Commercial landlords renting a restaurant space should know that every restaurant lease is unique. There is a balance to be struck between the square feet, the amenities, and the restaurant’s ability to cover rent with their revenue. For the landlord, bringing in a restaurant lease can be extremely lucrative, but it’s also a risk to bring on a business with potentially volatile income.
Simultaneously, the lease must be designed not to cut too deep into the restaurant’s revenue margins – running a restaurant takes constant cycling of capital. As a landlord of restaurant property, no doubt you’re thinking about a few margins of your own. How can you protect your restaurant rental revenue and still nurture a thriving business in today’s economy?
Let’s dive into the essentials of developing a flourishing restaurant property management plan.
Define Your Most Profitable Restaurant Tenant
If you have a vacancy or are expecting one, the first step is to define your most profitable restaurant tenant types. For example, there may be certain food items or cuisines, making better margins in your local economy. You may have the perfect location for a lunch spot, or there might be a high demand for sushi within the nearest several blocks.
Do your market research to determine what the most potentially profitable restaurant business might be. Use this to hone in on potential tenants and encourage those who your research suggests would do best in your location.
Negotiate Strong Leases that Nurture Restaurant Success
The key element to a successful landlord-restaurant partnership is a strong lease. Ideally, you need a lease that supports both parties and maximizes your mutual success. To this end, approach the negotiation table with nurturing the restaurant as your primary focus. A rising tide floats all boats. In this case, that means your restaurant tenant will be able to pay more in rent when they are making more money.
Provide Restaurant Exclusivity on a Multi-Tenant Property
Exclusivity is often non-negotiable for restaurant tenants.
Restaurants almost always seek exclusivity because competition between restaurants can be fatal to both. Opening two related restaurants on the same property can starve both businesses of sufficient customers.
Restaurant demand is like water pressure. Too many valves and the pressure runs out. For the sake of your leasing business and your restaurant tenants, agree to exclusivity in your lease and allow them to be your property’s only restaurant tenant specializing in their food genre.
Base Total-Occupancy-Cost on Revenue Percentage
Restaurants have high operating costs and are subject to service-industry demand patterns. This means your restaurant tenants won’t survive if their occupancy cost (rent plus common area maintenance or taxes, insurance, and maintenance) is higher than 6% of their revenue. The less well-known a restaurant is, the lower that percentage needs to be for them to remain in business.
So base your lease terms on revenue percentage with min/max thresholds. Properly balanced, this ensures that your restaurant tenants never pay more in rent than they can afford, therefore ensuring they stay open and paying you rent. As your restaurant tenant grows more successful, they will be comfortable with annual or every-few-years increases to the rent percentage.
Provide a Lower Rate for the First 3-5 Years
Restaurants can also have a challenging startup cycle. Even an experienced team must get used to a new location and a new ebb-and-flow of local demand. To give your restaurant tenants time to get on their feet, offer rent-percentage leniency during the first 3-5 years. You can set longer rent-increase intervals or set an established leniency period during the startup phase of the restaurant’s opening.
Raise the Rent Percentage When Margins Grow
If you’re charging a static rent per square foot, then you can increase rent over time by 2% to 3% as it’s traditional to raise the rent annually. Instead of doing so arbitrarily, base your increases on a combination of passing time and the success of your restaurant tenant. You can build a practical percentage rising plan, or you can plan to renegotiate at critical points when restaurant success can be assessed.
Provide Valuable Amenities that Restaurants Want to Pay For
One way to help defend a maximized income from restaurant tenants is to offer tenant’s improvements in amenities worth paying for. In other words, save your tenants money from outsourcing services by providing them in-house more affordably. The money they would already be spending goes to your property management instead of an outside service.
A Liquor License-Ready Venue
Many restaurant models rely on acquiring a liquor license, and the premises is a big part of the licensing process. If your property is ready to pass a liquor license inspection or easily adapted to the requirements, this is a substantial benefit for liquor-serving restaurant tenants. This is both a selling point and an amenity. Many restaurants will ask to make it a lease contingency, which is reasonable.
Laundry and Other Service Facilities
Restaurants have individual needs for outsourced services in a broad spectrum. If you have a diverse commercial property, on-site services and access to facilities can be an amenity worth investing in. In fact, the restaurant itself will serve as an on-site amenity for other businesses that like to have meals available nearby.
Develop a Survive-and-Thrive Plan with Current Restaurant Tenants
Last but certainly not least, consider the rough market that the restaurant industry is currently facing. With the pandemic changing how people eat (and where), even thriving restaurants may be struggling to meet their bills for a few months while the world and their business model realign. As a landlord, if you currently have a thriving restaurant tenant who now needs a little leeway – now is one of the few times where it is appropriate.
Instead of worrying about the rent income this month, work together with your restaurant tenants to build a survive-and-thrive restaurant concept development for the next five years of new revenue.
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At Blue Orbit, we have a lot of experience with property management and helping our restaurant tenants thrive. We are here to help from nurturing a new tenant building with their restaurant customer base to helping current restaurants thrive through the COVID market changes. Landlords seeking a property development consulting service or looking to craft the ideal lease with a new tenant can count on our expertise.
Hiring a consulting team like Blue Orbit can make the difference between a messy tenant loss and a profitable business partnership with your restaurant tenants. From tenant curation assistance for your property to tenant oversight, contact us to consult on improving your revenue and building a stronger relationship with your tenants.
Ray Camillo – Founder & CEO, Blue Orbit Restaurant Consulting