Purchasing Your Restaurant Space Rather Than Leasing
Should you lease or purchase commercial space for your restaurant business? It’s a question The Lease Coach frequently gets asked when we speak at restaurant shows throughout North America. While we can best advise on a case-by-case basis (rather than globally), we know that the most common reason restaurant tenants lease space instead of buying a location is that 95 percent of all commercial space is for lease and not for sale. It really is that simple!
Considering the importance of this matter (and how it can weigh heavily on the minds of new and current restaurant operators), we have explored the matter in greater detail in our new book, Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). From those pages, here is our expert advice.
One must first understand that there are several opportunities in which you may be able to purchase a pad site property: a business condo where you occupy the one unit; a strata title unit, small strip plazas or centers where you’re now a landlord to other tenants as well or standalone buildings on a small piece of land. Major factors that impact this decision for the average restaurant tenant are the long-term commitment of purchasing a building and the ability to obtain the financing.
Restaurant tenants able to purchase commercial property are in an enviable position. Before you jump into making a decision, here a few pros and cons of purchasing to consider.
First, the benefits:
- Paying a mortgage is better than paying rent. Lease payments are forever, but your mortgage will eventually be paid off (hopefully). Often, your mortgage payment may be very close to your rent obligation.
- In most cases, you will gain equity in your property and over time, your property may double or even triple in value. This increase in value is in addition to the value of your restaurant business contained within the property.
- You’re in charge and don’t have to deal with the potential hassles of a landlord or property manager.
Now, for the drawbacks:
- There may be some sacrifice on location desirability, because many of the prime locations may be available for lease, but not for sale.
- If you are vacating an existing location, you may be leaving a great opportunity for a competitor to move into your location.
- You’re in charge and will be the one responsible for all maintenance and repairs that a commercial landlord would normally handle for you.
As we write this article, we are reminded of a very recent (and very relevant) situation. Our tenant client (a Denny’s Franchisee) had been leasing commercial space in a free-standing building on a pad site beside a hotel. His franchisor – Denny’s corporate – was on the head lease, meaning they were ultimately responsible for the rental payments, however, in this case, had chosen to sublease the property to our client, the franchisee.
As the lease expiry date drew near, it became evident that the franchisor did not want to remain on the head lease, so we approached the landlord about a new lease for the franchisee tenant. In response, the landlord explained that our client tenant could continue leasing the property or purchase it outright. Although the asking price of $1.68 million (for both the building and the land) was steep, we did our due diligence and shared both options with the tenant. We didn’t just stop there, however! Over the course of several months and with proven strategies we have found effective over the years, we successfully negotiated the purchase price down to $500K (yes, less than one-third) – much to the delight of our tenant client – and closed the sale transaction.
The decision to lease or to purchase commercial property is not always clear cut. We can tell you this though – when making the decision to purchase or lease, don’t make the decision to buy simply for the sake of owning real estate. Only consider purchasing commercial space or property if you would be prepared to lease that same location anyway. Look before you lease (or purchase).
Source: RunningRestaurants.com; by Dale Willerton and Jeff Grandfield
If you’re ready to invest in your business, contact us today about obtaining a fast-approval working capital loan or line of credit!