Rental Property

I know that this question depends on your location but what should i pay per sq ft for my lease? I have an oportunity to get a retail space with all the equipmet (ovens, tables, buffet) pretty much a whole pizza place. THe other owner left it two years ago and i can get the whole deal for 3000 a month. Any thoughts…

You really gave us nothing to go on and a lease really has nothing to do with equipment left over from the previous owner. Maybe you will wind up paying more for the equipment over the long run because of a higher rent???

Traffic, Anchors, accessability, age, visability, comparable rents, cams, ti’s, term length, competition, demographics, lunch business, evening business, weekend business . . .

In my area that’s not a bad rent but it can be for the wrong location.

Thanks for that…and you are right there are a lot of variables. Ok let me give a little more info. My town is a suburb of the capital of my state. I talked with the chamber of commerce here and this is a little of the information I got from them. THe population is 29000 and growing, average income is 95,000 median is 80,000. Tha average price of a home is 190,000 and all are projected to grow. There are three of the major pizza places all in a 10 mile radius and there are no non commercial pizza places. The retail space was a pizza place that did not get off the ground and the place has sat there for about 2 years. The shopping complex that the spot is in has a Hollywood video and a hair salon next door along with a empty spot a radio shack once was. The spot where the radio shack was is emty also for about a year. The propert does face the main raod in the town. The property manager said the radio shack spot was going for 17 a sq ft.

Hope that helps.

The answer is as little as possible. Demographics are irrelevant to the LL’s pricing. Are you located in the middle of your target market? Do you have a business plan? Marketing plan? What’s your projected gross sales? How do you plan to succeed in the same geographic area as three top chain competitors? What kind of rent is being offered by the LL? Is CAM included? Is your equipment being offered as a separate agreement? Has the LL shown you proof of ownership? I have a million more questions where these came from.

Things I know.

  1. Unless you have successfully negotiated a commercial lease for a restaurant before, you will not be successful doing so on your own.
  2. The lease is the most important document in your business, if you sign a bad one, it won’t matter how good your marketing or product or service is - you will lose in the long run.
  3. Your landlord is not your friend - neither is his broker.
  4. The bottom line on cost is that you MUST keep your TOTAL occupancy costs below 6% to have any chance at thriving in this location.

Unless you’re an experienced operator who has negotiated leases before, I would seek out a consultant who does it for a living and hire them to do it for you.

Hi Techiedude:

Note if you are taking over an existing place you will have to bring it up to the latest building, health and fire Marshalls code.

Nothing is grand fathered in for a new operator. I suggest you have building, health and fire inspectors in to check out what changes and upgrades will be required before you make a deal,

George Mills

Thanks, did not even think about that.

If it’s only two years old, that means it was permitted and there shouldn’t be much, if anything, needed to bring it up to code. If there is, then that would fall to the landlord to take care of.

Jeff’s suggestions regarding leasing are good ones.

I am a licensed broker in my state and my background includes extensive work in site selection and leasing on a national level.

I disagree with him on one point though. 6% occupancy is a worthy goal but not often realistic these days and not a make or break number. With the changes coming in commercial property in this economy that may change, but long term, not many businesses enjoy costs that low.

At the very least, work with an attorney to protect your interests in the lease but you really need to have a tenant rep woking with you on your lease to assure that you get the best deal possible. A tenant rep can usually be paid by the landlord on a commission basis.

Total occupancy costs below 6%? I have read 10%. 6% was for rent alone.

Rent and Occupancy Cost Rules of Thumb

Rent (6 percent or less). Rent used here is the ongoing payments made by an operator to the lessor for the use of premises. Rent payments may be fixed or based on a percentage of sales. Generally, the goal is to limit rent expense to 6 percent of sales or less, exclusive of related costs such as common area maintenance (CAM) and other occupancy expenses.

Occupancy cost (10 percent or less). Occupancy cost includes rent, CAM, insurance on building and contents, real estate taxes, personal property taxes and other municipal taxes. Many operators want to keep occupancy cost at or below 8 percent of sales, however, 10 percent is generally viewed to be the point at which occupancy cost starts to become excessive and begins to seriously impair a restaurant’s ability to generate an adequate profit.

“4. The bottom line on cost is that you MUST keep your TOTAL occupancy costs below 6% to have any chance at thriving in this location.”

The comment I quoted above is the comment I was referring to with the 6%. As Dewar points out, 10% is a pretty common benchmark. Less than that is good, more is bad. Obviously, anything less goes straight into your pocket.

No. What you’re thinking of refers to full-service casual dining restaurants. Each type of venue has a different threshold for acceptable cost ratios. Pizza/QSR’s OC need to run around 6% due to their lower volumes and other factors.

Whatever.

I am currently a licensed broker with years of experience in tenant rep, site selection and leasing. This is my full time occupation.

I spent a couple of years in Dominos management (company stores).

I have also owned (still own) two pizza stores for 10 years.

6% occupancy is a nice day dream. Very few stores ever get there.

Then maybe you just need to try harder?

I’m a licensed broker as well, in fact I’ve held a CCIM designation for years. I’ve done nothing for 27 years but own, operate, manage and consult for every major restaurant chain in the United States and 13 countries worldwide, so I’ll put my credentials up against anyones. I’ve negotiated no fewer than 15 leases in the past six months alone in 8 different states - all in the 6% area or less. In fact, we just signed on a second location for a new, up and coming pizzas chain in Denver, Colorado at 4%. Just because your experience hasn’t been as fruitful doesn’t mean everyone else’s is just as bad.

