LEASE AGREEMENT REFERENCE GUIDE 1440: PLUGGING THE RESTAURANT TENANT INTO THE OFFICE BUILDING COMPLEX $24.95
Plugging the Restaurant Tenant into the Office Building Complex
Most restaurant deals are aimed at shopping center pads or space that is clearly retail in character. Such sites offer tantalizingly high levels of built-in customer traffic. Plus, retail landlords and restaurant operators tend to speak the same language of percentage rent, exclusives, operating covenants, and tenant mix.
However, a restaurant can also make an excellent tenant for an office complex if the deal is done right, and if the lease adequately covers operational concerns such as liquor license contingencies, successor operator clauses, parking, elevator usage, and the like. This LARG looks at the issues likely to pop up during negotiations for a restaurant taking space in an office complex.
Designing the Pro-Landlord Restaurant Rider for the Office Complex
Does it make good business sense for the landlord of an office complex to lease space to an upscale restaurant? It can be an excellent move for the landlord, particularly if the tenant is a good operator, and if the space in the complex is not particularly desirable for an office user. For example, ground floor space formerly occupied by a bank might make an excellent home for a restaurant tenant.
Space on an upper floor can also make a good spot for restauranteurs, especially if the operation is a quality “city club” type of operation that must offer their business customers a view to go along with their shrimp salad.
However, doing a deal for a restaurant isn’t like leasing a suite of offices to a consulting company. The business deal for a food service operation is likely to have a spate of features unfamiliar to the office landlord, such as percentage rent, continuous operating covenants, and liquor license details. Plus, a restaurant can bring its own collection of annoying habits to the office complex. The landlord must ensure that the restaurant doesn’t become a nuisance for the office complex’s main clients, the people who work there every day.
Leases for restaurants are normally percentage rent deals. The minimum rent often has two components: some stipulated rent for the unimproved existing space itself roughly akin to the landlord’s quoted rate for “as-is” space in the complex, plus a second sum based upon the cost of the tenant improvements paid for or constructed by the landlord in the space.
The percentage rent, of course, is based upon the amount of the tenant’s gross sales in the premises in excess of the “breakpoint” represented by the tenant’s minimum rent. For example, suppose a restaurant tenant agrees to take existing space in an office complex which the landlord would normally rent for $25,000 per year. In addition, the landlord agrees to construct tenant improvements for the space which cost $200,000. The landlord can finance those tenant improvements for $20,000 per year. The landlord adds those two components together and gets an annual minimum rent of $45,000 to which he also adds an additional $5,000 in view of his perceived level of risk in the deal. That produces minimum rent of $50,000 per year for the tenant.
If the tenant agrees to pay 5% percentage rental on its gross sales, the tenant would pay percentage rent on sales in excess of $1 million which is the tenant’s breakpoint (i.e., $50,000 ÷.05 = $1,000,000). In many restaurant deals, the tenant pays a higher percentage rent on sales of alcoholic beverages than it does on food sales, because the tenant’s margins are generally better on beer, wine and booze.
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