Restaurant Leasing Guide
I've received a number of questions regarding how to negotiate a restaurant lease from first time owners to experienced operators who previously had someone else do it for them; so I'm going to attempt answering all of your questions in one shot.
HH ANSWER:
There seems to be a general distrust of Brokers among those submitting questions...which is understandable since Brokers are, ironically, not always properly incentivized to get their Clients the best deal possible.
Fiduciary duties aside - their income is directly tied to your expenditure. i.e., the more you pay (i.e., the worse the deal) the more money they earn.
But Brokers add significant value in any real estate transaction - not only due to their familiarity with legalese and the local market but because of the likelihood that they may have pre-existing relationships with local Landlords and Developers. Those relationships can often result in your getting a line on a well positioned location before it even hits the open market.
That being said, engaging in any type of business activity without some base-level knowledge can be both intimidating and dangerous.
Even the most experienced restaurateurs enter into extremely disadvantageous agreements...the extent of which is often largely unknown until it's too late.
When something goes wrong (e.g., a change in the market or physical landscape) Investors, Brokers, Landlords and Developers (whose profits are largely determined by how much you spend and how much your presence drives up the value of their related holdings) often leave successful yet inexperienced chefs, owners and operators holding the bag and covering the loss… or worse force Tenants to liquidate assets or work multiple locations just to support one loss leader.
Regardless of whether it's knowingly or unknowingly, a simple turn of phrase (or use of one word in place of another) within a "boilerplate agreement" can not only negatively affect a small business owner but can destroy everything from their credit to their marriage. In short, being the less-experienced Lease negotiator can result in losing everything you’ve worked hard for.
It takes years of multi-disciplinary experience and foresight to ensure an operator is sufficiently insulated from the potentially disastrous effects of an unexpected downturn.
It’s during downturns that the more experienced parties in an agreement tend to far more protected as they’re well aware that “what-ifs” often do occur over the span of a 10-20yr Lease term.
With over 20 years in restaurant operations and experience and having worked on both sides of the deal table; I’ve learned many of the ways experienced deal makers insulate themselves and profit disproportionately from their “partners” who, in addition to risking their own capital, risk their time, sweat-equity and future security.
A seemingly "fair partnership", "bargain lease" or "smart purchase" needs to be evaluated not only by Brokers and Lawyers (who profit regardless of the venture’s success or failure); but by someone with practical restaurant experience AND real estate knowledge. Ideally - a consultant, mentor or partner who understands industry specific: operations, financial thresholds, margins, purchase & lease agreement language, opening and repositioning requirements, timelines, vagaries of economy, common facility and staffing issues, uncontrollables within an operation and the impact that pre-existing and future co-tenants could have on your business.
The hospitality industry is not just a game of guest satisfaction. It’s a business where pennies and percentages add up over time. It’s a deep personal commitment to warm, personal and engaging service and requires a willingness to accept responsibility for living, breathing, ever-evolving revenue centers.
That level of involvement leaves little time for much else like: educating oneself on Lease language and the intricacies of contracts & negotiations.
It is for those reasons that I offer general overviews and guides like this one - as a starting point for discussions and planning that can assist owners in navigating the most common (and often largest) pitfalls associated with hospitality-driven ventures.
The following guide is a general overview of common terms and important factors one should consider prior to entering into a Lease Agreement.
This guide is not, in any way, intended to represent a complete and/or comprehensive breakdown of any one Lease or any prescribed strategy as every situation is as unique as the use and as such - presents different challenges and opportunities that require an in-depth analysis and consideration of all terms and related collateral to appreciate the unique context.
For that reason (and a host of others), I strongly recommend consulting with a licensed real estate attorney, real estate broker, financial advisor, tax professional (and possibly your physician) before engaging in any contract, agreement or partnership.
If you’re not interested in my guide but are open to just two pieces of advice - they would simply be:
READ EVERY SINGLE WORD OF THE LEASE (DO NOT "GLOSS OVER" ANY PART).
STOP READING WHEN ENCOUNTERING ANY WORD OR PHRASE YOU DON'T UNDERSTAND AND GOOGLE IT.
Remember: executing 10,000 leases for restaurants does not make any Broker a "restaurant expert".
It merely makes them a restaurant leasing expert.
And while any lawyer or "leasing expert" can tell you whether or not a contract is “typical”, “legitimate, “legally binding / enforceable” or “in-line with other Agreements they've seen”; the fact remains that any agreement is limited only by the parties' own mutual: imagination, creativity, risk tolerance and motivation to structure a mutually beneficial deal.
Successfully navigating a restaurant Lease requires both real estate knowledge AND intimate first hand knowledge of the industry including: restaurant operations, vagaries of economy and market variables (both controllables and non-controllables) that can impact any outlet's performance…and thus their ability (or inability) to meet specific terms.
This restaurant leasing guide titled: "Anatomy Of A Restaurant Lease" highlights what I believe to be the most important parts of most retail Leases I've come across as a hospitality real estate agent and broker… and it’s free for clients or $250.00 for HH members .
I break down the elements, opportunities, consequences and legalese into plain English…and it’s the best tool I’ve ever come across for anyone interested in gaining quite a bit of practical commercial real estate knowledge in a very short period of time.
Please consider each of the points in this guide carefully prior to even looking at the inside of a space.
If you've already started looking at properties…then take a look now before you actually start negotiating or bringing a contractor into the equation (I explain why in the guide).
Any licensed Broker or Agent with integrity and a long-view approach to their own business should be willing to entertain any questions or thoughts you might have after reviewing this guide as it’s been written precisely for that reason: to facilitate conversation and transparency.
Good luck to you,