Purchasing a Pizza Shop

The Pizza place that I have been a manager at for 6 years recenlty closed due to eviction, the place was bought year and a half ago and moved to a new location which was a much more visable location than before. The owner had a gambling problem and failed to pay lease payments hence the eviction. My question is the landlord has approaced me about taking over the restaurant, the landlord has been given everything in the shop to cover back lease payments by the court and wants $20,000 to move in, the equipment will be signed over to me at the end of the lease which has 3 years remaining.

A little about the shop equipment it has double stack mm oven, 2-2 door refrigerators, walkin cooler/freezer combo, deep fryer, pasta cooker, kegerator, beer cooler, mug froster, radiant system pos, booths tables and chairs, ice maker and all odds and ends. In its first year in the new location sales were $575,000, lease payment is $5900 on 5500 sq ft. All equipment except oven and pasta cooker are a year and a half old. Oven worked great before shop closed.

Population is 39,000 and median income is $40,000 we have Pj’s, Dominos, Pizza Hut and 3 small independents . This paticular place has been in business for 23 years with a great name until the new owner squandered all the money and the place closed all of a sudden, I get asked by former customers all the time if it is going to reopen. Was wondering if this sounded like a good deal or not.

The deal for getting into the business is pretty good. The rent is not. Assuming the rent you quoted includes all common area charges and the sales you reported is net of sales taxes the occupancy expense is higher than 12%. If there are common area expenses beyond that rent figure or you were reporting sales including sales tax the picture is even worse.

It sounds like the LL wants you in there, I would go back with an offer to pay 9% of gross sales (not including sales taxes) with no minimum rent as total rent expenses to include ALL 3-net expenses…

Further, for the 20K you receive ownership of the equipment immediatly.

I’d add in a caution not to extend the lease as a condition of the terms BodegaHwy tossed out. Once you get into the flow and a stable sales level at 3 years out, getting a fixed lease amount may reduce your liability and let you keep more of your hard earned money.

Personally, if I could sign leases at 9% of sales with no minimum rent to include all common area expenses, I would sign them all day long and twice and Saturdays. Sure, some folks have lower occupancy expenses but not many.

The basic idea of percentage rent is shared risk and reward. The landlord is taking a risk that you will not have to pay as much as they hoped and you are perhaps giving up some $$ you could keep if things go well. Your rent is high when you are busy and low when things are dead. The LL knows that if they let things slide around the property and business suffers, they will get less rent. Conversely, if they improve the property, attract better neighbor tenants sales go up and they benefit. All in all, not bad.

Most % rent leases have a minimum rent and the LL wants % rent as an override with monthly breakpoint calculations (slow months do not offset big months) which is often not a very good deal. Innexperienced tenants sign these things and don’t get protections built in.

Take your rent, common area expenses (lanscaping, snow removal, trash, common utilities, management, insurance, property taxes and add them all up and let us know whether you like your deal or 9% of sales better.

Very few businesses like ours can survive with 13% occupancy costs.

Thanks for the info, much appreciated I meet with the LL next week