The Four Walls - The Reality of Restaurant Real Estate
Best Served & Fireside at Five #4
by Andrew Parr
This article is the fourth in an anthology of five that focuses on different aspects of the restaurant industry. The series is based on five panel discussions created through a collaboration of Jensen Cummings’s Best Served Live and Connor Holmes’s & Gertie Harris’s Fireside at Five. Cummings has also developed the Paragon Pillars, the “North Star” guiding all of his conversations. The Paragon Pillars set the lofty goals of creating an environment in which restaurants can attain 75% restaurant employee retention and satisfaction coupled with 19% restaurant net profit at flow state. Jensen gets a wink and a nod on the assist with this piece. Fireside at Five finds its genesis from FDR’s Fireside Chats. Its mission is to provide a welcoming environment where passionate and engaged professionals can connect with other diverse colleagues in a facilitated and intentional format.
The topic of conversation for this fourth panel focuses on the four walls — how the restaurant real estate sector can invest in the sustainability of culinary entrepreneurs. What does it take to open a new restaurant in Denver? Let’s find out.
Today’s contributing panelists are Carissa Sargent, Partner of Brazen Neighborhood Eatery; Ken Himel, Senior Broker with David, Hicks & Lampert Brokerage; Amy Eskola, Attorney and Partner at Messner Reeves LLP; and Jonathan Bush, Managing Partner of LCP Development.
A restaurant owner, a property developer, an attorney and a real estate broker all (virtually) walk into a bar…
Their happy hour conversation is fascinating. From all four perspectives, they focus on Cummings’s conception of transparent partnerships versus parties in opposition. Instead of trying to negotiate for each party’s sole benefit, based upon leveraged positions and perceived advantage over another party, they discuss cooperative solutions that benefit everyone. Since there are four constituents on this panel, that would be a win-win-win-win situation.
The conversation began with salient information about what to expect when you are a restauranteur looking for property and what to expect from the process. Sargent, from the perspective of the restaurant owner, talked about the unexpected length of the leasing cycle, and that the period of time in consideration of your LOI (Letter of Intent) and lease can result in a protracted negotiation. As restaurant operators, Cummings noted, we are in the business of instant gratification. We make a dish, we serve a dish, and we get immediate feedback about the dish. Not so with detailed negotiations that may finally culminate six to nine months from commencement with a 35 to 75-page lease agreement. This is the time to be patient, diligent, seek counsel, and to be absolutely certain of what you want and why you want it. Eskola echoed those sentiments and reinforced them, interjecting that in these situations an attorney is not a luxury, but a necessity. Clients need the protection of proper representation. Guess what? You should budget for that investment in your business — both as a pre-opening expense, and as an ongoing expense (professional services) for when the need arises during the course of operating. While you may be a wildly successful chef or the epitome of a restaurant operator, you might not know that it is possible to cap your annual triple net obligations in the lease (at least on a percentage basis). Restaurant tenants do actually have the power to negotiate, and everyone wants a deal to happen. Himel reminds us that a legal document is being signed which includes a personal guarantee — yes, your personal assets are on the line regardless of your business entity’s structure. As the developer in the group, Bush said the most important considerations are how a restauranteur is capitalized, and can they communicate their concept through a strong business plan. If you are undercapitalized, there is no positive long-term outcome to be achieved.
In terms of restaurant location, Himel talked about looking forward. Demographics, traffic patterns and trade area patterns can be useful; but working with a broker who understands what is coming next to a location is paramount. You don’t want to sign a 10-year lease (plus multiple five year options) only to find out after adding your John Hancock that a major big box location or residential complex is about to begin a two-year construction project that will alter everything you thought you knew about your location. Bush considered a “shell” as opposed to a second-generation site. With a shell you are delivered a blank slate with power, a grease trap, HVAC and some TIA (tenant improvement allowance) dollars to assist with the build out. You have the opportunity to create as your vision directs you. A second-generation restaurant space could be a blessing or a curse. You may be able to “spruce it up” to achieve the look you want, or you may run in to so many challenges that it ends up costing as much or more than a new build. Bush also mentioned sharing your budget with the property owner. They may be able to provide cost savings help in determining what you want versus what you need in your build out. You know, maybe skip the gold-plated restroom faucets. As Himel said, look as much at what you don’t want as you look at what you do want to avoid those pitfalls.
As regards the mechanics of it all, Eskola spoke to seeking lease protection from issues that are outside of your control. Include items like permit and liquor license contingencies in case there are delays or something falls through. Himel said it is possible to negotiate in consideration of future government-imposed shutdowns or forced closures. Property owners are now, more than ever, willing to demise larger spaces, provide common outdoor spaces, and consider walk-up windows or (depending on the property orientation and accessibility) pick-up drive-throughs. Sargent said since the landlord wants her restaurant to be able to pay rent, they are more flexible with outdoor space in order to accommodate the business’s needs and to meet their mutual goals. All she had to do was ask. Bush added that most property owners want to work with their tenants to reach a mutually beneficial resolution when problems arise. Just don’t wait until “the house is on fire.” Start those conversations as soon as you know there are challenges. He also talked about taking advantage of common consumption spaces and applying for those variances. Eskola closed the loop with a reminder that it is always the restaurant operator’s obligation to stay up to date on laws, regulations and ordinances. Stay vigilant and do the right thing. She said, “Alcohol liability still exists — it’s not a free for all out there!”
The biggest take-aways from this panel are: 1. Seek legal representation early in the new restaurant opening process 2. Everyone involved wants to make a deal happen to bring your restaurant to fruition 3. Don’t be afraid to negotiate to get the best deal for that dream restaurant 4. Stay true to yourself - Himel’s final reflection is that ultimately, restaurants have been deemed an essential service. Bush reminded us that restaurants and bars are the anchors of our neighborhoods (a common theme through these conversations). Continue to push forward, as our communities need our restaurants to provide gathering spaces, respite, and sustenance.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. This article contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; the we do not recommend or endorse the contents of the third-party sites.
Additional information on Best Served + Fireside at Five and The Paragon Pillars:
Best Served + Fireside at Five chats can be viewed on YouTube
· Chat 1 of 5: Why Restaurants Need to Invest in Their Most Valuable Asset – Their People
· Chat 2 of 5: Running a Restaurant: The Challenges and Opportunities in the Restaurant Operation
· Chat 3 of 5: Searching the Supply Chain
· Chat 4 of 5: The Four Walls - How the Real Estate Sector Can Invest in the Sustainability of the Restaurant
Best Served Fresh episode discussing the Paragon Pillars
Additional resources related to the topics of this article:
Legal Terms
· Tenant Improvement Allowance (TI / TIA)
Other Terms
· Shell
Andrew Parr is Best Served Creative’s “Herald of How,” AKA Chief How Officer. Understanding why we do what we do and who we serve, Andrew digs into the nuts and bolts of how we get it done. He craves one-on-one interactions and thrives with the written word. The ability to contribute to our Read channel by penning articles covering a variety of subject matter and running down rabbit holes for research quenches his desire to learn.
Andrew has over 25 years of restaurant and hospitality industry experience and his education includes a BA in Psychology and History from the University of Wisconsin along with a JD from Mitchell Hamline School of Law. Andrew was born and raised in Milwaukee, WI, and currently resides in Denver with his wife Jody and their dog Cooper.
