Bar / Tavern Tenants - Pros & Cons

8 Replies

I'm currently analyzing a property in a C grade neighborhood, where the 1st floor is a tavern and upstairs is 4 apartments. I would love to hear from any investors who have experience with this type of property--or any other relevant experience. There are certainly some obvious concerns, but I don't want to overlook the opportunity just because I have some preconceived notions of the headaches that may or may not ever materialize.

I'm planning to do more research on the particular bar both on social media and in public records. And I guess I might as well just show up one night for a few drinks to see what the place is like.  I'll probably stick out like a sore thumb, but that may be even more telling.

One specific area I could use help with, is knowing what questions to ask and other possible sources to pursue. 

Also, are there any special benefits that I might not be thinking of--besides maybe drinking for free :) 

Thanks!

We have a local unit here in our community that is a floor of residential tenants over 3 connected bars. Most of the tenants are actually employees and the owners of the bar, so it works out pretty well. 

I am very experienced with food.

Bar the beer is very little money especially if bottled beer. Tap has some profit in it. Specialty mixed drinks is where the real money is at. Having an excellent bartender staff that makes great drinks consistently is key and does accurate pours. You do not want them using to much alcohol ratio. The patrons with too much alcohol in one mixed drink will get  buzzed too fast and not be able to have more drinks.

For food main meals there is not much profit. Profit is all in the sodas, appetizers, and desserts. If a customer gets water to drink and main meal special with nothing else then almost zero profit they are just adding to sales total.

You need to see who is guaranteeing the lease. Is it a remote LLC the bar can bankrupt and walk away? Do they own other locations backed by the lease? Do they disclose ongoing personal and business financials? How worn down is the bar? Is it old and filthy with equipment breaking down? Do they have outdated terminal equipment for sales or even worse just a written ticket system?

Is there a personal guarantee on the lease?  What is their personal liquidity and net worth to back the guarantee? What is the rent per sq ft to annual sales for the health ratio of the business?

There are many,many,many other questions I underwrite but this should get you started.  

The first thing I’d be concerned about is turnover in the business. Most people think they know how to run a bar/restaurant and there are MANY more moving parts than what appears on the surface. If the tenant leaves, now you’re running a bar or it’s sitting idle not collecting rent.

*Are you looking to own the bar and run it yourself or have someone rent the bar from you and run it as their own business?

Side note: The biggest piece of advice about owning a restaurant/bar is to pay for your own drinks. 1. It’s not your inventory, it’s the businesses...you don’t own it. 2. If people see the owner paying for his/her drinks they’re less inclined to steal theirs.

We’ve been in the restaurant/bar business since 1974...I’m happy to help answer any specific questions you may have.

Thanks for tips so far. I actually visited the bar this afternoon and was surprised how nice it was.  I can definitely see some deferred maintenance on the building, but the business operation seemed smooth and profession on the surface. 

@Joel Owens  I can tell you from my short visit there they definitely are not over-pouring! Your questions gave me several things to look at and consider. Thanks for the tips.

@Nick Ruffini  I'm not looking for any business ownership, strictly a landlord-tenant relationship. I found out they've been there 11 years and have done all the interior improvements which I'm guessing is not uncommon. Thanks for your feedback.

@David Bardwell -  Makes sense. Good to hear that they did some improvements to the place, too. I'm happy to answer any other questions you may have. I can't reiterate enough though, if they leave you'll have two choices: 

1. Run the bar yourself

2. Keep it closed (collecting no rent) until you can find another tenant, which can be difficult with a restaurant/bar. One of our locations sat empty for 8 months (in a prime location)

Key is if the tenant is strong on the personal guarantee and has high liquidity and net worth.

Most business owners are not absentee but owner operators.

Even if sales are down but personal guarantee a landlord can usually negotiate a hefty early lease termination fee for the operator to shut the business down. The goal being to be break even after termination fee getting the new tenant in place and revenue starting back up for rent.

If no personal guarantee and single LLC guarantee for one location you have no security. Things get tough tenant can walk away and keep other assets intact.

At least if no useful guarantee you want to look at sales if they require it per the lease. National corporate guarantee  among thousands of locations backing the lease seeing sales once every 6 months or a year can usually be okay. If this is local really want monthly and not further out than quarterly to see how the health of the business is performing.

Bars usually need to drive certain sales per sq ft of space to be healthy. Look up Jon Taffer and Bar Rescue show. He has a book also I believe.   

There was a local bar that had, from what I was told, a beautiful apartment above it. They couldn't find anyone to rent it, even at a few hundred below market rent, because of the noise the bar had from 6pm-4am. Are the apartments currently rented? Even if they are, it could be tough to fill them when they become vacant. If you could rent to employees of the bar like @Laurence Smucker said, that could work well.

Originally posted by @Chris Szepessy :

There was a local bar that had, from what I was told, a beautiful apartment above it. They couldn't find anyone to rent it, even at a few hundred below market rent, because of the noise the bar had from 6pm-4am. Are the apartments currently rented? Even if they are, it could be tough to fill them when they become vacant. If you could rent to employees of the bar like @Laurence Smucker said, that could work well.

 Thanks Chris - I continued my detective work on this property and found out that the apartments above are a revolving door for this exact reason. Maybe they think the noise won't be a problem--until they realize it is.