Our first restaurant build out - before and after!
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
11yDecades of experience in all facets of the restaurant industry before getting into real estate.
It is a very hard business.
Right now you have the "New Factor" as a restaurant. Do not get overly excited by lot's of business to check you out. That Is nothing that isn't normal.
I see owners hands on in the beginning and things are going well. Then owner get comfortable and believe things will hum along with the status quo. Biggest thing I see is they get cheap in the kitchen and use great products but have so-so cooks preparing the meals.
I want to repeat as it is that important. Many concepts have test kitchen facilities where they test product with quality ingredients and believe it tastes amazing. When sales fall flat at a store location they can't figure it out. It comes down to execution of the product. You could have meat at 20 a pound costs but if prepared wrong it can taste like crap. Conversely if you have only decent ingredients but a great chef the dish can be made to taste great.
It is as much about skill as the products used. I eat out a lot for business and pleasure. I would rather wait 20 minutes longer and have poor service and excellent food then get good service with fast food that tastes poor to okay.
Consistency of excellent food will be a major key to your success of the restaurant. Your biggest killers to your bottom line will be keeping rents in place and increases over the years if you do not own the space, labor cost policies with people asking for 15 an hour, and having FFC's ( fixed food contracts where you have set food costs even in a rising market ). FFC's are huge for small operators because it is the big boy's advantage in that if food costs soar you can't pass along all of that to the consumers so it starts eating into your bottom line.
Another factor is long term planning. Right now the asset is new and fresh. Over the years it will get older and older. Classic mistake is the owner will hoard cash and live fat for years and make good bank. They will not allocate 80k per year over 10 years for a re-image.
69 Replies
Wow - that is a serious build out!
Your project strikes me as similar to one I had in mind for a building in my area (photo below). Great location, same size building and with front and rear patio/parking opportunities. The area is hot for restaurants but on investigation it was the cost of redevelopment that killed the project. It would need to rent for $22-25 a foot built out in order to cover acquisition and redevelopment costs, but comparable restaurants are renting at $15-18.
I still love the building and site though... just need the dream tenant to come along!
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes11y
Hi Dave,
No I was with all facets of Dominos Pizza over a long span of time. Cowabunga has about 120 stores and is one of the largest franchisees in the country. I left there eventually and did my own thing for awhile plus people wanted me to do consulting work.
You can go in and show problems and what needs to be fixed for an existing restaurant or a start up but if standards are not maintained then it goes back down hill. A lot has to do with the employees you have. A bad one is like a cancer you have to get rid of. They will make others carry their load and then the superstars will get discouraged and leave. Then the slacker will invite more of their friends to work at your place as it doesn't require much.
I don't want the employee who does the minimum and then sits on their butt all day. I want the worker who is motivated for the business and realizes the better they do the more upside is in it for them.
I would rather have 3 superstars on the team then more people that are all duds or a mixture of superstars and duds. If you have a mix then your restaurant will get bad to good reviews and it will be hard on yelp for instance to gauge whether someone should go to your restaurant or not.
If your food is amazing I am a fan of the free food strategy. Instead of spending thousands on an ad a bunch of people are not likely to see have a free try us out day where they get one item free with purchase of another item. Ordered item has to be as expensive as the free item. Example cannot order 3 dollar app and then want 20 steak free.
What this does is release the barrier to trying your food. People can't stand trying a new place and spending big money to find out it is no good. The free food takes that away in a sense that if they do not like it they got it for cheap anyways so worth a shot. You break even on food cost but get a lot of exposure.
You can have a " Get to Know Us " marketing campaign with the food. You can do charity work and write it off also for events. People see how great the food is and become regular customers. Statistics show that about 80% of business is repeat where 20% is new customers that are coupon clippers etc. and just want the deal of the week.
The food business can be high profit but it is a lot of hours as an owner/operator. You need to build volume to a point where supervisor, manager, assistant managers can be on the payroll so you can enjoy life and it runs itself with minimal over sight with systems in place. You can do the grind for a few years as the operator but over time it will wear you down and have adverse effects on quality of life. Anything I invest in today I am not buying myself a job anymore. Did it with restaurants and did it with smaller scale apartment buildings and never again.
If I want to go to the beach for 3 days then my investments will keep throwing off the cash flow passively.
@Nick L. looks like a great space for our concept...too bad it isn't in the Carolina's! At the end of the day for us we didn't mind the build out costs on this project because we locked a 10 yr lease at ca. 10/sqft below current market rates. The landlord made up for low TI by giving us a very attractive rate psqft. In other negotiations where we can get 30/sqft in TI we are willing to flex on percentage rent, etc.
