When the Restaurant Seller owns the Real Property

When the Restaurant Seller owns the Real Property

April 2023

When the Seller of the restaurant also owns the real property, they list the restaurant for sale one of the following ways:

• Restaurant sale with a lease
• Restaurant sale with real property—seller will only consider offers for both the real property and the business
  or
• Restaurant sale in which the seller also owns the real property and will consider selling both

One thing to note: when a business is sold with real property it involves two separate escrows: one for personal property (the business) and its assets and one for the real property. The buyer can make the purchase in cash for both, cash for one and SBA funding for the other or SBA funding for both. Note: of course the buyer can secure funding other than SBA funding, but for our purposes here, I’ll discuss SBA funding. If the buyer is securing SBA funding for both the business and the real property, those loans are also separate and unique: there is an SBA 7a loan for the restaurant (and in most cases the liquor license)

If the landlord wants to maintain ownership of the real property and lease it to the buyer of the restaurant, they will either assign the existing lease (if there is one) or negotiate a new lease with the Buyer. There are many advantages to the restaurant seller owning the real property and it very much expediates the sales process because the buyer doesn’t need to be vetted by the landlord which can take weeks or even months. The other advantage with the seller as landlord is the seller/landlord is much more apt to help with some of the health department change of ownership requirements. I just had an example of this on a restaurant sale in Sonoma County…because the restaurant seller owned the real property and was involved in the sales process every step of the way, he stepped in during the change of ownership requirements required by the health department to purchase and install a new water heater. You might be thinking that any landlord would or should contribute to this type of requirement during a sale, but that is not the case at all. Most requirements by the health department are considered trade fixtures of the tenant and even when they’re fixed assets like a mop sink, the landlord is dis-inclined to contribute because the transaction is between the restaurant seller and buyer. I have a lot of thoughts on how this part of the restaurant sale and transfer is handled but I’ll save that for another episode.

Even though some of these assets become fixed assets in terms of real estate, they’re trade fixtures. Because of the expensive infrastructure, the restaurant that sold on Fourth Street could operate as a restaurant or it could also operate as a plant store, a cannabis store, etc. They’re still trade fixtures. Most landlords, if they’re just handling the lease and they have nothing to do with the business sale, are less inclined to help in what might be required by the health department.

When big things happen, regardless of who owns what and who’s selling what, I typically bring the landlord into those discussions. It’s best to ask to see if the landlord is willing to help. Often, they help in some way, such as with rent abatement. Or, like the example I gave you where they’ll pay for one expensive item on the health department site review inspection requirement.

In the case of the Old Western Saloon, the bar and building has been family owned since the 1970s. The business has a very celebrated history. The owner passed away in 2022, and the owner’s daughter needs to sell it due to her different career and life path. She put it on the market last year but that proved to be an emotional process which she wasn’t ready for.

It’s important for her to know who the next buyer is, but the next buyer is going to buy the bar and the building. And in this case, the building has rental property up above with approximately 85% leased out. When you see this advertised, the bar is advertised for $189,000, that includes the liquor license and it includes, this is super important, the use permit for live music. This bar features a robust live entertainment program. The real property is listed at $2.1 million, the seller is only going to entertain offers from the buyer that’s going to buy both.

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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.