Get the Most Out of Your Lease Agreement
Location, location, location. Whether a restaurant is opening store No. 1 or 51, finding the right spot is one of the first steps toward success. But beyond finding that magical location at the corner of Main and Main, restaurants must also perform their due diligence—possibly with the help of an attorney—to secure the terms, conditions, and, yes, rent that will put the operation in good standing from the very start.
Other pressures including rising labor costs and a saturated real estate market are making the process trickier, but a combination of thorough research and negotiating strategy can go a long way. Three leasing pros—two restaurateurs and one attorney—share their experiences and tips.
Clemente Heredia | Owner, Caló Kitchen + Tequila
Location is half the battle. I think you can never underestimate the power of visibility and convenience for your customers. As long as we feel the math will work out, we will do the deal. Our biggest challenge is really other restaurants wanting the same location, so for us, it’s about having the right contacts and being able to move swiftly to lock a location down before they do.
I don’t expect many changes in terms of real estate and leasing. Restaurants really haven’t changed that much. We still serve food, and we still provide service; those things don’t go out of style. I think the real question is, “How do I see labor changing?” I am much more focused on my operating costs versus the rent itself. With that said I am really focused on keeping the size of our restaurants efficient. I expect a wait every night, including Mondays.
Don’t get emotional. Do the math, know your operating costs, and be aggressive when dealing—what’s the worst that can happen?
Sonu Chandi | President, Chandi Hospitality Group
Our approach is that the location has to be visible, and we have the right improvements in place so it minimizes our investment. We don’t agree to terms if it doesn’t make sense. We have let many opportunities pass, and I don’t regret it. We have also purchased buildings with closed restaurants, and it has been an incredible investment for us.
We are still working hard to master our single-brand concepts. The labor crunch in the North Bay (San Francisco) and the fires have made it extremely hard to grow, but we have been able to continue our success by having each family member take on a heavier workload. We focus on building the right concept so rent can be afforded by the space that occupies the site. Our experience of holding more than 10 leases in the North Bay allows us to negotiate terms with shopping centers. They usually increase rent without appropriate comps, but we have been able to negotiate terms that make more sense to be successful as a small business.
Rent cannot continue to go up, because labor costs are making it extremely hard to run a restaurant with good margins. Room for error is not there, and I think small restaurant owners agree to leases that don’t pay their hard work. Shopping centers need to adjust their rents to reasonable prices to allow small and large businesses to keep their margins.
Make sure to do market research when you agree to a lease. It is very important that you understand what you are signing up for.
Eric Bernheim | Partner, Halloran & Sage
My portfolio of full-service restaurant clients includes bartaco, Barcelona Wine Bar, and Hawkers Asian Street Fare.
While finding the right location and being able to afford that location are paramount for a successful restaurant, I do not get too involved in those decisions. After the operators make those business decisions, the overarching challenge for a restaurant is negotiating a thorough lease that clearly sets forth the parties’ rights and obligations while ensuring both parties can perform within the parameters of the lease.
My clients keep an open mind about their locations and landlords. Many large restaurant groups are usually located in shopping centers and malls owned by the national landlords. Although my clients also utilize these popular locations, they typically pursue the small mom-and-pop locations that have been family-owned for years and are found in up-and-coming neighborhoods.
Sometimes negotiating leases with less-experienced landlords can be more cumbersome than negotiating with the larger landlords. Often, the mom-and-pop leases are short and do not include terms and provisions necessary for an experienced operator to comfortably engage. Historically in those scenarios we have added an addendum with the necessary terms.
The mixed-use development trend leads to new challenges because restaurants are now sharing systems and walls with residential, office, and traditional retail tenants. In these developments, proper attention to the noise-attenuation systems and who is responsible for them is critical.
Operator needs to read every word in the lease to ensure no surprises or should carefully hire counsel that understands their operations and will protect their best interests.