Lease vs. Own

[sohail]

Good morning everyone:

I need some help with a decision regarding a restaurant i want to open. I am getting mixed feelings from people regarding whether i should lease or own the building! I am also getting the same results with leasing vs. owning the equipment.

The restaurant i am looking at is pretty much an empty shell, the last person who had it, left and took everything with them, including (no joke) the kitchen sink. The place is totally empty, not even a toothpick or chair in there.

I have estimated roughly about $160,000+ to get the kitchen equipped and the dining room filled with table, chairs, bar stools, etc..

I am told that i am insane if i were to spend so much money on a leased space! It is suggested to me that if i want to spend that much on the inside, i should not do it to a building someone else owns. The expenses above do not include some of the minor renovations i have to do either.

Last but not least, it is also suggested to me to lease the equipment the first 2 years! rather than purchase, how do you feel about that?

Thanks in advance for any advice you can give me. I have been in the food business for over 20 years, and i have done all aspects for the restaurant, starting as a dishwasher, working up to food service director for a resort in lancaster, PA.

[foodpump]

Yes and no. The main thing is that the infrastructure is there: Ventilation system, fire supression system, plumbing, greasetrap, 200+ amp electrical service, etc. To install these items you would need to invest a minimum of $50,000 and most of them can't take with you when your lease expires. As you now very well know, equipment is portable, and can be taken when the lease expires.

The whole issue revolves around the lease itself. Most landlords are very well aware that a restaurant needs heavy infrastructure; lease rates, new leases, rent increases and sabre rattling revolve around this fact, and if the landlord owns the infrastructure, he's got the upper hand. On the other hand if you invest $50,000 in infrastructure then the landlord knows you'll need at least 6-8 years to recover on the investment and, yup, he's got the upper hand during negotiations.

So is it better to lease or rent? The biggest three factors to consider are 1)location, 2)location, and 3)location. If you can make a buck on a good location inspite of high overhead, go for it.

Leasing equipment? Read the contract and use a calculator, what's the juice those guys are charging? If you suddenly become rich and famous and want to pay off the equipment before the end of the lease, there's a punishment fee, check to see how much it is. If you want to terminate the lease before the end, there's a punishment fee, check to see how much it is. If the lease ends at the required time you have an option to buy the equipment--for a punishment fee, and can keep it or sell it privately, check to see how much the punishment fee is. If you decide not to buy the equipment, there's still a punishment fee to pay, just because. Check to see how much it is.

Hope this helps

[firechef37]

I am leasing to get up and running. We have a very supportive company we are leasing from. It was pretty much equiped when we moved in. We have managed to establish our name and have a following and are now looking at buying a bigger/second location in our town and leasing in a second town north of where we are currently located. It is 6 of one half dozen of another in my opinion. If you don't make it a lease is better than the risk of loosing money on reselling a building you owe lots and lots on.

[kenbowie]

It all depends on what your lease states....most say that any renovations or additions or fixtures become the owners property. Why waste your money if your not going to get to keep them.

[jonesg]

" have estimated roughly about $160,000+ to get the kitchen equipped and the dining room filled with table, chairs"

I could do it for less than $80K in any location, given a choice of locations I could and have done it for a LOT less than $80K several times.

If you're in love with this location then I'd demand a 10yr lease with 10 ys option or walk away.

But don't lease. Don't go ahead if you don't believe you are going to succeed with a certainty. If you don't believe in you why should anyone else.

If you lack capitol to purchase equipment up front then just purchase on credit, when I order new equipment I just get on the blower and the equipment arrives , the invoice follows, usually stating 15 days net. Send them a check for 50% , the fees will kick in and they're certainly going to be a better deal than leasing.

For used equipment, AUCTIONS !!!
I'm in Boston, I just bought a $5K hobart dishwasher from Penn for $1300 plus $200 shipping.
Your state is bubbling over with auctions.

I could have spent $4K locally.

Certain things I would not buy used, refrigeration can kill your business fast if its unreliable.
But dishwashers and mixers or tables, they're just mechanical objects which most of us should be able to fiddle with without specialized tools or knowledge.

At auction I identify the owners vs the equipment dealers, bid against the dealers because they know values, just slightly outbid a dealer and you've got a great deal.

