Matrix of successful restaurant leasing

"All too often developers look to the perceived success of existing centers and believe in the me too simplicity of merchandising in lieu of a sound judgment decision based on analysis. Therefore, they leap over the data analysis that could have helped ensure merchandising and economic success or at the very least hedged their chances of failure.


Basic Building Blocks


Merchandise the restaurant tenant mix to the prospective demographics.
The lead indicator in demographics is, as always, population density both day and night, income and age. But the vast majority of restaurant sales is driven by two meals per day; therefore, the proximity, identity and specifics of the adjacencies make the daytime population a critical factor to a restaurant tenant's decision. The demographics used for retail tenants are not necessarily the same for the restaurant tenant, which requires a denser population within a smaller radius usually 1, 3 and 5 miles. As such, the development's marketing package should contain a separate restaurant data supplement that speaks to this specific required criteria, as well as the particulars of the daytime demographics, as well as that of the adjacencies to the development.
Take advantage of psychographics, which study how the demographic spends its money in correlation to its income.
Another consideration is the restaurant competition to the proposed tenant's cuisine within the radius to determine if a certain cuisine is over-restauranted in the developer's trade market.


Retail and entertainment tenants want to know that the restaurant mix will complement their customers, as they consider restaurants being their marketing partner to the public. Research the restaurant tenants within centers where they are currently most successful and compare the demographics to the specific development's demographics. Conversely, the vast majority of restaurant tenants want compatible retail tenants and, more importantly, a theater for the large number of bodies it brings to the center. A matrix of various cuisines and brands should be complementary — not competitive — thereby contributing significantly to sales, bringing potential customers to the front door.
This expands mealtime hours, and therefore the tenant can increase his pro forma sales, which will make tenants more apt to pay greater rent and take less tenant allowance.


Focus on the anchor restaurant tenant first. As in retail, restaurant tenants follow the most successful companies. Do not shotgun the restaurant tenant market, or there is a risk of having the tenant initially turn down the site, only to make it a more difficult task to sell that same tenant after the lease is signed with the anchor restaurant, as they would believe they would be at a disadvantage in negotiations. As there are relatively few national anchor restaurant tenants, developers look to multi-unit regional and local restaurants.
Be careful to investigate the tenant's ability to expand operationally.
Although the development and economics offered by the developer could be quite appealing to a restaurant tenant, if it is not organizationally staffed for expansion, it probably will not be capable of maintaining its quality in food and service, especially if the site is located outside the tenant's sphere of control geographically. Chances are, the tenant will fail. At which point there is a vacancy in the center that will cost additional tenant allowance dollars in addition to those already expensed to the initial tenant.


Review tenants' sales trends for at least the last 3 years. If a restaurant is open less than 2 to 3 years, the sustainability of the sales and concept is hard to determine, but nonetheless, it is a solid indicator of whether the tenant's restaurant is answering to the center's demographic.


Merchandise 3 tenants for each site and cuisine, as it is more prevalent in the restaurant business than in the retail business for a number of the tenants not to go forward due to insufficient capital and/or lack of adequate management.


An evolving trend has been high-end restaurants that have created polished casual cafés as well as multi-concept growth restaurant companies that are non-chains. These are eclectic restaurants that extend beyond the brand of well-known successful operations. They are able to grow without leaving the current or adjacent trade markets while still taking advantage of the brand and its proximity to existing operational management.


Lease Economics


There seems to be a disconnect between a developer's expectation of restaurant lease economics and the reality of the restaurant's financial ability and experience. All too often the developer will prepare a pro forma and budget prior to merchandising the restaurants and/or assume that the economics of the deal, especially the rent, would be consistent with that of retail tenants or prior experience with other restaurant tenants. Due to the cost differences between restaurant and retail development expenses, the disparaging difference in usage of the gross leasable area and the percentage of sales threshold for rent, the economics of a restaurant lease must be determined based on its own industry and individual data. With proper analysis, the developer will be less likely to have protracted negotiations, will properly gage the tenant allowance and rental income and therefore will make the best possible deal with the most desirable tenant in the shortest amount of time.


The pro forma economics of rent, tenant allowance, landlord shell work and bankability of each restaurant tenant will vary by the brand, the size of the company, the type of cuisine, the historical cost to build, sales per unit, sales per square foot and net revenues as a percentage of sales, as well as food and labor costs. This due diligence and analysis will help the landlord to estimate the tenant's threshold for rent and thereby assist in qualifying a restaurant as a potential tenant.
Does the tenant have the equity to develop the restaurant above the landlord's tenant allowance? If not, a lease is being signed with an out provision for the tenant if he cannot raise the required dollars. Does the tenant have the financial capacity (bankability) to guarantee the lease? Small restaurant companies most often do not have the financial statements that would be considered bankable. Don't expect personal guarantees or cross-collateralization because small operators are understandably risk-adverse. The landlord should be prepared to take the financial risk if she wants the advantageous emerging restaurant concept that would set her center apart from others and bring the most traffic.


Before the lease economics are negotiated, establish the previous comparable center experience of the tenant. If the restaurant has not been in a center previously, and is not represented by highly experienced and trusted consultants, attorneys or brokers, the issues of gross rent vs. triple-net leases, percentage rent, and lease assignment and subletting — amongst many others — will become difficult barriers to completing a deal.


Today, restaurants have become an anchor. They help to
define and differentiate one development from another."

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