, five-year options for example, would provide for the extension of the lease totaling ten years past the expiration of the original term (fifteen years in all). This is an ample amount of time to generate income should the restaurant be successful, but would also yield an exit strategy at the end of the initial five-year term should the venture be failing. It’s extremely important to negotiate a favorable rent adjustment at the beginning of each option period. The landlord will usually attempt to adjust the lease to FMV (fair market value) but one thing is for certain, they will build in a floor figure to ensure that under no circumstances does their rent decrease. If your landlord is insistent on an adjustment to a FMV it may be beneficial to instead offer a threshold percentage of FMV whereas to not exceed a specific figure. The key for you in this negotiation is to ensure that your rental adjustment is not so egregious so as to undermine the feasibility of the business.
Rule #4: Crawl the Neighborhood
Pound the pavement and learn your neighborhood. The landlords and the brokers are always going to tell you how wonderful a particular location is. You are going to hear about what’s coming into the neighborhood and how this particular area is the ‘next big thing’. The truth is, every single area can’t be the next big thing despite all representatives in their respective areas claiming so. Some areas develop more rapidly than others. I remember over a decade ago everyone in Los Angeles was screaming to anyone who would listen that Downtown was the place to be and that if you didn’t urgently get on board then, you’d miss the boat entirely. Guess what? It really did happen and Downtown is in fact the place to be now but it didn’t happen 10 years ago. It took a lot longer and I happen to know multiple people who jumped in back then and simply couldn’t survive long enough to now be a part of the evolved neighborhood. Really get out there and do your homework. I’ll often meander around the streets for hours and talk to everyone and anyone who will listen. Find out what’s really going on in any particular area and remember that one block can often be the difference between success and failure. Take a trip down to your local planning office and ask around to see what is going on in a specific district. There is truly a world of incredible information sitting at your local city hall just waiting to enlighten you.
Rule #5: Never Personally Guarantee Your Lease
I can think of 150 reasons why you shouldn’t and 0 why you should. Your landlord is always going to ask for it and some will demand it but my general rule in this area is to just say no. The cold hard truth here is that restaurant businesses fail fairly often. You want to make sure your business has the greatest chance of success but alternatively, should the business not succeed, you don’t want it to drag you down too. Get creative with your landlord and offer a corporate guarantee instead. If they say no to that then offer an increased security deposit. There is also something called a “good guy” guarantee for you to consider. This means your personal liability for a lease default is limited to the rent that accrues up to the day you leave the premises. Again, sit down with the landlord and get creative. I have yet to lose a lease because I refused to personally guarantee it.
I hope these 5 rules help you as you begin this exciting journey. This list is by no means exhaustive and only includes what I believe are the foremost crucial rules. As I wrote this, several other key came to mind so stay tuned for a sequel to this article!