@Joel Owens we have been doing exactly that - buy one food item, get one free, and because the food is very good, it is starting to really pay off in the form of repeat business already (and those customers telling their friends). The beer selection sells itself but in our space (craft beer) the differentiator is 1. Food and 2. Knowledgeable staff - both of which we have put a very heavy focus on. For an entire week prior to opening, we spent 8 hours/day putting them all through rigorous beer, wine, and food training, and while we saw some attrition, it served to eliminate those who weren't serious about the opportunity.
Hello All,
I thought I'd provide an update - we are 2.5 months in on the Charlotte unit.
Construction has started on our second unit in Myrtle Beach, SC (will update with pics as soon as I get some) - currently the landlord is completing our work letter specs and the space will be delivered to us this month with a November targeted opening (our build-out will be 6 weeks).
We also have a signed LOI for a Rock Hill, SC unit for a late 2016 delivery (new development). Currently, we are scouting other Charlotte, NC locations for a mid 2016 opening.
I've attached a few pics of the Charlotte unit 'in action'.
Big thanks to everyone who has provided feedback and advice thus far!
- Realtor · Charlotte, NC · Member since 2014 · 935 posts · 467 votes11y
@Dave Hurt Continued Success! I'm investing in Charlotte as well and will make a stop in the Restaurant in October. I'm also looking to lease a home for personal use in Matthews so I hope to be a frequent guest. Best!
Thank you @Don Harris! Shoot me a note when you're in town if you'd like to grab a cold one!
Hi All,
Just an update - unit #2 in Myrtle Beach, SC is underway! This is much different from our first unit in Charlotte NC, as it's an endcap space in a lifestyle shopping center (think high end retail, movie theater, dining, etc). A few delays due to permitting, etc (as to be expected) but construction should be complete next month. I'll continue to update this feed with progress pictures. What you see in these pics is the cutting away of the slab for plumbing. We have since installed plumbing and cemented over. Have to say, I love those arched windows!
- Wholesaler · Charlotte, NC · Member since 2015 · 127 posts · 63 votes11y
Originally posted by @Dave Hurt:
Hi All,
Just an update - unit #2 in Myrtle Beach, SC is underway! This is much different from our first unit in Charlotte NC, as it's an endcap space in a lifestyle shopping center (think high end retail, movie theater, dining, etc). A few delays due to permitting, etc (as to be expected) but construction should be complete next month. I'll continue to update this feed with progress pictures. What you see in these pics is the cutting away of the slab for plumbing. We have since installed plumbing and cemented over. Have to say, I love those arched windows!
Congrats on the update Dave! The lifestyle shopping center brings a lot of promise for you! Keep us updated! Anthony
Hey Dave,
Congrats on your success, outside of being a REI my main job is a restaurant consultant. What's funny is I was reading through the thread and was trying to figure out what restaurant was being spoke of and then I hit the pictures. I thought wow I just met your wife at a recent event as I live in Charlotte and we were discussing [redacted]. That's awesome for your success and best of luck to you.
Thank you @Anthony Davis!
@Deb Jones wow what a small world! I'd love to chat REI and/or the restaurant industry some time!
Cheers,
Dave
Hey Dave,
That would be awesome and I need to stop by [redacted] as I haven't been in yet and keeping thinking about it. Regarding what I do as my full-time job you can go to Resultsthrustrategy.com and get an idea. We consult all over the country but a few of us are based here in Charlotte as is the founder of RTS. If I can ever help you out with anything just reach out I'd be glad too.
Deb
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes11y
Dave what is your total annual sales per location tracking so far??
I am on the transactional side of commercial real estate selling those strip centers to buy and hold investors.
Typically for restaurants we want to see no more than 10% rent to sales volume annually. So if rent is 100,000 a year than sales minimum has to be 1,000,000. Generally if they are hitting 6 to 7% of sales then that is the sweet spot.
We have to watch out for an owner trying to recover TI's with higher rents per sq ft above market and also 3% annual increases when the going rate is 2% per year. What happens is they sell you a retail center to buy at inflated per sq ft and restaurant has trouble down the line and wants to renegotiate the lease.
@Joel Owens we are tracking at 5% of annual sales volume with our Charlotte unit. We negotiate very strongly against annual increases. Typically we counter the 2% annual increase with 10% every 5 year term, so we aren't stifling cash flow in the crucial start up phase of the business. The idea is that it is a win-win and by the 5y mark we can easily manage the increase. Of course many landlords will ask for percentage rent at a natural breakpoint, and depending on the deal we may comply.
To your point, we have noticed a prevalence of 3% per year increases in initial LOIs recently (especially from owners who are providing TI) to which weusually counter with 5% every 5y so that 10% ultimately seems like a compromise.
What are you seeing these days in terms of going TI rates psf for warm vanilla shell deliveries to FSR tenants - 10 year term with 2-3 5 year renewal options for example?
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes10y
Hi Dave,
If you are getting 2% rent increases every year and pay in 5 years for a 10% pop you are lucky.
