When one decides to start (or move) a restaurant, a logical next step might be to consider where exactly this restaurant will be located. Location can be a critical factor in a business' success or failure. Similarly, the financial terms or obligations a business agrees to can drastically affect its bottom line or profitability. The crossroads at which these ideas may intersect is when a restaurateur must decide between building a restaurant from the ground up, or leasing out a space previously used by another restaurant.
As with many business decisions, there are many arguable advantages and disadvantages of buying and leasing an existing restaurant location. Understanding the common pros and cons can help restaurateurs decide which one is right for them.
Building a New Restaurant Location
Building a new restaurant location can be an involved (and often costly) endeavor. Restaurant owners who would like to build a new restaurant location—rather than take over an existing restaurant location—may do so for varying reasons:
- Lack of existing restaurant real estate.
- Specific needs not met by existing real estate.
- Desire to personalize their restaurant space in a way that is unrealistic in an existing building.
There are many attractive aspects of building a new restaurant location. Being unconstrained by the walls of an existing building, restaurant owners can make their location as spacious as needed to serve as many customers as possible. There are other advantages to building as well, including:
- Safety: A brand-new building will be built to the most up to date code, to ensure the safety of the people who work and eat in the building.
- Personalization: Building a new structure enables the restaurant owner to personalize their structure in a way that specifically illustrates their brand.
- Efficiency: Not only can a new building be built with proper insulation and energy efficient appliances in mind, but it can also be laid out in a manner that is conducive to the specific processes or workflows a restaurant may have.
- Low maintenance: A new building that is properly built should not need much maintenance for the first several years when the restaurant is in business.
- Potential to generate buzz: A new structure may attract customers by virtue of it being new. A restaurant under construction might catch the eyes of locals prior to opening, acting as a form of pseudo-advertising.
Of course, there are disadvantages of building a restaurant:
- Expense: Building a new restaurant can be a significant expense, which can put a lot of pressure on even an established, profitable business. This alone may force the hands of many restaurateurs who simply cannot shoulder this kind of expense at this point in time.
- Commitment: Buying and building on a piece of land represents a big commitment for a business owner. Leasing an existing space may provide more "maneuverability". Purchasing land or a building means owners and investors believe in the economic potential of the area for many years to come.
- Property Management: A restaurant owner without a landlord must manage (or find and pay someone to manage) all building maintenance problems on their own.
Moving into an Existing Location
Moving into an existing restaurant location can yield many different results, depending on the history of the restaurant, the desires of the restaurant owner and the expectations of the local patrons. Before deciding to take over the lease for an existing restaurant space, a restaurant owner must take the following things into consideration:
- Did the previous restaurant fail, and if so, why?
- What kind of restaurant occupied the building previously?
- What does this space mean to members of the community?
- Who lives in the neighborhood, and will the restaurant attract them?
- What is the age and condition of the building?
- Are there any major structural problems with the building?
- What kind of changes must be made before the space can be occupied again?
Restaurant owners who are considering taking over an existing space may do so for many reasons. Perhaps the most obvious benefit of signing a lease is the smaller financial commitment when compared to building ownership. A lease may be less expensive than the mortgage for a brand-new building and, even if the lease is comparable in price to the cost of building the structure, a lease can end after a relatively short period. Loans may mean a decades-long commitment.
Other advantages of leasing an existing building include:
- Speed: Oftentimes, preparing and remodeling an existing space is faster than building an all-new space.
- Character: Existing restaurant spaces typically come with a lot of character, which can be incorporated into the personality of the restaurant.
- Built-in customer base: If an area already has a lot of foot traffic, there may be a diminished need for advertising/promotional expenses.
On the other hand, leasing an existing space can sometimes be stressful for the same reasons that occupying any pre-existing building can be stressful. In particular, older buildings can be fraught with maintenance problems, from bursting pipes to creaky stairs and a narrow hallways.
Some of these problems may require changes before the restaurant can open. Other problems will arise at inconvenient times, like in the middle of a workday. Other disadvantages of leasing a pre-existing location include:
- Lack of aesthetic or structural choices: Sometimes the aesthetic choices in an existing structure can be pretty limiting, because the building was built for another purpose. It may be difficult to find a building that is ideal for everything the restaurant wants to do from the kitchen to the dining area.
- Less control: Business owners who don't own the building they occupy rely on the landlord to be responsive to the problems in the building (depending on the type of lease they have). There may also be rules pertaining to how the restaurant may present itself if the landlord wants a strip or shopping center to adhere to a certain aesthetic.
The Bottom Line
It's impossible to say which option is "best" for everyone, because nearly every situation will be unique. Due to the cost of building a new location (and the requirements to qualify for a loan of that size), most new restaurants will lease their building. However, as one's business grows in size, the option to build/own may become an option over time. Owners should always evaluate what would make the best financial sense for their business. They'll need to separate what they can do from what they should do, and the loans they can qualify for from the risk they are willing to take.
Robert Dekanski is the team leader of The Dekanski Home Selling Team, serving all of New Jersey's residential and commercial real estate needs. He believes education is key when making large financial decisions, and that knowing when to stay the course is just as important as knowing when to take on more risk.