Also, at auctions ,if elec equipment is located away from a power source and no elec extentions are available, its junk.

[justwingit]

one bit of advice I can offer, is at the inn we purchaced some things, Liek the oven, range and fryer etc. We lease the espresso machine and the dishwasher is a rental. $100/month for a brand new ecolab dishwasher. If the thing breaks on Friday night, the rep is out on Saturday morning to fix it!! In the last 4 years I have run the kitchen, it always, always breaks down when we have a full dining room, busy brunch and a wedding for at least 70 to boot!!

Tom

[sohail]

Thank you all for the help. I am amazed by how much info i got from this thread.
I must clarify the #160,000 statement. The restaurant i am looking at is totally empty. nothing in it at all. The price i quoted included all liquor, beer, food purchases and necessary things to fill the restaurant, including supplies for the opening.Although i did check on leasing the equipment, if i should decide to do so, and i can furnish the kitchen and bar with equipment for about $2200 a month.

I met with 2 other chefs/owners in town and they said the location was good, and they offered to help with any advice they could.
They both recommended buying the equipment used to cut cost.
And they recommended leasing the dish-machine just as you had, so i am definitely on the right track with all your advice, thank you.

Any suggestions on the opening of the restaurant? I thought it would be best to do a silent opening for about a month, just deal with the word of mouth and street traffic. Lancaster is not a huge town, so word will get around pretty fast about the opening. What scares me is how many restaurants have grand openings with no silent opening, and it is a disaster! Poor service from foh and boh, since no one had real hands on training time. Not all restaurants, but quite a few around here.

Am i being too careful and losing money or should i just stick to the silent opening and invest a month in hands-on training and coordination between foh and boh, trouble shoot
point of sales issues, and re-evaluate the menu and cooking times, and logistics of the floor operation? I know with prior proper planing you can avoid a lot of issues, but i still dont think you can run an operation smoothly if everyone has not had at least 2 or more weeks of experience with a smaller crowd.

[justwingit]

I would say to invest maybe two days, maybe three, invite people in off the street, get friend and relatives to come in. You can perfect BOH while they are decorating the foh, and feed the contractors at the same time!!

Leaving it too long might not be such a good idea. Be confident in what you are about to embark on, every new joint will have teething problems, but its how they are delt with is what will get around town!!

Tom

[Frantastic]

If you're looking at a location that was previously a restaurant of a similar structure that you wish to build, then you should have sufficient ventilation and electric already. Leasing is a PITA - I'm from the same school as Jones - I purchased everything including my hood system. 95% of my equipment is used but in excellent shape. I purchased new refrig/freezers, hood, fire suppression etc. and my sink and grease trap; but I did a lot of research and purchased at a pretty darn good price for everything. Lots of e-bay equipment and a few auctions but I think they're a rip off. I checked out local sales and searched internet for what I wanted. You can purchase everything from package deals on tables/chairs/etc. don't buy new!

[FishinChef]

The silent opening is a great idea, I think a month might be a little much; two weeks maybe? Word of mouth will spread like wildfire in your area; you'll have plenty of new customers in no time. You're correct about the number of restaurants that poorly plan their openings. You are in a very critical market for new restaurants; do it right from the start, be consistent, and you'll do great

PS- I told you this was a great site!!

[foodpump]

Sohail I hear you, and a soft opening sounds great, but....

The lease, the lease, the lease. It's one document that WILL either make or break you. Study it till you're blue in the face, then get a lawyer to study it, then think about making an offer. Never accept the first terms a landlord gives you, and never accept the phrase " It's a standard lease".

Yeah, yeah, the equipment, Used, leased, whatever, it's all good, but I haven't heard anything about the infrastructure. From your post the place sounds empty, is all the infrastructure there? It is there, right? All of it?

When we moved out of our last location, we had it worked into our lease that we owned all the infrastructure. Landlord tried to jack up the rates when the lease expired and we pulled out. I personally took out the hood and fire supression, let my 6 yr old son loose with an electric drill and he removed the s/s fire wall and shelving. I even forked out $200 to plug up the hole in the roof when we removed the ventilation fans and make-up air unit. I dismantled the grease trap and gave it a farewell heave into the dumpster. A week after we pulled out and were happily settled into our new location I recieved an irate phone call from the landlord's new sucker screaming about lawsuits and missing infrastructure. I had a sh**-eating grin on my face for weeks...

