RESTAURANT LEASE LISTING VS RESTAURANT BUSINESS LISTING: WHAT’S WHAT?
If you’re looking or have ever looked for a location to open a restaurant, you’ve probably noticed that there aren’t many lease opportunities for restaurant spaces when you search LoopNet (the premier commercial real estate listing site) or Craigslist. The reason for this is because most restaurants will sell as a business opportunity long before it those locations will ever drop into the realm of a lease opportunity. Restaurant spaces offer very valuable assets; from the ABC liquor license to the fixed assets such as an exhaust hood or grease trap, as well as the asset in most demand these days, staff.
When and if a restaurant does become a listing opportunity, it is generally because there are challenges such as the location, the condition of the facility, the lease terms, the requirements of the health department or maybe some variation of all these factors. On rare occasions, a restaurant becomes a lease opportunity because the operator can no longer make rent. However, even in those scenarios, it can be more advantageous for the operator, as well as the landlord, for the restaurant to sell as a business opportunity then for the operator to close the doors and vacate the premises. I’ll explain this more as you read further.
In my video, Ed and I are located at 4th street in the heart of downtown Santa Rosa in Sonoma County California. The beautiful restaurant space I’m standing in front of is available for lease. I’m going to use this restaurant as a case study. This restaurant started as a business opportunity listing. It was one unit in the collection of many units scattered across the north bay owned and operated by a local family. This location is a little off type from the rest in the group because it is quite large at 6,000 square feet. A location this large makes occupancy costs substantial which means only a very specific concept can achieve the gross sales to support those occupancy costs. We thought we’d have a good chance of selling the business opportunity because the facility is in incredible condition with a lot of great assets, including a Type-47 full liquor license.
One of the challenges that everyone in the restaurant industry is facing right now is staffing. Because of the size and the design of the restaurant which includes a bar, 2 pizza cook stations, and sauté station, the minimal staff required to open the doors for minimal service is substantial. The operator needed to use the trained staff in other locations, and it wasn’t worth the manpower or resources to keep the doors open. Once the doors close on a restaurant, it is extremely difficult to sell a restaurant as a business opportunity. Right now, we have an experienced operator with a great concept who is currently negotiating a new the lease with the landlord. The new operator will also be purchasing the liquor license from the former restaurant operator.
Let’s unpack this—right now all the furniture, fixtures & equipment (stoves, fryers, dining room tables and chairs, reach-in refrigerators, etc.) are now the property of the landlord. Anyone who has seen a few restaurant leases knows that sometimes there will be exhibit to the lease listing some restaurant assets, such as those mentioned above, as property of the landlord. This is usually the result of the restaurant operator vacating the premises and leaving the FF&E as part of a negotiations with the landlord to get out of the lease. As I’ve mentioned in past episodes, it is never my preference to have restaurant operators signing leases where the landlord owns some of the trade assets. This is because operators do all kinds of things with those assets during operating. An example would be if someone were to get rid of or replace a piece of equipment with a brand new one, they think that they now own it when they do not. The lease will state that the operator must keep all the equipment in good condition and if it needs to be replaced it is still the property of the landlord.
The other pain-point with the landlord owning equipment arises later. When the restaurant operator wants to list the restaurant for sale, a big chunk of the equipment is listed as property of the landlord. Buyers will always ask what they are buying if the seller does not own the equipment. For this and other reasons, I always recommend that the new tenant purchase the furniture, fixtures, and equipment from the landlord when they are negotiating the lease.
Earlier I stated it can be advantageous for both the restaurant operator and the landlord to list a restaurant for sale and to go through the bulk transfer process even if the operator is not current on rent. The landlord can put a demand in escrow for the outstanding rents due, so the seller (current restaurant operator) will not receive the funds from the sale until the landlord is paid. This way, the landlord does not lose the unpaid rent. The landlord also benefits because generally a restaurant buyer will have industry experience and financial standing that will benefit the landlord. Additionally, the landlord will not have to pay a leasing commission to commercial agent which the landlord would have to do if the restaurant operator vacates the space and the premises becomes a lease opportunity. The restaurant operator benefits because they may end up with a little money from the sale and, importantly, they will not have to get into litigation or pay the landlord to get out of the lease.
Ryn Longmaid is a restaurant broker and consultant at Santa Rosa Business & Commercial in the San Francisco NorthBay and the host and founder of the Facebook Live Series, Deep Dish: discussions on the business of restaurants for restaurateurs, restaurant buyers and sellers and the restaurant curious.
As well as being a licensed real estate broker, Ryn is a CBB with the California Association of Business Brokers (CABB), a CBI with the IBBA and she holds an MBA in Sustainable Business Management. In addition to being a proficient business broker, Ryn has over 20 years’ experience in the restaurant, hospitality, and food industries. She has served as the executive chef for Amy’s Kitchen, personal chef to actor Don Johnson, she founded and operated a successful and longstanding restaurant. She has also held teaching posts in restaurant management at the Art Institute-San Francisco and The Culinary Institute of America-Greystone.