A good number of people looking to start a restaurant business lack the substantial capital to build a solid structure; therefore many end up leasing their restaurant space.
Leasing your restaurant space comes with its own benefits, especially since you won’t have to bother about gigantic mortgage payments (you do need to worry about rent, though) or taxes, or the cost of maintenance. Although building your restaurant space can have its own benefits, it may not always be ideal especially when you are starting up.
Experts note that acquiring your restaurant space or structure will only seem ideal if you plan to stay in the same location for over 7 years. But since new restaurants can barely predict the level of growth and expansion in 7 years, it is always better to rent or lease.
Have it in mind that your new business might become so successful that you have to move to a bigger and better location, or you might switch plans and try to target a different neighborhood or demographic. Therefore, to ensure that your business can continue to stay flexible, it is advisable that new businesses lease their space.
However, before signing any lease, whether long term or short term, it is imperative you do your research and homework. You also need to find out if the landlord is someone you can have a genuine working relationship with. Ask around to know why the space is vacant and if it would suit your restaurant concept.
Note that you might find an empty affordable space, but not all will suit your business concept and plans. For instance, a former office or retail shop may not have the necessary requirements for a licensed eating establishment.
If you find a suitable space but you feel or plan to make extensive renovations, first find out if the space will pass the initial inspection. Consider bringing in the fire marshal, health inspector, and building code officer (code enforcement officer) to evaluate and tell you what you have to do.
Sometimes, after all the initial visits, you may choose to get another space due to expenses associated with the renovations.
How Much Does It Cost to Lease a Restaurant Space?
Truth be told, this will vary depending on certain critical factors. Howbeit, according to industry reports, restaurants typically spend between $3,000 – $8,750 on rent per month. The average amount spent on rent is projected at $6,914 per month.
However, if you possess the capital, and can locate the ideal spot for sale, it is always recommended you purchase the property. Howbeit, if you don’t have adequate capital to outrightly buy the property, then leasing space for a restaurant is your next best option.
Always remember that how much you remit each month on rent coupled with other operational expenses will impact the profit margin of your restaurant. However, just as was noted above, the average cost to lease a restaurant space will differ owing to factors like; geographic location, neighborhood, sort of space, and many more.
Factors That Influence the Cost of Leasing a Restaurant Space
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Location
This is without doubt one of the critical factors that will impact how much your restaurant space lease cost. Have it in mind that very viable locations in urban cities or places with encouraging foot traffic will most definitely command higher lease prices.
Remember to consider the issue of your location extensively because aside from the lease cost, your restaurant’s location impacts so many other components of the business, including overhead costs, utility bills, and marketing. Do
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Size and Layout
This is another critical factor that will have a massive impact on your lease cost. Ideally, bigger spaces will command higher fees than a location with smaller spaces.
Aside from that, also note that the configuration and design of the space, which would include the presence of a kitchen, dining area, bar, or outdoor seating, will have an impact on the lease cost. Nevertheless, it is important you extensively consider the sort of space you need before making payments.
How large would you like your dining room? Or, do you even require a full, indoor dining room for your restaurant concept? What size of kitchen is required to meet the estimated amount of orders?
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Market Demand
You also have to realize that the demand for the services you intend to offer will impact how much you get to pay to obtain the space.
Accordingly, if there is intense competition and limited availability in the location or neighborhood, have it in mind that landlords might decide to charge higher rents. In the same vein, places with lower demand might serve as more affordable leasing options.
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Lease Term
This is another vital factor that will most definitely impact your lease cost. Have it in mind that different contracts will have varying terms and thus impact your costs.
For instance, longer-term leases will come with lower monthly rents because landlords are known to prefer stable, long-term tenants. Meanwhile, shorter leases or month-to-month agreements will come with higher rents owing to increased flexibility for the tenant.
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Condition and Infrastructure
Also, have it in mind that the condition of the space you intend to lease as well as its infrastructure would have an impact on how much your lease cost.
There are situations where you might want to make adjustments to suit your business or renovate dilapidated structures. However, note that a properly maintained, fully equipped restaurant space with up-to-date systems will command higher fees.
But if you have to make renovations or modifications or the space doesn’t have the things you need, the amount you have to spend to fit it properly can also be subtracted from your lease payment.
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Economic Factors
Every town and city is different and that is why it is essential you carry out proper market research. However, note that the general economic conditions of the country or your city can also have a noticeable impact on how much your lease cost.
Have it in mind that things like inflation, interest rates, and overall market trends, could either make your lease prices higher or lower. Note that when the economy is booming, lease prices will increase due to increased business activity and demand. Howbeit, during economic downturns, lease prices might also be more negotiable.
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Negotiation and Competition
Once you have found a location you believe is perfect, the next move will be to go over and negotiate the lease. Have it in mind that the more prepared you are, the more you can get the cost to be in your favor. Negotiating a restaurant lease is never an easy endeavor, but pushing for what you want is worth it.
Always remember that a good proportion of your budget will be spent on monthly rent, as such you have to take your time to ensure that it is exactly what you want.
Just as was noted above, the average cost to lease a restaurant space will differ based on factors such as geographic location, neighborhood, sort of space, and many more. Nevertheless, always remember that your lease cost should never exceed 6 to 10 percent of your gross sales or projected revenue. Have it in mind that anything over that, and the lease cost might cut into other budget categories and profits.
