Top 5 Tips for Leasing a Restaurant: A Quick Guide

Restaurant leasing is a serious business. In general, restaurant leases last for three to five years, and once you've invested money and time into space, you can't go back. Leasing a restaurant is one of the most important commitments you will make, whether you are an eager new restaurateur or an experienced entrepreneur considering a new location.

Don't sign anything until you have carefully considered your options. To make the process easier for you, here are a few tips:

Commercial lease agreements are legal agreements between landlords and tenants. You must consult a lawyer to understand your relationship with your landlord as a tenant.

While every commercial lease is unique to accommodate the relationship between the tenant and landlord, some facets should be explicitly specified in your agreement.

Advantages   

1. You'll be putting money into your own space and paying your mortgage rather than someone else's. Mortgage payments are often comparable to monthly rent. A mortgage can also be paid off.
2. Property values tend to rise over time. The growth in value may result in a nice payoff if you sell your firm, and the profit here does not even include the increase in the worth of your business itself.
3. You will not have to deal with landlords or property managers.

Disadvantages   

1. You may have to sacrifice location; most popular, high-traffic commercial properties are not for sale.
2. You will be responsible for the property's maintenance and repairs as the owner. These expenses pile up and put a strain on your organization if you're not performing well.
3. Buying a space requires a lot more startup capital. Considering how expensive it can be to start a restaurant, the average restaurant owner cannot afford to buy a property outright.

1. Create a Budget    

Setting a reasonable budget to work with is vital when assessing different spaces to lease. You won't be able to make decisions or negotiate if you don't have a clear grasp of the prices.

If you have already created a restaurant business plan, you will know how to conduct a market analysis, in which you thoroughly research the market to calculate how much revenue you could potentially bring in.

You look at similar businesses and competitors in the locations where you want to open the restaurant. You can even interview business owners to get a sense of what to expect.

Based on your projected revenue, you can estimate what you can afford to spend on rent, utility bills, insurance, property taxes, and maintenance. In general, restaurateurs budget 5–10% of revenue for these fixed costs. Calculations can be automated with financial spreadsheets.

You can then select how much wiggle space you can leave in your budget based on your capital assets. Keep a buffer in case of unexpected occurrences. Given the past few years, we can all appreciate the necessity of being prepared for a rainy day.

2. Research the Neighborhood  

If you're looking at a specific neighborhood, you probably have an idea of the foot traffic and demographics of the individuals who live there. However, when leasing a restaurant for three to five years, it is vital to dive into the facts and plan for the future.

Be patient and don't rush this process. It could take months to thoroughly explore an area and consider all the possibilities.

Is the neighborhood a well-established dining district with a lot of competition, or are you going into an up-and-coming hotspot where you'll have to set the trend and lure consumers to the area? When an area becomes a dining hotspot, restaurant real estate prices can skyrocket.

It's not only about how the neighborhood is right now. You must consider how it will alter during the term of your lease. Consider this: What will the area look like in three years? Are there any emerging trends?

The key factors to dig into include:

b) Business turnover: 

Do companies come and go in the area, or are there several well-established restaurants? A transient business crowd on a street, building, or even neighborhood is a huge red flag. 

c) Foot traffic: 

Is there enough foot traffic to support your restaurant? Is it more important that residential areas be closed for delivery orders? 

d) Atmosphere:

Make sure you know the region inside and out, at different times of day, and every day of the week. Does it get raucous on Friday nights? Is it a place to spend a lazy Sunday?  

e) Access: 

Is your space easy to find? Can you provide parking? If not, is it close to public transportation? Consider whether it is simple for your customers to find. 

4. Assess the Space's Potential   

Many restaurateurs want to establish their mark on the restaurant industry, while others want to hit the ground running and start making money right away. As you evaluate your restaurant lease, decide what your key objectives are.  

5. Negotiate a Restaurant Lease  

It's time to get down to business now that your restaurant finances are in order, you've finished your research, and you've chosen the space that's right for you. But before you sign this vital contract, you must prepare for negotiations.  

Here are some great tips to help you overcome your fear and take control of the negotiations while renting a restaurant space.  

a) No one is going to negotiate for you 

You can be sure that the landlord or agent will work hard to secure the best deal, so you should be prepared to do the same. Don't be afraid to stand up for yourself. Grab your head around your finances, know your budget and how far you're willing to stretch it, and then go out and grab the best deal you can.  

b) Be prepared to walk away  

This is easier said than done, especially if you've fallen in love with a location and started to fantasize about your future success there. However, if the plan is not suitable for you, it is important to remain rational and free of emotions.  

d) Talk to other tenants  

If possible, speak with other tenants in the building to get an idea of how the landlord is. Ask the landlord a lot of questions regarding the reality of leasing.  

f) Take your time  

There's no need to rush into signing a restaurant lease at this stage if you've spent months carefully settling on a budget and researching the area and restaurant space. Always consider your options carefully, talk with colleagues and close friends, and then take your time making the next move. 

1. First, consider the location   

The success of your restaurant will be highly dependent on its location. There are two common options:   

Leasing a new location to start your restaurant business; or   

Purchase an established business and have the restaurant lease transferred to you for the remaining term.   

If you are leasing new premises, you will have to do a bit more legwork, such as getting local authority approval to ensure that the usage of a restaurant is permitted. You would look to transfer the restaurant lease with or without purchasing the business when there is an existing restaurant. You should not assume that this restaurant owner has a legal lease on foot. After hiring a lawyer, you may discover that the lease is nearing the end of its term with no option for renewal. If this is the case, you may want to ask the landlord for a direct new lease and have the existing tenant surrender the lease to exit the business.  

4. Maintenance    

It is common to find grease traps, ovens, air conditioning, and even an alfresco eating area on restaurant grounds, which you would eventually be liable for as a tenant. You are responsible for these fittings, in addition to the actual premises, which may require maintenance work depending on the age of the building. Before going into a restaurant lease, be sure that any machinery is in good working order.  

5. Renovation   

A standard lease often entails an obligation to renovate the property at regular intervals (such as every three or five years). The scope of a renovation duty can range from painting the internal walls to replacing the floor coverings, updating the décor and fittings, and updating the outdoor signs. A full renovation obligation can be costly, thus it's in your best interest to agree to limit the extent of such an obligation.  

With so many factors to consider when leasing a restaurant space, it can be tough to think critically and operate clearly during a negotiation agreement. While every situation is unique and requires various questions, these five will help you prioritize what's most important in a leasing agreement. 

1) What are the renewal options?  

Yes, it may seem risky to commit to a long-term space as a startup company, but the consequences of failing to renew your lease could put you in a much worse position. When getting into a leasing arrangement, consider the cost of business disruption and moving expenses. 

3) What are the parking options?  

You'll need enough parking places for customers, and you should question the landlord about parking options in the area. You should also inquire whether the building has enough guaranteed parking spaces for all tenants and staff.

As a tenant, you must understand who is liable for what in order to avoid unforeseen future expenses. Ask about:  

1. Cleaning  
2. Repairs  
3. Upkeep of property and restrooms, parking lots, entrances, and outside areas  
4. Grass trimming  
5. Snow removal  

Property taxes, insurance, utilities, security, and equipment (e.g., HVAC) repairs are examples of operating expenses.  

After you've established the basics of the lease agreement, the exciting part begins writing a mutually beneficial contract with the landlord. 

However, we hope you are now armed with the knowledge you need to ask the right questions, understand your lease agreement, modify your agreement, and ultimately get the best deal possible for your restaurant.