Keep as Restaurant or Convert to another use?

Question

Hi all. I currently have a contract and am in due diligence on a foreclosed commercial property that was a popular deli/sandwich restaurant. It still has almost all of the equipment as it looks like the owner cleaned up and closed the doors. I do not have a desire to be an operator of a restaurant and my plan is to lease the space. To do a cosmetic rehab it will cost around $30k. But in order to get it back to restaurant ready it will require several other fixes and upgrades to meet health inspection requirements. I do not know yet exactly how much this would cost but my thoughts are $10-$25k.

My question for everyone is do I repair and update and lease as a restaurant? Or do I sell the used equipment, rehab and target a broader type of tenant? The building is capable of being split into 2-3 units and would obviously cost above $30k to rehab because of the framing, wiring, plumbing etc of the separate units.

The reason I am having some trouble with this decision is the dynamics of the market the property is located in. It is a very small town. Most of the residents are low-middle class(20k-45k income) or they are 2nd home owners and retirees. It is a tough market for a restaurant as well as most types of non professional business. Another concern is that the property is set up as a deli style establishment so other restaurant concepts may not work without changing the layout. For example, a Japanese steakhouse most likely would require some different features and/or layout.

Maybe I am jumping the gun and overthinking all of this but any advice or input would be greatly appreciated.

Ryan McGowan · Answer

Leave that up to the tenant. You have space that is available and can be marketed to retail, office, AND food service. Spaces that can market retail and office space have less potential demand than one that can also include food service. It is much harder to convert a space from retail/office into food service, so if a restaurant owner wants to lease, they have a slight advantage if they can make it mostly turn-key. They have the grease trap, the parking ratio is already there, etc.

Usually the owner will give an allowance for the T.I. and leave the remainder up to the tenant to come up with. Besides, a Quiznos is going to build out a very different setup than a Coffee Bean. I would liquidate the equipment, gut anything not bolted down, and just market it to everyone. Leave the hotline hood and the dishwashing sink. Those are really the only equipment that ever seems to get reused.

Dmitriy Shnitman · Answer

Take a good look at the area and analyze what would work best there. Maybe retail is not the best option. You could hire an appraiser to give you an opinion of what would be the highest and best use. You mentioned there are a lot of retirees- senior housing, AFL or another kind of residential could work. This will depend on what is permissible under current zoning, and you would likely have to get a variance or a rezone, which is quite a cumbersome en devour but could turn out be very lucrative.

Jonathan Bethel · Answer

@Benjamin Timmins@John Arendsen@Ryan McGowan@Robert T. Thanks guys for the input. All of you have given me somethings to think about.

Robert T. · Answer

What a coincidence! Happening to us right now. In general, there is a market for second generation restaurants as it saves the restauranter a lot of money. The hood, cold room, grease traps etc. is actually worth a lot to a restaurant tenant. In fact, leaving it there may make it easier to find a restaurant tenant and is a draw, and not neccesarily a negative thing. I would leave it. But, you could spend money maybe on the exterior, roof, car park to make it more attractive for a tenant. If you think you have too much space, consider splitting into smaller Units. Problem will be adding the extra bathrooms, electrical and plumbing and looking after those permits. Never one way to do real estate; a lot depends on luck and who wants it & being there at the right time. We have had clients that took a dumpy old restaurant and turned it into a palace, spending millions of their own money on build up. Good luck!

John Arendsen · Answer

Eating establishments are as fickle as an 18 year old co ed in the middle of the mens football locker room. That stated, I'd go the 30k route and let the tenant deal with the TI. You can't second guess your lessee. You could spend a 100k and a viable tenant would want to change things. Unless you're a restaurantuer with a specific plan which you've stated you're not.

Benjamin Timmins · Answer

Restaurants are the toughest businesses out there. The vast majority of them fail. Which means if you keep it as a restaurant, your chances of frequent tenant turn over is really high.

Keep as Restaurant or Convert to another use?

Keep as Restaurant or Convert to another use?

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