That is usually reserved for national caliber tenants such as a corporate Starbucks or if a franchisee then the large corporation is guaranteeing the lease.
I see it from your perspective as an operator trying to grow the brand and remain liquid. Now I will show you how the landlord thinks. If I am an investor owning a retail center and I have a tenant with a new concept that is growing they could go boom or bust. Same thing with a franchisee of a large corporation if only the tenant is on the hook it is a weak position for the landlord.
Those types of tenants can fail at any time. So I want to EXTRACT every single year the 2% rent increase as honestly I am just keeping pace with inflation. So I am not charging the tenant more but keeping pace with the devaluing of money. I might collect 1,100 instead of 1,000 but it's still worth 1,000 due to inflation. The restaurant is raising prices multiple times a year to it's customers to make the same profit margins and the landlord is only doing the same thing.
If the tenant lasts 3 or 4 years with no increases and goes out that big 10% increase means nothing as I never saw it to begin with. That is why generally it is reserved for nationally guaranteed tenants. Same thing with TI's. Landlord will want to give free rent versus heavy TI's on a small operation. The 10% every five for a national guaranteed tenant is generally fine because the odds are very high you will see that bump. National tenants tend to demand heavier TI's but the landlord is almost assured of getting the rent promised in the primary term. With a strip center the national tenants are very demanding on the lease so you have to make up for it with regional and local tenants. They are trying to get the cherry terms of the national tenants but do not generally have that kind of pull with negotiations.
National might be 30 TI per sq ft in an upscale area. If it's a space that needs to be retrofitted and a restaurant was there before maybe 10 to 15 sq ft TI. It's a case by case basis based on the tenant and what the lease rate is compared to market along with rent increases for the overall blended return to the landlord.
If for example I have a Pizza Hut and is a corporate guarantee then the store could lose 30k a year and I the landlord still get paid like clockwork the rent. When it is a franchisee with no corporate guarantee I need to know annual sales to assess how that franchisee is performing. If I can't do that then it's a big risk. I need to know for instance if the average PIzza Hut nationally does 1,000,000 a year in sales and this store does 750,000 then that's a problem. I know pizza places have a break even point and once they go above that they can make great profit. So a pizza place doing 10k a week might break even versus one at 13,000 a week it's just a little more labor and food and the rest is profit etc.
@Joel Owens thank you so much for the input! We are seeing TI numbers around what you quoted as well. Regarding the rent increases, we have not had much trouble thus far personally guaranteeing leases and getting 10% every 5y, but it could also be that as a group our personal assets are fairly substantial. We have done 3 deals with these rent increase terms thus far - one of which included 30 psf TI, 6 months free rent, and 10% rent increase every 5y (project for next year not yet under construction).
- Full-Time Investor · Charlotte, NC · Member since 2009 · 2k+ posts · 1k+ votes10y
@Dave Hurt, congrats on the success! I live and invest in Charlotte, and also drink a lot of beer :) Look forward to stopping by and supporting the cause
Having personally been there I can tell you it's a nice place and run by some smart guys. Really taking advantage of the huge craft beer scene here in Charlotte. Since this topic got a good amount of interest I would be open to meeting up if anyone is available next saturday the 14th if @Dave Hurt is wanting up back. @Troy Knight held a great meetup here and I know we had a good show of people including @Don Harris @Jasmine S. etc. I propose a saturday afternoon because I know from going to @Nasar Elarabi 's meetup weekends pull a lot of people especially non charlotte people. Maybe even @Joel Owens can make it up and local guys like @Account Closed will swing by. I know last time we did a saturday meeting a few of us actually went and looked at some properties. I'm open to doing that again and its a great way to get some business done while people are in town.
@Justin F. great idea and of course we are happy to host! Was just texting @Troy Knight last night about getting together again.
In other news - framing is up in the Myrtle Beach unit, along with our massive walk-in keg cooler, HVAC, plumbing, and electrical rough-in. And NO that will not be the final paint color - ceiling will be sprayed black and walls/flooring/mill work will match the Charlotte unit. I'd also like to take a moment to say that IT IS SO WORTH IT to pay a little more for a good GC - these guys are killing it!
- Flipper/Rehabber · Charlotte, NC · Member since 2010 · 241 posts · 127 votes10y
If you guys decide to meet. I am in..
Quick update on our Myrtle Beach unit: drywall is up, tile laid in kitchen and main dining area (not shown in picture), bar structure is complete, and ceiling painted black. Construction should be complete in 2 weeks and we should be opening mid-January! In the next update it will actually look like a restaurant!
- Insurance Agent · AZ · Member since 2013 · 306 posts · 161 votes10y
@Dave HurtGood for you! What a way to KICK OFF 2016!
- Investor · Myrtle Beach, SC · Member since 2015 · 7 posts · 1 vote10y
Dave Hunt - where is this in Myrtle Beach? I live here and was just curious - I may check it out sometime.
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