23 May CAFES AND RESTAURANTS: Rents, landlords, and leases
NOTE FROM TOM WEST:
Clyth lives and has his office in New Zealand, and some of the language, etc. may be different. But, if you read the following, you will see that business brokerage is not much different here in the states. Clyth has been in business brokerage for 50 years. Here is the latest from him.
Nothing is certain but death and taxes… and rent, if you own a café or restaurant.
There are three critical factors that determine the financial success and survival of these types of businesses. These are cost of goods, wages, and rent. The owner has some control over the first two, but the rent is generally fixed for a period by a lease.
Ideally, rent should be in the range of 6% to 10% of the turnover. Every 1% above that comes directly out of your bottom line profit. Of course, if your rent is low as a percentage this improves your profitability. And if you increase your turnover the percentage drops.
Currently, we are hearing many stories of landlords asking for hefty increases in rent. We are also hearing stories of owners closing, and walking away from exorbitant rents. When this happens everyone loses. The owner’s income disappears, the landlord’s rental income stops, and the staff are redundant.
This is a lose-lose situation. Any new tenant will be wary and the previous one may face horrendous set-up costs if suitable premises can be found for re-location.
It is in the landlord’s interest to have a stable, successful tenant paying the rent on time. It is in the tenant’s interest to have security of tenure at a reasonable market level rental. Understandably the landlord wants to maximise his rental – but not so much that he or she is left with empty premises. The café / restaurant owner should expect to pay a fair rental.
The lease agreement is critically important. The terms and conditions are as important as the rental. The tenant needs clarity as to what other occupancy costs are involved, how often the rent is to be renewed (and on what basis), what restrictions may impact a future sale, how many rights of renewal there are and what is the final expiration date. A demolition clause can more than halve the value of your business. At renewal and review times a tenant in good standing has some leverage. Most landlords would rather work with a known quantity than be at risk with a new and untried tenant or have an empty building.
A major problem with café and restaurant rentals is that their viability is dependent upon the turnover of the business. The rent of other businesses in the area may be dependent purely upon floor area.
In negotiating a lease or renewal the business owner should start early, have a knowledge of market rents in the area and prevailing market rents for the hospitality sector, strive for a long-term lease (but short-term renewals) with clarity on rent increases, and no clauses that will limit the transferability of the business when your time comes to exit.
And be friendly. Landlords and tenants really do have common interests!