You Should Hire a Restaurant Real Estate Broker

We work with lots of clients who are thinking about opening their first restaurant, or who are in expansion mode. When I get one of these calls, among my first questions is “are you working with a broker?” If not, I always try to encourage them to call one of the many experienced restaurant real estate brokers that I work with. Why? It’s simple:

They Don’t Cost Anything. If you work with a restaurant real estate broker as a tenant, you don’t pay a dime. Your broker can pound the pavement and work the phones looking for available space and, if you find a good space, negotiate the business terms of the lease and shepherd the process through to signing. And, if it all works out, the landlord pays his commission. So you – quite literally – have nothing to lose.

They Know the Market. Unlike buying a house – where sale prices, along with detailed photos and precise locations, are readily available – renting commercial restaurant space can be an opaque, mysterious process. Price per square foot can vary dramatically from place to place, and landlords are often willing to give concessions (such as tenant improvement money or months of free rent) depending on the circumstances.  If you don’t know the market, you won’t know what to ask for. And you can leave a lot on the table.

They Know the Landlords. As we’ve written here before, who your landlord is can make all the difference in the world. There is no single greater relationship that will determine your success. And landlords, like people, run the gamut. Some are accommodating and forgiving. Some are tough but fair. And some are unrelenting and unforgiving. When you are signing a ten-year restaurant lease, you want to know which one you are dealing with, don’t you?

They Know the Restaurant Business. A caveat here: a good broker should know the business. And this is where you need to do a bit of due diligence. You wouldn’t hire a podiatrist to fill one of your cavities, right? You wouldn’t hire an electrician to fix your toilet.  By the same token, don’t hire someone who is used to filling office space for lawyers or accountants or dentists to find your next restaurant space. If you hire someone who knows the restaurant business, they can tell you the dead spots in a shopping center, and if the space you are looking at is one of them. They can tell you if the kitchen is suitable to your needs. They can tell you whether the demographics of where you are looking work for your concept, or if there is a lot of competition in the immediate vicinity. And if they are not sure of any legal issues (like can I get a liquor license for this location), they know enough to call a restaurant lawyer like us to make sure all questions are answered.  In short, only a broker who knows your business can make sure the terms of your deal are consistent with the needs of your business.

We work with experienced restaurant real estate brokers every day. When we get a restaurant lease from them, we know that the business basics will be covered – just as they know when they get the lease back from us, the legal terms will be airtight. We act as a team to make sure you get the best restaurant lease possible, and thereby have the best chance to succeed in your business.  If you need a referral to a good restaurant real estate broker, just give us a call. It’s one of the biggest decisions you can make to get your restaurant business off on the right foot, and we’d love to help make sure that the decision you make is a good one.

Limiting the Personal Guaranty in Your Restaurant Lease

If you are getting ready to sign a restaurant lease, you are almost certainly being asked to provide the name of someone who will provide a personal guaranty of payment on the lease.  This person, whether it be you yourself, or someone with whom you are associated, will be personally on the hook if the tenant (usually an LLC or some other corporate entity) itself does not pay.  The reason the landlord requires this is because, unless the tenant is a big corporation with a lot of assets separate and apart from this restaurant (and, regardless, we usually advise our clients to set up new entities for every location they open), a personal guaranty is the only way the landlord can have some assurance that you won’t simply walk away from your restaurant (and the lease) if business gets bad.  The landlord wants someone on the hook.

Many restaurant tenants do not realize that they do not have to agree to a full guaranty – i.e., one that will make them liable for all payments due under the lease, for the full term, if there is a default.  On the contrary, landlords will often agree to limit the personal guaranty on on the lease, and thereby limit the personal liability that can result if your restaurant does not succeed.  The two most common forms these limits take are a cap on liability, and a “burn off” provision.  Most common is some combination of the two.

A liability cap means that the guarantor’s liability is capped at some dollar amount or, more commonly, some number of months’ rent due under the lease.  For example, the guaranty could provide that, in the event of default, the landlord’s maximum recovery against the guarantor be (let’s say) 24 months of rent.  This would be true even if it takes the landlord much longer to find a new tenant or incurs significant expenses in securing such a tenant (such as in brokerage fees, rehabbing the space, or in concessions to the new tenant).  One can imagine such a cap being particularly valuable if a restaurant fails early in a long-term (e.g. 10-year) lease.

burn off provision means just that, that the lease guaranty will “burn off” at some point, provided the tenant has met all other requirements under the lease.  For example, a restaurant lease guaranty could provide that, after five years of on time payments by the tenant, the guarantor would have no further liability and the guaranty itself would terminated.

Again, most common is a combination between these two liability limitations.  In one formulation we negotiate for our clients quite often, the liability will be at some amount during the initial years of the lease, then burn off, or “burn down,” as time goes on: perhaps from a full guaranty to 24 months after some number years of on time payments; then from 24 down to 12; and then maybe eliminated altogether.  In this way, a tenant is incentivized to keep paying rent on time (especially early in the lease, when the liability is the greatest), and rewarded for being a good tenant later in the lease.

Of course the specifics of what a landlord will agree to will depend on the financial viability and business history of the tenant, but this all where an experienced restaurant leasing attorney (or restaurant real estate broker) can be immensely helpful.  The limits your lawyer or broker can negotiate for you can make the difference between bankruptcy, and being able to pick your self up and give it another try some time the future.