The Matrix Of Successful Restaurant Leasing
Successful restaurant tenant leasing is grounded in realistic merchandising and lease economic analysis.
Irv Siegel and Nick Lillo

Irv Siegel.

Basic Building Blocks

Merchandising your 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 required 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. You may also wish to take advantage of psychographics, which study how the demographic spends their money in correlation to their 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 your 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 their front door. This expands its mealtime hours and therefore the tenant can increase his proforma sales, which will make them 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 as you risk having the tenant initially turn down the site, only to make it a more difficult task to sell that same tenant after you have signed 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 you have a vacancy in your center that will cost additional tenant allowance dollars in addition to those you have 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 three tenants for each site and cuisine, as it is more prevalent in the restaurant business than in retail 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. The sidebar “Examples of High-End Regional Operators” points out a few of these restaurant groups.

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 proforma and budget prior to merchandising the restaurants and/or assume 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 GLA and the percentage of sales threshold for rent the economics of restaurant leases must be determined based on its own industry and individual data. With proper analysis, the developer will be less likely to have protracted negotiations, properly gage the tenant allowance and rental income and therefore make the best possible deal with the most desirable tenant in the shortest amount of time.

The proforma economics of rent, tenant allowance, landlord shell work and bankability of each restaurant tenant will vary by the brand, the size of the company, type of cuisine, historical cost to build, sales per unit, sales per square foot, 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, you are signing a lease 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 as a small operator is understandably risk-adverse. The landlord should be prepared to take the financial risk if they want the advantageous emerging restaurant concept that would set their 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. If you are a developer who is not intimately experienced in negotiating these issues, you should have a competent representative that would assist you and the tenant through these issues.

Today, restaurants have become an anchor. They help to define and differentiate one development from another. The topics discussed within this article were summary in nature and each deserves its own in-depth analysis, as the best decision is an informed decision.

Siegel/Lillo and Associates is a full-service commercial real estate firm whose primary focus is urban and suburban restaurant leasing and development as part of lifestyle/entertainment centers and shopping malls. Irv Siegel has performed consulting and brokerage services for many of the nation’s largest REITs, as well as serving as director of real estate for Wolfgang Puck for 11 years. Nick Lillo served as the national director of leasing for specialty restaurants and entertainment at the Simon Property Group for 9 years.

Collectively, they have leased in excess of 2 million square feet of restaurants nationally with such tenants as Cheesecake Factory, Grand Lux Café, P.F. Chang’s China Bistro, Legal Seafood, Maggiano’s and McCormick & Schmick.

©2006 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.