You have a business plan and found the perfect location for your new restaurant concept. Now comes the hard part: negotiating the lease and opening for business.
Here are the top operations and risk considerations that you should not overlook during the lease negotiation.
1. Tenant Entity
For liability reasons, do not list the tenant as a single individual. Pick a name for, and then form, the entity that will run the business and appear on the lease as the tenant. Unless there’s a licensing reason to incorporate (more on this below), the restaurant owner should be a limited liability company (LLC). This allows for more flexibility with raising capital from operating owners and “silent” investors, all referred to as “members” of the LLC. It also provides a clear outline of who manages the business, who gets certain decision rights over restaurant operations and major business decisions and what returns each member will receive once the restaurant is in the black.
An LLC also helps protect individual owners or members from personal liability from operations, such as slip-and-falls, although many landlords require a lease guaranty from a live person who controls the tenant. Any guaranty you give the landlord should be limited to a dollar amount “cap” or have a sliding scale reduction in liability over time.
If you plan to serve alcohol, before forming your tenant LLC and signing a lease, make sure to check the local liquor license requirements. Some counties have a local residency requirement for the controlling owner of an LLC liquor license applicant. This type of requirement can doom your liquor license application after you sign a lease, so it is imperative to determine in advance if a corporation is better for the tenant to ensure it is able to obtain the all-important liquor license.
2. Rent Commencement and Lease Contingencies
If you are still raising funds or obtaining a business loan to support the build-out and initial restaurant operations, push for either a “soft” commitment from investors or your bank, or a financing contingency in your lease (a termination right). If the termination right is not agreeable to the landlord, get a rent payment extension option. Be realistic though, as landlords are more flexible with restaurateurs who have successful operating experiences and great credit. A broker can assist in nailing down important lease terms up front and negotiating with the landlord or the landlord’s broker.
Ask yourself: how long will it take to get funds in hand, design and construct the space needed to open for business, and get well past a soft opening? If you are pushing for a financing contingency, be prepared to set aside funds for a broker’s fee, as the landlord will not want to be out of pocket with the broker if the lease kicks-out, and the broker will not want to aggressively negotiate on your behalf if they think they will not be compensated for the effort.
You will likely need a few local and state permits and licenses to do build-out, acquire a certificate of occupancy and open for business. If your business plan includes alcohol, the liquor license is key. Have your application paperwork together so that, immediately after a lease is signed, you can submit everything to the various agencies. In certain locations, the prior tenant’s license can be assigned to you, as the new operator, which accelerates the process.
At the very least, it is imperative that the lease allows you to extend rent payment commencement for any delay in receiving all necessary operational licenses. Additionally, push the landlord for a lease termination right if you are unable to obtain the necessary licenses by a set date.
Whether this is your first restaurant venture or your tenth, it takes time for a new restaurant to gain traction in the local market, especially if it’s a new concept. Having a marketing and PR strategy in place before you open is crucial. Building a rent buffer or ramp-up period not only for a soft opening but also a market awareness period is just good business sense. Have a period of time “ask” in mind when starting lease negotiations, but be realistic about what cash flow your landlord wants to see and when, as they are underwriting their property carry costs with income from your lease.
3. Signage and Marketing
Depending on site location, the ability to install signage will vary. If your restaurant is opening in a shopping center, push for high billing on existing monument signs that are visible from the street and marquee signs with your logo. Determine up front if the shopping center allows logo marquee signs, as some are restricted in lettering, size and colors of permitted signage.
If your location is on a busy urban street, your window and door signs will be instrumental for helping pedestrian customers find you. Identify what you want to paint, post or hang, and make certain it’s permitted in your lease including tent, banner signs and awnings. Don’t forget the right to install a “coming soon” barricade during the build-out to create public anticipation for opening.
4. Operational Considerations
Your design team will make the interior of the restaurant consistent with your brand and the clientele you want to attract, but remember that the efficiency and success of your business will rely on the kitchen and food storage layout too, as well as having separate delivery and rubbish access. The lease should spell out exactly what parking and access rights you, your employees, vendors and customers will have, and specify, with a rendering if possible, where your loading/unloading and trash disposal areas are located and any sharing arrangements with other tenants. If you plan to use mobile icemakers, drink units or wait stations, expressly permit these in the lease, and make sure they remain your property at the end of the lease.
If you want an outdoor dining option for your customers, build this into your lease in advance. As this may add to your minimum rent rate, the landlord should be willing to represent that sidewalk or patio access granted in the lease is permitted by the shopping center and local law. Clearly specify in an exhibit the outlines of the outdoor area permitted to be used for food and drink service, what temporary barriers you may install, whether and what type of heating lamps or fans are permitted, and if you can leave furniture secured in that area when the restaurant is closed.
For a shopping center or a building with multiple retail tenant spaces, the landlord may want the ability to move your restaurant to another space in the near vicinity, or a “relocation right”. Of course, this will depend on the size and type of the restaurant and your relative bargaining power. If you agree to a landlord relocation right, be aware of the impacts a relocation would have on your business, and make sure the lease requires the landlord to cover all of your costs to relocate, including any new marketing and customer informational signage needed.
The lease should provide clear information on permitted and required open hours. For instance, if you are opening a traditional steak restaurant, you may want to avoid being required to be open for breakfast or weekend brunch. On the flip side, if you are opening a diner, you want flexible (maybe even 24/7) permitted open hours.
If the lease term is more than five years in length, it should allow you to close for periodic renovations or concept changes, and of course a termination right in the event of major casualty damage that requires a prolonged restaurant closure or is not adequately covered by insurance.
5. Financial Considerations
Particularly if this is your first restaurant venture, consult with a restaurant business accountant or financial expert before or during lease negotiations. Someone with this expertise can help you ensure your business plan can be implemented in a cash positive, and ultimately profitable, way. They will look at your concept, the desired location, number of planned seats, table turns per shift, and anticipated menu and related food and drink margins, and then help you reconcile those with your anticipated food, drink, labor and insurance costs, as well as your rent obligations. This includes determining the right breakpoint if there is a percentage rent obligation and your obligations to the landlord for CAM (common area maintenance) expenses. The lease should provide flexibility to cure any payment delinquencies, ideally at least three times in any 12-month period, and to receive and potentially audit the landlord’s CAM expense allocations.
Lease negotiations can be stressful and there will be points on which you need to compromise. Try to keep in mind during the process that you and the landlord have the same goal for the site: a successful, long-term enterprise. But make sure your lease gives you the flexibility needed to operate to your plan and minimize the risk to you if it does not work out.