See, an 8' hood isn't just a hunk of s/s, it requires a mechanical engineer's drawings, inspections and acceptance by city hall, then a shaft, then the machinery, tempered make-up air, wiring, filters, etc. An installed hood alone could cost you anywhere from rock-bottom $5,000 to $60,000 depending on the nature of the building and the landlord's demands. Then figure on about $500 per foot for fire suppresion.

Infrastructure is the next biggie after the lease with #3 being liquor regulations and #4 parking.

It's all in the lease

[Silverfox]

Depending on where you happen to be located, anything attached to the building, i.e. hood, flue, etc., "may" be considered part of the building and thus, the lamndlord's.

I'm in the process of "taking over" a restaurant where the lessee "abandoned" the business, he simply locked the door, turned off the power, and refused to talk with the landlord.

Guess who's walking into a completely equipped facility with no capital outlay and paying about $1.25/sf 1 block from City Hall and the D.A.'s offices, three blocks from the Courthouse, banks on both sides, and the Post Office around the corner...

[Derek Cooks]

I like soft openings. That first word-of-mouth can make or break you.

Yes - study that lease 15 ways from Sunday. It IS a negotiable instrument.

Listen to JonesG.

Every dollar you spend on capital equipment is another dollar less of operating capital. And you WILL need operating capital. More than you think. No, even more than that...

All the best. Lancaster is a fabulous place!

[jonesg]

My brother opened a new place last week in NH, they spent $40K total, it already had a hood but nothing else, an empty shell. Seats 50.

You can do a hood for less than $18K with charcoal filters and makeup air in a single story building.

Usually , here at least, the lanlord is only responsible for the basic structure, a hood isn't part of that.
You can literally take the tiles off the floor in commercial property.

If you put new windows in , then they have to stay.
Most landlords will go 50/50 on leasehold improvements if you ask.

As pump said, its all in the lease and the lease is only what you make it. Read it very carefully, make sure YOU understand it, don't pay a lawyer to negotiate for you, they are idiots who can't run your business.
You have to know what YOU want, tell your lawyer what you want and have it addended to the lease proof and sent to the landlord.

Then call the landlord and talk DIRECTLY, if the 2 lawyers get in the middle of you guys its ....KaCHING! for the lawyers.

When I bought this current business I was considering another partner, we decided to do our own places, he spent $20K freakin thousand dollars on his lawyer, I spent 0.
Yes I did have a lawyer but his role was review only. I did all the legwork and negotiation.

My freinds lawyer offered to go to town hall and do all the license applications, $185 hr to stand in line at town hall, not bad work if you can find a fish to hook I guess.
It was his first venture. The only big mistake he made is he didn't ask.

[tommygator]

First thing you need to do is talk to your accountant.. they will tell you the tax (in the USA) advantages of owning vs. lease for the equipment. If it's on wheels, then it's usually a good idea to lease it, for several reasons. The tax right off over the first 5 years. and if it's leased. 5 years from now someone builds a better more effiecent mouse trap, then it's a breeze to either send it back and get a new unit on lease. When your trying to sell older equipment, from now on, energy efficiency is going to be a major factor.

As far as things that are built into the building, buy them. but make sure your lease has a soft out if the landlord decides not to renew your lease, make it state that the landlord has to purchase them. and as normal if you walk away, you loose the capital asset.

If it's consumable, always buy it. items that wear frequently, such as glassware, pans, mixer attachements etc should all be purchased.

Leases come in many forms, the worst are usually from the equipment manufacturers. you can get others thru special equipment lease vendors. they normally have ending deals like 10% buy or $1 out etc. once again, tha accountent can tell you the tax advantages.

Also, see if you can get the restaurant owner to "cut the holes" for the vents and exhausts. that way he can not finger point later and say you did damages

also, make sure that you have the business plan figured with at least 6 months advertisments. the soft start is a great idea. 3 or 4 days of friends and family. a few days for invites to political leaders and vendors as well as the last day of invites to media as well. There should only be small hiccups in the system after a week of test runs. the cost is expensive for that week, but the experience is priceless.

Also, never give alchol away in a soft sart. just food.