Leasing restaurant space is similar to renting retail space however there are a few nuances about restaurant space that you need to be aware of. The last thing you want to do is get stuck in a 5-7 year restaurant lease that was not negotiated properly. If you have not leased restaurant space before it would be a good idea for you to hire an experienced restaurant real estate advisor to guide you through the process. If you want to go it alone the following things to be aware of will get you started.
Lease & Rent Commencement Dates
Most leases have a lease commencement date and a rent commencement date. It’s important that you know and understand the difference between the two.
- The lease commencement date is the date that the lease is signed.
- Rent commencement is when the first months rent is due.
When negotiating a restaurant lease it’s important that you give yourself enough time to build out the space, get your certificate of occupancy, and open for business before you have to start paying rent.
Restaurant Space Operating Expenses
When leasing restaurant space tenants have to pay their pro rata share of operating expenses (aka NNN) if in a multi-tenant building or if in a single tenant building pay 100% of opex. These operating expenses are typically referred to as “additional rent” and include charges such as the property’s taxes, insurance, and common area maintenance (CAM).
The common area maintenance charges include maintenance and repairs to parking lots, walkways, roof, etc. Additionally they include security and utilities for the common areas.
Triple nets (NNN) are estimated each year and included as part of the tenants monthly rent. The tenant’s pro rata share is calculated by dividing the square footage of tenants space by the total square footage of the building.
For example if the retail tenants space is 2,000 sf and the total building was 10,000 sf, that tenants pro rata share would be 2,000 / 10,000 = 20%. Again if the tenant occupies the entire building then they pay 100%.
Restaurant users will benefit from having complimentary businesses in the shopping center however you want to make sure the landlord does not allow too many competing restaurant users. Make sure to get an exclusive clause in your lease that prohibits the landlord from leasing to competing businesses that sell similar products & services as yours.
Assignment & Sublease Clauses
You want to negotiate to have the ability to assign or sublease the remaining lease term in the event you want to sell the business or if things don’t work out as planned.
You need to have in writing how and in what condition will the landlord deliver the space. The space will either be in shell condition (never been built out or occupied) and need a complete build out OR it will be a 2nd generation space that was built out and occupied before.
Is there a tenant improvement allowance? How old are the HVAC units and who is responsible for maintenance and repairs?