Commercial Restaurant Space - Where do I start?!

9 Replies

I have been wanting to get into commercial real estate this year and I have come by what could be a great commercial deal, however I am realizing just how different commercial is from residential when it comes to running the numbers. 

Current building is 5,200 with 61 parking spaces. Current site plan attached uses the existing building and permitted construction drawings have raising the roof and a whole new facade with a drive thru. 

The seller is willing to do seller financing on the deal, however how will I be able to pay the seller during construction and if I can't place a tenant right away. 

The numbers alone are seeming hard to get exact figures on- future assumptions, fixed - paid expenses, projecting rent, cap rate, tenant improvements, etc.. 

I would love to bring a partner in on this deal who is more familiar with this industry, however I don't know the numbers to present to them. 

ANY ADVICE would be greatly appreciated!

@Kara Beckmann restaurant spaces are very different than most other commercial as well. There are unique requirements for different concepts from mechanical systems, to handle the kitchen equipment, hoods, water heaters etc. It’s best to find a tenant and build to suit or let them handle their own buildout once renovations are complete.

You need to structure the deal with your owner to defer any payments until construction is complete and a tenant is in place.

The numbers are fairly straight forward. Estimate gross rents by looking at comparable properties. This will be a NNN lease so your tenant pays all expenses.

Tenant improvements are negotiable as are lease terms. The better the location the less you offer the tenant. If it’s a tough location you will need to offer a lot of concessions to attract a tenant.

Be careful in assuming a restaurant will work as that is a tough and fickle business these days. Best if you can get a regional, national or local multi unit operator. Make sure to thoroughly underwrite your tenants to make sure that can last.

There is a different level of risk for a national tenant build out compared to regional and mom and pop.

You are putting in money expecting an equity return on the back end. If the tenant fails early on before you resale money can be lost.

Additionally whether you reface a building or tear down can depend on age of the vacant building and what it would take to attract a new tenant.

Example if you are getting the land and the building for dirt cheap then likely a mom and pop tenant would go in a decades old building with just some paint and other things to open up. If it's a national tenant that has a high end and specific layout and finish they might only do a brand new ground up building. You then have  a building worth nothing that costs you money to tear down rather than land already scraped and ready to go.

Different tenants with newly minted leases and credit ratings trade at different cap rates once open for business. A chick Fil A can be a 4.5 cap versus a Bojangles with the same box size can be 6.5 cap. Might want to tie the property up until you get a solid forward commitment with a tenant for the lease.   

@Greg Dickerson

Thank you for taking the time to reply with such useful information. 

In your experience, do you think the restaurant industry can be a good investment or would your stick with retail/office or multi family? 

If you do think the restaurant industry can be a good deal, how would you go about contacting national restaurant chains to be potential tenants. One of the reasons I see this as such great deal is because of the location and other national chains in very close proximity - McDonalds, Target, Starbucks, Taco Bell, Costco and Five Guys. 

Thank you again, 

Kara

@Joel Owens

Thank you for the response. For this property,  the sellers would also be selling their permitted renderings of the complete exterior remodel - not a tear down. The new renderings give an entirely different look to the building including raising the roof, and dividing the building into two with one of the tenants having a 2,800sqft drive thru end cap. 

With this location, I would prefer to go after more recognizable national tenants. This definitely isn't a "cheap" deal, however what is the best way to find out if it really is a "good deal" without having tenants in place?

Renderings do not mean anything. That is just an option being floated. The real cost of doing that getting to businesses open the cost could be way more than the sellers estimates.

Typically get an option to purchase where the property is tied up exclusively with you. Then approach the tenant rep brokers for the national brands in your area to see what their response is to the site. There are companies that fund these types of deals once the forward commitment with the leases are in place by the tenants. Until then it is more speculative so they tend NOT to fund buy it and then try to find tenants.

Originally posted by @Kara Beckmann :

@Greg Dickerson, 

Thank you for taking the time to reply with such useful information. 

In your experience, do you think the restaurant industry can be a good investment or would your stick with retail/office or multi family? 

If you do think the restaurant industry can be a good deal, how would you go about contacting national restaurant chains to be potential tenants. One of the reasons I see this as such great deal is because of the location and other national chains in very close proximity - McDonalds, Target, Starbucks, Taco Bell, Costco and Five Guys. 

Thank you again, 

Kara

 Yes restaurants can be a really good if you get the right tenant as sometimes they can pay more than local retail or office tenants and they will keep the property up as well.

 The best way to find them is to look on their website for the real estate department, or you can contact local commercial brokers who rep regional and national tenants.

I have found about 80% of the time even when you contact the real estate department directly they still send you to their tenant rep broker. A few companies will talk to you directly but it is more rare.

@Greg Dickerson Good to know that restaurants can sometime pay more than local retail or office tenants. I spoke to someone in my local area today who has a lot of experience bringing national tenants to a space, including the tenants who I would be going after for this building. Possibly thinking of bringing them in as a partner since they could possibly help with the funding and bringing the tenants. Seems like a win-win?

Thank you again!

Originally posted by @Kara Beckmann :

@Greg Dickerson Good to know that restaurants can sometime pay more than local retail or office tenants. I spoke to someone in my local area today who has a lot of experience bringing national tenants to a space, including the tenants who I would be going after for this building. Possibly thinking of bringing them in as a partner since they could possibly help with the funding and bringing the tenants. Seems like a win-win?

Thank you again!

Yes sounds like a good solution. Just make sure to get everything in writing regarding a partnership. That way you can avoid any misunderstandings 

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