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HOW MUCH RENT SHOULD I PAY?

Jun 24, 2010
Article #48
Author: Mel Jones

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So you want to buy a restaurant and enter into a lease? Let's cover some basic points befoere we discuss rent. 
Over the past 15 years, we've sold more than 700 restaurants, read thousands of leases and negotiated hundreds of leases, so we've seen our share of sad stories in this business.  All too often people enter the restaurant business without consulting an experienced and educated restaurant broker. 
If you're in the process of looking for or you are negotiating a lease right now, then call us immediately. 800-576-3615. It won't cost you a dime but will save you heartache as well as thousands of dollars. 
Here are some of the points needing professional attention:
EXIT STRATEGY
Of course as a sales person of restaurants, we're always interested in getting our clients out of the lease
(a) CONTINUED LIABILITY:  First, it is rare to get completely off a lease agreement even after the business is sold. Most leases hold the tenant responsible for making payment through the whole term of the lease. Yes, after you sell it, you still have liability. Sometime the landlord will take a payment in lieu of holding the Seller liable. 
(b) OPTIONS PERSONAL:  Many leases have language making the options personal to the original tenant. This is a problem when trying to transfer a lease because buyers want at least 10 years on the lease and if the options are personal, then technically they don't transfer to the buyer. Usually landlords will cooperate on transferring them to a new buyer, but sometimes they are not willing to transfer them.  But the lease assignment needs to clearly state the landlord is approving the transfer of the options. 
(c) PERSONAL GUARANTY: If the lease is in a corporate name, then a personal guaranty is likely required. This means the person signing the guarantee is responsible to make rent payments through the term of the lease, and that could hold for the option periods as well. If an assignment is done, then the Seller ought to make sure the language in the assignment agreement is clear on exactly what the Sellers liability is for the terms of the assignment. 
(d) LEASE ASSIGNMENT: Although this is usually one of the easiest things to negotiate with a landlord, all to often people ignore it and later find themselves unable to sell their restaurant. The restrictive language to stay away from is "Landlord may without consent at landlord discretion" or worse yet "This lease is not assignable." Look for language such as "lease is assignable with landlord's consent, which consent shall not be unreasonably withheld." Also avoid qualifying language tied to an assignment such as must have the same skills or financial position as the current tenant. If you're a high net worth person this could be problematic. 
These are the four main areas one must focus on to write a great exit strategy in their lease. Give us a call and we can help. 
HOW MUCH RENT SHOULD I PAY
The restaurant industry has a rule of thumb on how much rent should be paid. But each situation is different, so use common sense. The general rule of thumb is rents (base plus triple net) should be no more than 6% of gross revenues. Again, this is a rule of thumb. So if you expect to generate $100,000 of monthly gross revenue, then the rent should be $6,000. But there are cases where rents of 10% may work fine when the rent included utilities, trash, water, etc. as i the case of a mall location. The bottom line is if the rent is above 10%, the restaurant will struggle to make a profit. So keep it in the 6% range. 
And don't get sucked into the notion that although you think the restaurant will only do $50,000 and you don't care the rent is $6,000 because you'll squeeze the margins to make it, you will eventually drown the business or constantly struggling to make ends meet. In other words, don't fall in love with a location unless you true can support the volume with a 6% rent factor. 
These days, landlords are greedy as they were in 2005-2008 and asking for frankly absurd rents. Don't get caught in that trap!
Mel Jones
CEO Paramount Restaurant Brokers, Inc. 

                                                                                                                                                                                                                                                       

We at SellingRestaurants feel obligated to educate the public, our customers and our clients with information that can help them make more intelligent buying and selling decisions. 

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attended Law School at Gonzaga University. 


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