6 Questions with Kyle Inserra of Zelnik National on Restaurant Capitalization, Landlord Relationships, Lessons from Signing a Lease

Read time: 14 min

By Sophie Braker

Kyle Inserra is a commercial real estate professional and the host of two podcasts, The National Restaurant Owners Podcast and Commercial Real Estate School. A 15-year restaurant industry veteran, Kyle is a thought leader in the hospitality industry and commercial real estate space. To learn more of Kyle’s tips and tricks, watch BSP394: Kyle Inserra of Zelnik National on 3 Keys to Negotiating Your Restaurant Lease.

Biggest lesson you learned from the first lease you ever signed?

I was really young. I was 24 years old. I had the opportunity to purchase a business and it was very affordable. I was eager to get it signed, an impatient 24 year old. I learned shortly thereafter that there are things called additional rent. That’s a very important phrase. There are alot of little phrases that can get you caught up. This building was a co-op, a corporation where you pay your share of the electricity. The space is 2000 square feet and the building is 400,000 square feet. You pay your share of the electric. For the commercial space, it had gone up from about $300 a month to $3000. There was no additional equipment, no additional anything. 

When I pushed to ask, “Hey why is the electric so high? Nothing changed here. We run the deli slicer. Nothing changed.” They said, “It’s in your lease.” I pushed and I pushed. At the suggestion of an attorney, because everyone said to talk to an attorney, he said don’t pay it. Which was dumb. He was not a restaurant specific attorney but I imagine any attorney would be able to navigate that better. We went to court. I ultimately ended up winning the case but it just set up a whole slew of other issues so that the building eventually kicked me out. 

"Everything is negotiable.” How do first time restaurateurs adopt that mindset?

I believe if you're a restaurateur who's speaking to a landlord directly or even to a broker who maybe is not so in tune with the hospitality space and your market, you say, “tell me about the space.” Ask very broad questions. When they emotionally dump all of their information about the space, like the cost per square foot, say is there anything else that I need to know? Is that it? Keep pushing with these vague questions. You are going to get to what is the most important to the landlord. They might say, I have some money allocated here to invest in this space. Or they may say I’m not going to invest any money in this space but I’m willing to give a bunch of free rent.

You are essentially trying to get to their pain points, what’s most important to them. Don’t go into it assuming that every landlord is going to write a check or every landlord is willing to give free rent. You need to say, we need to have a conversation and let’s figure out what works best for both of us here. You might come into it with some preconceived notions from some quick exterior looks at the space. You might get inside and it might shock you in a good way or a bad way. You want to find out what this landlord really wants from this space. Believe it or not, it's not always strictly about the rent number. You can get creative and find ways to make it work for both sides. It's going to be leveraged, to some extent, off the rent. By no means should you hold what he or she said in that first conversation true to the end of their relationship. You can negotiate a lot of different points. But don’t make assumptions about what the landlord wants. Find out from them.

How much money do I need to start a restaurant? I'm sure you get asked that all the time

For so long, it was three or four months and then it was four or six months. If I was opening a restaurant today, I would have one year of cash reserves on hand. The stress of wondering where that money is going to come from to pay for your vendors, to pay for your payroll, to pay for your rent. You are going to have enough stress. Give yourself a little bit of a runway. I can honestly say that if my brother was asking me, I would say if you don’t have it, don’t open a restaurant. It is not worth the emotional toll, the stress on your personal life. You are working on 10% margins - if you are crushing it, 10% to 15% margins. And that’s not going to start right out of the gate. So where is this money coming from? What happens if the boiler breaks or you need a new dishwasher? What happens if something breaks in the walls and you’re not covered in your lease for it? You’re going to want to have that cash.

If it’s part of your loan and you don’t have a prepayment penalty, just pay it back. Just give it back. But if you don’t have that extra money you are going to be in bad shape. 

The 3L's of retail real estate are no longer "Location, Location, Location.” They are "Landlord, Lease, Location.” How do you view a landlord-tenant relationship?

For a long time, historically it's been portrayed that you have this tenuous relationship with your landlord. What the last year and a half, the last few years have taught us, is that that relationship is so critical to the business. That stereotype that all landlords want is the rent is not the case. A lot of them are really good people who want to have a business partner. That’s the way you have to look at it.

