There are four types of commercial spaces you can consider for locating your new restaurant:
- stand-alone building
- mixed use multi-use building
- a strip mall
- a shopping mall
Malls bring a lot of foot traffic, but the rent is high and often includes percentage rent to the Landlord. Percentage rent is an addition to the base rent amount that is a percentage of the restaurant’s gross revenues. Percentage rent typically is calculated on gross revenues over a “breakpoint” or a “ceiling”. For example, in a lease with a million dollar breakpoint and percentage rent of 10%, the restaurateur will pay the mall Landlord 10% of all revenue earned over one million dollars. The net calculations typically have very few deductions from gross revenues. You pay the landlord off the top before you deduct your operating expenses. With an industry known for small profit margins, this can be a difficult environment in which to make a profit.
There are some benefits to locating in a strip mall. You can benefit from visibility of the plaza. The increased foot traffic can attract customers from nearby businesses, especially if there is a popular anchor store. You’ll want to be sure that your restaurant style and price point targets the same customers as the other plaza tenants. You’ll also want to be sure that you are not duplicating what other tenants offer. The competition can make it hard to make rent. Other eateries can provide synergy and increase sales if they offer diverse cuisines and dining experiences. Competition can be good sometimes. If there are several restaurants in a plaza, it can become a lunch (or dinner) destination. The increased traffic can benefit all of the eateries as people will typically want variety by frequenting different establishments in the plaza on a regular basis. Think of it like a mini-food court.
There can be a downside to locating in a strip mall. There can be space constraints that prevent you from expanding. In a strip mall, parking can be a problem. Some strip malls also have percentage rent or fairly high common area maintenance (CAM) charges. It is important to look at total rent, not just the base rent amount. It may also be difficult or expensive to get separate utility metering, potentially having you subsidize other tenants with high utility usage.
What it means to you: Be sure to evaluate the food traffic and available parking at the strip mall, especially during peak dining hours. Spend several days doing your own “recon” mission by actually observing existing customer behavior patterns and traffic conditions throughout a typical day and a typical week. Be sure to ask for a 2-year history on all base rent add-ons.
Best location in a strip mall
If you decide to locate in a strip mall, the best locations are free-standing detached buildings in the plaza. You’ll notice franchise restaurants often choose these locations because of the successful business they tend to attract. Second best – look for a spot located at the ends of building. If the architecture focuses on the central features center locations can be prime real estate. Otherwise you’ll want to avoid middle store positions near other major stores
One of the biggest reasons restaurants go out of business is they can’t afford the rent. New business owners also tend to overestimate sales in the first year. There are some strategies for negotiating your lease that can reduce your rent during the start-up phase.
Working with an experienced real estate professional and attorney can pay big dividends in helping you locate the perfect space.