As a commercial real estate and business broker specializing exclusively in restaurant businesses for sale and restaurant real estate for sale or lease, many times I am asked by both tenants and landlords to negotiate a lease in each respective party's interest in the process of finding a restaurant site location. One issue which consistently arises is build-out allowances. The landlord typically desires to contribute as little as possible, while the tenant desires as much as possible. In my opinion, there is a way for each to win, should a developer budget a much higher allowance than competitive developers.

In the following example, I am making an assumption that a 5,000-square-foot restaurant tenant is looking at space in a new shopping center. The prospective tenant is of marginal to moderate strength and has one successful existing location. The tenant does not have the borrowing power or track record to go to the bank. The total "turn-key" for the restaurant is $400,000, of which $200,000 is permanent improvements, including plumbing, electric, HVAC, hood system, walk-ins, etc. The other $200,000 is removable equipment and start-up expenses, including soft costs. The standard tenant upfitting allowance is $10 per square foot or $50,000. The base rent is $10 per square foot. The cash available to the tenant, including the value of leased equipment, is $250,000. The tenant needs $150,000 in build-out allowance.

Should the landlord approve a build-out allowance for $30 per square foot for restaurant tenants, this could work to everyone's advantage.

By offering $30 p.s.f. the landlord first of all provides an advantage over competitive locations, and therefore should be able to obtain greater rent. Should the extra $20 p.s.f. in upfitting be amortized over a 10-year term at 11 percent annual interest, the effective cost to the tenant would be $100,000 at 11 percent or $16,530 per year in payments This effectively adds $3.31 p.s.f. to base rent. The landlord could conceivably obtain $14 per square foot in base rent because of the competitive advantage, and because of the additional upfitting contribution. By arranging permanent financing in advance, the cash flow position to the landlord is also improved, because the amortization period is greater than 10 years on the permanent loan. The tenant has a real win by being able to open a second location much sooner than the tenant's borrowing ability would dictate. A $14 p.s.f. lease capitalized at 10 percent creates a value to the landlord of $700,000; ($14 times 5,000 square feet or $70,000 in base rent per year divided by .10). Had the landlord only provided the standard $10 p.s.f. upfitting and received a rent of $10 p.s.f., the effective value created would be only $500,000 ($10 times 5,000 square feet or $50,000 in base rent per year divided by .10). The result is that the landlord has created as much as $200,000 in additional value of the shopping center for an investment of $100,000 in additional upfitting money. Not a bad return for the landlord!

The downside risk for the landlord is, of course, in the event of the tenant going out of business. In my opinion, should the tenant default on the lease, the landlord is not in a very high-risk situation. First of all, the shopping center may have already been sold at a higher price because of the resulting cap rate. Should the landlord still own the center, the likelihood of finding a new tenant is great, because of all the restaurant permanent improvements that are in place, including the tenant work. Restaurant prospects traditionally look at "conversion" opportunities extremely positively. In fact, the reality is, should the tenant's sales and profits be a disappointment, the tenant will probably sell his business assets at a distressed price and assign the lease. Even if the tenant defaults, stops paying rent, and vacates the space, the landlord can take steps in advance to have a UCC filing in a second lien position on public record to prevent the removal of any equipment. The first lien holder (for example, the leasing company) would have an advantage in leaving the equipment in place until a new tenant is found, who will pay off or assume the equipment lease. The landlord can still lease the vacant space if need be at $12 p.s.f. and break even on the investment. In summary, the tenant wins by being able to open a new location more quickly than the banks would normally allow. The tenant also wins by keeping a more attractive debt-to-equity ratio. The tenant can certainly understand paying a higher lease rate because of the extra upfitting allowance, and should be willing to offer the landlord a lien position on the improvements and equipment. The landlord wins by creating higher value in the selling price of the shopping center, by being able to offer a real competitive advantage over other locations, and by more quickly leasing space. The rewards are great for both tenant and landlord.

1) BACK LIABILITIES FROM A RESTAURANT BUSINESS FOR SALE
Many times the bills which a previous owner has not paid to suppliers, tax agencies of the government, contractors, etc. can be "passed on" to the new owner without the new owner realizing. Always contact all past creditors of the current owner as to the status of the account. Review the check registers to get a list of suppliers and repair and maintenance companies who have done business with the current owner. Even if you are successful in separating yourself from the bills of the previous owner, a supplier may hesitate to do business with you based on not having been paid in the past. Always have an attorney research any liens or Uniform Commercial Code Filings on the business. Always fight for at least some owner financing to protect yourself against any liability and have the seller sign a statement allowing you to deduct any past debts directly from your payments to the seller.

2) HEALTH DEPARTMENT
Always have a contingency in your offer for purchase which states that the review of the health department must be to your satisfaction. Many times the Health Department will use the fact that a sale has occurred to bring the restaurant up to current codes. The health department certificate must be in the name of the owner of the business or they can pull your license. Tens of thousands of dollars can be lost in unexpected repairs because the Health Department was not contacted prior to the sale.

3) SALES AND EXPENSES
Always verify sales by checking the sales tax reports, the check registers to verify deposits, the accounting statements to compare the accountants or bookkeepers record of sales, and the tax returns, again as a comparison. Always verify expenses by checking the accounting statements, the tax returns, and even the returned checks for utility, repair and maintenance, and supplier bills.

4) NON-COMPETE
Always insist on a radius from the restaurant in which the previous owner will not open a competitive restaurant for a specific period of time. Even if the previous owner is retiring to Australia, he may decide he's bored in two years and come home to go in competition with you, the new owner.

5) REASON FOR SALE
Always check out any impending changes in the area or market which could cause the business sales to drop dramatically. Call the state and local departments of transportation to look into any road changes. Will your new restaurant be made much more inconvenient because of access or has the stale a plan to build a highway across your dining room? Always check with site plan submissions which a new competitor has filed to build a competing restaurant right down the street. Keep your ear to the ground and talk to anyone and everyone who knows the market.

6) EQUIPMENT REPAIR
Always have a knowledgeable serviceman check out the equipment for length of expected service. Have the heating, ventilating, and air conditioning units been serviced? What about the plumbing and electrical systems? Always check the structural integrity of the building. ALWAYS use a professional team of an attorney, an accountant or CPA, and a professional real estate and business broker, all having specialized experience in your area of investment.

Planning a restaurant depends on your target market, the type of food you are serving and customer turnover.

Reception

The best place for the reception, where you would take bookings, greet customers and process bills is at the front of the restaurant, near the door.

Bar

It is advisable to have a separate bar near the entrance for diners to wait for companions or for a table to become available.

Circulation

Think about how you want customers to get to their table and how you want meals to be served. This can be forced by the use of furnishings to block throughways etc.

Space

The amount of space you should allow per customer will depend on the type of standard expected by the restaurant. The more upmarket and expensive the restaurant the greater amount of space you should allow. A seated diner will take up to 2ft (61cm) of floor space from the table therefore 6 sq ft should be allows per table for four.

To create a busy, buzzy atmosphere you may want to put the tables closer together, however this must be thought through as it may discomfort the diner. This might work in your favour by encouraging faster turnaround times.

Kitchen

A kitchen can either be hidden away or made the focal point of the restaurant (Fifteen, 140 Park Lane). In this case be aware that cooking smells and noise will be present in the restaurant which might upset a few people.

Internal fittings

The selection of internal fittings (chairs, tables etc) will depend on the style of restaurant you are planning. Make sure it is pleasing to the eye and a specialist restaurant designer may be the best choice to aid you. Also the lighting of the restaurant is exceptionally important, it can help enhance the overall mood of the restaurant and the appearance of the food being served.