Look at what happened during the pandemic. The bad landlords say, hey we need our money, and restaurants said f*** you. We can’t pay you. The good ones said ok let’s figure this out. When you have that understanding that you both have goals in mind and things that you want to achieve and you communicate on a regular basis, that relationship means everything. And if you are bumping heads with them from the get go or you want to play hardball, that’s just not a good way to start the relationship. If you're that type of person who can be more aggressive, it's always going to pay off to be the person with the cooler head here. If you get something that is not so agreeable to you, take it back and say ok we’ll think about it. Don’t be so anxious to get into a back and forth. The mom and pops are very emotional about their property. You want to make sure that you are getting into a relationship with someone who you can communicate with and understands what you are looking to accomplish. It’s important you understand what they want to accomplish too. 

How much commencement assignment (runway) does a new build vs second-gen space need in their lease? 

So that's a great question. It goes back to the conversation with the landlord. What’s most important to you? Are you willing to help me build out this space? Am I going to be doing it? To determine what you can use in potential negotiations with the landlord, you’re going to want to do your homework, your due diligence, on the property. What's the situation with this space? What condition is it in? How much work is actually going to have to be done regardless of who it's done by?

One of the biggest issues that we are seeing, which is getting a little bit better, is the backlog on the timing for permits. This isn’t renting an apartment. If you sign a lease, your lease execution date and your rent commencement date are not the same thing. The day that you sign the lease is the day that the clock starts ticking. In that conversation with your landlord, if they say, I’ll give you a year's free rent to build out the space if you are willing to take my rent. You want to make sure that you are dealing with facts and figures. Don’t ever say it’s going to take you three or four months without having any idea of how long it will take you. Go to the building department. Talk to an architect. Get an engineer into the space to look at something. 

Ask the landlords if they're going to battle you on that. They will say it's not going to be a problem. But it's going to be your problem if something is not right and your rent date is creeping up. All of sudden you find out something is wrong. 

One of my clients just dealt with this. Opening night is coming on Friday. In a second generation space, the person who had the restaurant before them never filed a permit for the hood. So now they have to retroactively inspect. I don’t know how it ended but I guarantee you they found an issue with that hood. It's going to impact your business.

It becomes emotional, that's the biggest thing with everyone. New start ups and old restaurateurs alike. You need to have a process so buttoned up that anything that falls outside of that process can be eliminated. You will be kicking yourself in a month when the flow of the space doesn’t work for your products and your staff. Just don’t fall in love. There will always be another opportunity. There will always be another space. 

​​How are COVID protocols affecting Force Majeure and other aspects of leases?

Number one is don’t go into the negotiation thinking that you’re going to get a COVID discount. That window was very tight and it’s closed. It doesn’t exist anymore. It’s going to show you are completely disconnected from what's going on in the industry. A lot of the bigger landlords are striking COVID language from their leases. They aren’t offering it. You might be able to get some sort of protection in the lease. The Force Majeure language is a hot topic right now. What I have seen some landlords agree to is a very detailed if shutdowns happen what’s your plan. If the state of New York says we're shutting everything down. What happens? Very specifically the rent goes to this, this is for how long, and this is how we are planning to pay you back. 

Don’t leave them thinking we’re going to have another conversation. This is what it's going to take. This is what we’ve been told, this is what we’re willing to do, this is for how long, and this is how you will get your money back. Either you are going to get it back as a lump sum or we’re going to tack it onto the end of each month’s rent. 

You’re not going to get this if you pitch a fit about it. You go in there willing to negotiate and you have to pick and choose your battles in the process.

 Kyle is a 15-year restaurant industry veteran, and commercial real estate professional focused on the nurturing and strategic growth of emerging Hospitality, Lifestyle, and Retail brands on a national basis. His industry knowledge coupled with an insider’s perspective of what it means to be a restaurant operator day-in and day-out, allows him to relate to his clients’ ever-changing needs.

Kyle Inserra is at the forefront of both restaurant and real estate trends and spends a significant portion of his time creating content on multiple social media platforms. In addition, his two podcasts, The National Restaurant Owners Podcast and Commercial Real Estate School – has Kyle speaking with forward-thinking thought leaders in both the hospitality industry and commercial real estate space on a current industry topic on a weekly basis.