Commercial locations are being foreclosed on almost as fast as residential ones. 50,000 commercial locations in strip malls throughout the country are expected to go dark in the next 6-12 months. Rental rates are dropping as fast and LL’s are offering unprecedented high levels of incentives for tenants just to keep cash flow positive. In other words, it’s a buyer’s market.

The difference between those who are trying to survive this recession and those who will thrive in this recalibration will be the ones who rid themselves of old ways of doing business which have now been rendered inappropriate and meaningless.

No doubt there are great opportunities at a time like this.

That does not change the fact that many businesses survive and thrive with occupancy in the 8-10% range. This is especially true for independant stores. 6% is great but not a “must” have item when the rest of the picture is right.

National chains have leverage that indi operators just do not enjoy so it does not surprise me that you are able to get better deals for tenants that are both bankable and considered anchors. My own background includes directing leasing for a national. bankable tenant as well and I also was able to do very well for them.

I understand that you are here to sell your services. I am not.

Calling the long term average relationship of revenue to rent “inappropriate and meaningless” is a little misleading. Can folks do better right now? Perhaps so. Should they have a close look at the issue, especially if they are in an area with vacancy? Sure, why not. Especially if the lease they currently have is up for renewal or options are coming up.

When all is said and done, the best locations are going to get a premium over average locations and that premium will, in time, come back to conventional ratios of rent to sales. That conventional ratio is not 6%.

First of all, no one said you can’t survive at an 8-10% OC. But that’s not the point is it? I’m talking about giving your business and your people the best shot at the highest level of success possible. If you’re happy with average success then I’m not talking to you.

Secondly, 6% is great compared to what? 8%? 10%? 12%? Of course it is. But 5% is better than 6% isn’t it? Isn’t a 30% food cost better than a 40% food cost? So why settle for 35? Why settle for 6%? You’re just playing games.
I quit working for national chains years ago to focus on independents. To say that indies don’t have leverage is ridiculous. And frankly, I’m sick of hearing all this Chain vs Indie crap. National chains aren’t the independents problem. Independents are the independents problem and your thinking highlights that very point.

Thirdly, you need to reread my last post; the “chain” I got 4% for was a two-unit chain – that particular location was their second. They have mortgaged themselves to no end to try and grow their business and have a better life and frankly, I think they deserve the extra 2%.

As for selling my services, I’m sure you have noticed the hard sell I give each and every time I post. Give me a break. Every person here is selling something. We’re posting on an industry magazine forum for Pete’s sake surrounded by ads! So if someone wants to call me and engage me to help them build a better business, so you’re absolutely right because I want to be a part of it. But I don’t troll around on industry website forums and solicit new business. I post here because this is where the need is the greatest and I can have a bigger impact by influencing core thinking on the issues that affect the industry I work in. Sometimes, it really is that simple.

The idea that you have to wait to renegotiate your lease simply because it’s up for renewal is preposterous. Deals get worked and reworked all the time. I’ve renegotiated client’s leases in as few as 6-8 months after they’ve been signed and the business is open. Things change. Business climates especially and smart operators look at everything in order to give themselves an advantage.

When all is truly said and done the best locations don’t always command the premium rates. That is simply too subjective an outlook and ignores a multitude of variables that impact the negotiations for a specific space. Premium rates are commanded by the LL’s who can negotiate them – period. The most important determinant of any rate for any space is the ability of the prospective tenant to negotiate it. Some of the worst deals I’ve ever seen have come from brokers or accountants or attorneys who couldn’t tell a grease trap from a hole in the ground, and their operator-client simply took them at their word that “…oh 8% is fair and the LL seems firm on that…blah , blah, blah…” and we all know how many NSO’s don’t see life past their first year. Is it any wonder?

Lastly, rules of thumb are just guides to being able to conceptualize some idea of how something typically works. It is not an exact science and your experience may vary. The point is to achieve success not perfection. But I don’t like walking away from the table without winning.

The last thing I’ll say is this and it’s directed to anyone who wants to participate in any forum anywhere. I could care less about who you were in a past life, nor do I care whether you agree with me or not. It’s not mandatory that you do. What matters is the idea on the table. You have a better one? Let’s hear it! Have a better process? I’m all ears! You wouldn’t believe how dumb I was two weeks ago. But don’t give me this baseless posturing BS. It adds nothing to the conversation and makes you look like the amateur you really think you are but have to stoop to ad hominem attacks just to make yourself appear more important.

Now can we get back to trying to help this guy build a better business?

Have you considered buying one of those ads, or do you plan to continue to shill your services for free? If you’re not here to solicit business and are just here out of altrusim, how about removing the link to your website from every post?

Also, how about letting us know about the successful restaurants that you have owned?

I have not because, for me, they’re a waste of time and resources. And aside from the fact that you don’t know what the word shill means, or that there is no link on my posts except to my PMQ member profile - where there is a link to my website where you can find out all about me if you choose to or not. What’s your point?

BTW, why is your profile completely empty? No name, occupation, location, interests, email or even an avatar?

Is this the kind of hospitality that you offer in your business? If it is, I’m sure I’d want to keep my identity a secret too.

Congratulations Jeffrey, you’re more annoying than Gregster!

I always love “coaches” and “consultants” that have never done anything for themselves. Never even owned a restuarant, but he’s an expert in restaurant ownership! I can’t find anything about you or your company that wasn’t posted by you. Seems like you haven’t seen much success with your “coaching”.

And wow, vocabulary advice from somebody that graduated from SIU. Was clown college full?

If they are lower volume, the percent is going to be higher. Think about it.

No. You’re missing the point. 6% of $350,000 is 6%. 6% of $600,000 is 6%. We’re not dealing with variable amounts to determine ratios, we’re talking about using static sales to determine the level of maximum OC allowed to maintain an appropriate margin.