It is not easy to own and run a restaurant business. However, good lease terms are helpful for restaurant owners and may reduce the long-term costs of operating a restaurant and making necessary improvements. Avoid getting stuck with the short end of the stick and know how to get the best terms possible on a restaurant lease. What should new restaurant owners know when it comes to discussing lease terms?
Use the following suggestions to nimbly manage restaurant lease negotiations today.
Put It in Writing
Restaurant owners begin with a LOI or Letter of Intent. This offer is non-binding, is in writing and is given to the potential landlord. The LOI includes:
- Initial lease term
- Lease rate
- Occupancy date
- Lease start date
- Option periods
- Specific space and size
- Rate increases
This offer will help get the process started with a potential landlord. Changes to the initial offer may be required before acceptance.
Consider Long Lease Terms
Some restaurants may want to reduce their risk and ask for a short-term lease. However, such individuals may have to contend with significant lease rate increases when they go to renew. In order to maintain a space and make necessary changes it is recommended that a restaurant owner have a lease term of at least 10 years. Rates for renewing should be negotiated at the initial lease signing. This avoids the need for a new negotiation letter should a restaurant owner want to renew their lease. Long-term leases are useful for those who want to secure a location that can increase potential customers. Owners who may be planning to move locations in a few years may want to go for a shorter lease, such as one for two years.
Get Support for Improvements
A restaurant owner signing up for a long lease may want to look into a TIA or Tenant Improvement Allowance. This serves as a negotiating tool for both parties. A restaurant owner needs to demonstrate strong financials for a landlord to take on the risk associated with a TIA. A raw space generally requires a greater TIA.
Keep Competition at Bay
Restaurant owners may want to include an Exclusivity Clause in their lease. In such cases, landlords cannot offer a space to a restaurant serving a similar cuisine or offering specialty entertainment in a multi-tenant location. This may help restaurant owners provide a unique offer in a busy center and get more customers.
Specify the Required Condition of the Space
Tenants can require a landlord to turn over a space in a particular condition prior to occupancy. When a landlord receives a Landlord Work Letter they will need to complete specific work and incorporate construction elements in the space before a tenant moves in. Restaurant equipment may need roof mounted equipment and approval. A Landlord Work Letter can help ensure the space is given to a new tenant with the infrastructure and approval needed for a smooth transition.
Get Some Free Rent
It may take time to get the space ready for opening. Restaurant owners may need to secure permits, finish construction and have all equipment, furniture and fixtures installed and arranged. This may take from 3 to 6 months. As such, it is useful to request a free rent period and save some money during this busy time. Just as a homebuyer would attempt to negotiate after an inspection, prospective commercial tenants have some negotiating room based on the condition of the space. Landlord are generally flexible with start date for rental payments when a space needs updates or has not been occupied for some time. Restaurant owners can use this additional money toward construction and hiring before the restaurant is open for business.
Beware of Percentage Rent
Some landlords may require a percentage of the revenue generated at a certain level of sales. This may cost restaurant owners an additional five to eight percent from their revenue. Know that there are other options, such as paying prorated rent or helping with insurance or property taxes. Investigate all of the options possible before signing off on a new restaurant lease.
Work Out a Repair Scheme
Restaurant owners do not need to cover repairs in their entirety, especially when leasing a commercial space. Discuss how repair costs will be handled. It may be possible to negotiate rent reduction or free rent when a major repair needs to be done and it may offer tax benefits to a restaurant owner.
There is much to decide upon when getting ready to lease a space. Improved negotiations can make it easier to handle making repairs or updates in a space while reducing rental payments. Explore useful terms to include on a restaurant lease today.