Steps to Find and Lease a Restaurant Space
Leasing a restaurant space without a detailed plan is like walking into a grocery shop void of a shopping list. Searching for a commercial space for your restaurant is a step that requires knowledge about leasing options and the ability to negotiate a lease with your landlord. To help you make the best decision for your business, here are steps to find and lease a good space for your restaurant.
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Understand What You Want
First and foremost, restaurants come in varieties of shapes and sizes, from local hole-in-the-wall shops to exotic cafeterias. Depending on the concept you have in mind, you probably already know what you want your restaurant to look like inside.
The ideal space for your restaurant may not, at first, seem like the perfect space. But a good number of restaurants are popular because of their location and not the shape or setup inside the building. Understand that you can make renovations, add extensions, or redesign the restaurant to fit a not-so-good space in a great location.
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Do Your Research
The importance of extensive research cannot be ignored when looking to lease a suitable space for your restaurant. Note that research will help you understand the pros and cons for each location. Most restaurant businesses succeed by standing out from the many lots in their area.
To be profitable, you need to have an edge in your local market and attract enough customers to generate revenue. If any of the spaces you look at are in locations that won’t allow you to do that, then it might just not be the perfect space.
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Have a Realistic Budget
Don’t start looking up restaurant space for lease without first having a budget you’re comfortable with first. New restaurant owners tend to underestimate the cost of starting their restaurant, as well as how long it will take the restaurant to become profitable.
Have it in mind that over-extending your budget before you open your doors for business will make it even hard to get a return on your investment.
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Do a Landlord/Location Background Check
After you must have selected a restaurant space, take your time to find out as much as you can about your potential new landlord. Ensure to have an in-person conversation to get a firsthand experience of their expectations and communication style.
If you have issues getting on the same page in an initial conversation, a long-term business arrangement might have to be reconsidered.
In addition, if there are other businesses in the same location, take time to find out the owners and ask if the landlord is easygoing. You can also ask about the pros and cons of the location, foot traffic, and customer patterns. Also, remember to look out for both red and green flags right before you take the next step.
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Don’t Be Scared to Bargain
The earlier you understand that rent is often flexible, the better you are in terms of negotiation and discussion. A good number of landlords in this modern age prefer to rent their real estate rather than have it remain vacant. If no one has been in the space for some time — or if other properties hardly retain tenants — the owner may be open to negotiation.
Note that basic rent negotiations for a new restaurant include not paying until the restaurant begins operation, also referred to as pro-rating rent, or paying a low rent the first year of the lease, then increase it gradually each year.
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Understand What’s Included in the Rent
When negotiating your lease, ensure you understand explicitly what is included in it. Are you expected to cover all the utilities, or are some included in the cost of rent? What of trash removal, water, and sewer coupled with heat and electricity?
If you can negotiate a better or cheaper rent, you can try to get your new landlord to cover some of your utilities. Ensure that your lease agreement notes who is tasked with building repairs, expected renovations, general maintenance, and pest control.
Also ensure it comes with provisions about insurance coverage and liability in the case of damage to the building, both in the case of negligence (for instance, a fire in the kitchen) as well as acts of God (such as wildfire or earthquakes).
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Don’t Accept the First Offer
Even if the first offer seems reasonable, or you have no idea of what to negotiate for, it is always advisable not to accept the first offer.
Most times, the first offer or rental rate is inflated; a good number of agents start leasing negotiations at a higher number so they have enough room to haggle. Although you may jam a few exceptions to this, howbeit most agents give you a higher number and expect you to counter-offer.
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Don’t be Afraid to Walk
When negotiating a lease, it is critical to understand the importance of being rational and to make objective decisions. If you genuinely love the space but the numbers don’t seem encouraging and the property owner isn’t prepared to reduce their price, do not be scared to walk away.
Note that securing a beautiful location that you can’t afford would more or less result in you not having enough to pay other expenses associated with starting a restaurant.
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Create an Exit Plan
No entrepreneur wants to consider the fact that their business might close down, especially not before it is even open. But according to industry reports, a good number of new restaurants close within the first couple of years. Therefore, to ensure peace of mind and practical reasons, it is advisable you limit your lease to one to three years at the outset.
If all goes well, you can extend or even decide to move to a bigger space. Ensure that your lease states how and when it does end. In addition, it should stipulate how your landlord is expected to contact you if your lease will not be renewed or your rent will be raised.
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Consider a Broker
Although it may be tempting to seek the expertise of a real estate agent or broker, however note that they most times work for the landlord. Have it in mind that their aim is to get the landlord the highest rent possible and get a big commission for themselves, not to get you, the tenant, and the best deal achievable.
Also note that the longer your lease term, the higher the rent and the more space you agree to lease, the more money the real estate agent bags.
But if you intend to search several properties, it is advisable to work directly with each property’s listing agent instead of letting one show you other agent’s listings. Note that this will help you avoid commission-splitting and make your tenancy more economical.
Conclusion
The space you choose for your restaurant can make or break the business. Have it in mind that so many factors go into making a commercial space the right space for your restaurant. Once you have found the right space for your new restaurant, it is time to meet with the landlord and lawyers to put together a contract. Never relent to ask questions and suggest changes during this period or process.