Lease $$$$$$$$ Average???

[crazychef99]

I want to survey all you restaurant owners out there... I was checking out a site today that is 7,500 square feet on the main floor, 180 seats, with an additional out door area that can put down another 40-50, huge basement area with a lot of storage, the business/building is for sale at a good price but the lease on the spot seems high. What do you think a monthy lease on a space described should be???

After I get a few answers I'll post the proposed lease, and we can comment on that as well..... THANKS

[crazychef99]

OH!!!! the space is in a busy downtown area accross from a huge parking garage......

[lebelage]

How much you should spend on your lease has less to do with a figure such as "don't pay more than $3000 for 89 seats" (just an example) than a percentage on projected sales.

Lenders prefer to see 6% as a number. That is, 6% or less of gross. Over 8% and you start to skate. You can spend $10,000 a month and it's a great deal... if it's 5% of your projected gross. You can spend $3,000 and if it's 10% you may have a problem.

All these costs are relative.

[foodpump]

Lebelage is right, lease should be based on a % of gross income.

Never, ever, ever believe the phrase "It's standard lease". There are no standard leases, just as there are no standard human beings, everyone's different. You can always negotiate, a common tactic being to increase the rent towards the end of the lease, in the 4th and 5th years, when the business is well established. If the business is for sale, the big question is why?

[Flattop]

Location location location...never follow a start a restaurant where one failed I was taught in school. While I don't plan on opening one it seems like a smart practice.

[lebelage]

That's a little broad.

A lot of successful restos open up in the spot of a failed one. You've got to do a very thorough due dil.

A spot can be awesome... but if the owner is putting all the till up his nose every night...or the chef doesn't like to show up for dinner service you have a failed restaurant that someone else can make a great success of.

More restaurants close because of incompetence and/or breech of fiduciary trust than anything else.

[Derek Cooks]

And restarting under the same name as the failed biz? No thank you. But I've seen it. Do your own thing. Do your due dilligence. Do your business plan. Then you know what your bricks-and-mortar cost can/should be.

[crazychef99]

So its a $10,000/mnth lease with an extra $5,000/month for CAM(common area maintenance) which includes garbage removal, and grounds keeping..... Similar sized restaurants in the area are doing $3-5 Million a year.....

[foodpump]

Meh, you can do your own garbage removal for under $500/mth from any of the garbage guys.
An additional half month's rent going towards grounds up keep, sounds like a landlord's grab. Remember you got to make this sound attractive to your lending institution.

What about taxes, who's paying the lion's share of property taxes? And that very suspicious, horrible, nasty, money-milking thing called "additional rent", are they included in the lease as well?

When the time comes, negotiate. If you don't, the landlord will fleece you for anything he can. When the water main broke in our complex, took the landlord 2 days to fix it. Had to shut down my biz or two days, but the icing on the cake was the Landlord charged me for repairing the watermain. Had to take him to small claims.

[lebelage]

Absolutely Derek, I thought FT was talking about just the location.

Do the math CC99.
$180,000 per year in rent. Which I'm assuming has a yearly margin of increase?
Add to that your food budget
Your labour budget
Your beverage budget
Your promotional budget
Your operational (utilities, insurance, etc) budget
Your monthly payment on the business itself (assuming it is financed)
Your equipment and smallwares
Your taxes and licensing
Your "incidentals" cushion

And you have a good basic estimate for your yearly spending.
So, do you look at these numbers and feel confident that you can make your money back AND make a margin of profit reasonable enough to satisfy investors and continue to reinvest in the business?

Think of this also. You don't want to go into a venture with a defeatist attitude but you don't want to screw yourself (and your partners) forever. Say you take on this lease for ohhh...5 years. The slow start up of the business and maybe a few lukewarm reviews and a couple worker's comp claims set you on the rocks. A partner gets tired of it all and needs to be bought out. They need to be replaced with yet another salaried worker.

The invoices are being paid late. You can no longer afford the best product, you're too overdue. You take out MORE working capital loans against your credit card takings...which decreases your cashflow still more...paychecks start bouncing.

18 months into a 5 year lease the business is no longer viable. It can't be done. Your credit is ruined, you can't get deliveries and you don't have enough working cash to get product at the cash n' carry.

You close. Ah, yes... but there's the issue of that 5 year lease at $15,000 a month you can't get out of.

When building a business...visualize this scenario. Then think to yourself... what do my gross sales and net sales need to be to avoid this? Can I REALLY expect to bring that much in or am I maybe being over confident? What am I going to do when I fall short? What am I going to do when I'm in the red 8 months longer than my business plan estimated?

[moselle]

God, that sounds so scary.
What % (odds) of new restos make it?
Do they just get by, or do they do well?

[lebelage]

Oh.... and don't even THINK of getting a short lease to mitigate that risk. You have to be confident enough in the business to get a nice, LONG lease.

Because you know what the landlord does at the end of the lease if you're really successful?

They squeeze you for more money. Lots of it. So much that many successful places close because of this. Long lease, additional options.

Have you thought of taking some business and accounting classes before taking this on? You can never know too much...and no offense intended but it sounds like there's too much about this side of the business you don't know. Of course, a chef can get someone else to handle the accounting and cash flow but you still have to understand it.

How else do you know if you're being ripped off?
Many chefs that go into business with a partner who handles all the "nasty financial stuff" find out they didn't even know they were going out of business until it was far, far too late.

[bbally]

My suggestion would be to hire a business consultant. In the interest of full disclosure I am one of them.

I here the complaining about the fees all the time, but what you never see is the amount of people who are educated and make a correct decision with the emotion stripped away and the raw financial facts on paper. If you can not do it on your own, save yourself a lot of heartache and find a consultant. Better to spend $3500 upfront and tank the idea, then get stuck on the back side of a 7 years triple net with a personal garauntee after failure!

[foodpump]

Amen. A restaurant isn't like a bookstore where if the landlord gets crafty with you you can move across the street into an empty unit. A restauarnt is like a retarded newborn baby, requiring mind boggling infrastructure and support, compliance with numerous codes and permits. Landlords know this and figure they've got you by the short and curlies when you sign the lease. Rent and lease obligations will be by far one of the biggest financial worries, and one of the biggest factors in establishing whether you make or break it. Food and service come in a close second.

In the meantime get a hold of the business's books, see what the gross income was, and what he was paying for rent. If you got the copy of the lease from the landlord, see if it matches with seller's rent.

Take bbally's advice as well as Elmer Fudd's: "Be vewy, vewy cahfowl..."