Waterfront property restaurant purchase
Member since 2026 · 5 posts · 1 vote
My client is looking for financing on a pre-established restaurant that closed its doors after 100 years or so. Great location, property is listed at $2.79m. He is seeing a loan for the purchase of the land and the buildout, renovation of the pre-existing restaurant there is a cottage on the property that was a bed and breakfast. He is looking for $1.5m for that. All in $4.3m. What would you expect he will need to put into this deal to obtain financing? Would prefer responses based on deals actually funded.
For a waterfront restaurant property, I would separate the real estate underwriting from the operating-business story. Focus first on zoning and permitted use, flood and wind insurance, environmental condition, deferred capital work, parking, utilities, and what the property could support if the current concept fails. Then test debt service using conservative real-estate cash flow rather than optimistic restaurant revenue. The downside question is especially important with a specialized asset. Is the value primarily in the existing business, the building and land, or a redevelopment opportunity?
This sounds like an extensive project that has many intricate layers. What is the exit strategy ? Owner operator, lease out, or sell upon completion? Ultimately the exit strategy on this one will dictate the type of financing you need.
For a waterfront restaurant property, I would separate the real estate underwriting from the operating-business story. Focus first on zoning and permitted use, flood and wind insurance, environmental condition, deferred capital work, parking, utilities, and what the property could support if the current concept fails. Then test debt service using conservative real-estate cash flow rather than optimistic restaurant revenue. The downside question is especially important with a specialized asset. Is the value primarily in the existing business, the building and land, or a redevelopment opportunity?
I appreciate your insight.
are there insights to why it closed? obviously there are many reason a restaurant closes, if someone wanted to retire and noone wanted the biz thats one thing, but if they had reduced revenues for years and closed becuase of that, theres a totally different thing to look into. backfilling properties is difficult and generally requires much underwriting and nuance.
This would not be viewed as an established restaurant. At best, viewed as a second-generation restaurant space or venue. Lenders will look at your client like he has three heads if this is marketed to lenders as a pre-established restaurant.
Will your client operate the restaurant or lease it to a third party? If your client will operate it, how much restaurant experience do they have? If it will be leased, is there an established operator lined up? This will be incredibly important to a lender.
Is a liquor license included? That is critical for profitability. If it is not included in the sale, your client should have one lined up or under agreement. Otherwise, lenders will view the property less favorably. Massachusetts, like many states, treats liquor licenses as a privilege rather than real property. However, based on my experience working in house for a hospitality REIT that opened hotels in Massachusetts, the state does allow liquor licenses to be pledged as collateral for loans which isn't the case in in many states. I doubt every lender will have an appetite for relying on that collateral.
Overall, expect relatively low leverage. Leverage could increase if the property generates meaningful revenue from uses other than hospitality. A good example would be a mixed use property with apartments, particularly if at least 50% of the lease revenue comes from the residential units. That's a benchmark I look for in my development projects with hospitality uses.
To help with leverage, separate as much of the FF&E and operating startup costs as possible and finance them through an SBA loan rather than the real estate loan. That financing would generally be best obtained by the restaurant operator. Also understand its difficult for operators to get FF&E and operating start up capital placing a greater burden on the building owner. As a result you see a lot more turnkey build outs with base rent and revenue share arrangements and if you are looking for a 3rd party operator tenant that may be the best bet but again adds more capital intensity to the owner's plate with a more difficult financing path. I am working on a few projects with this arrangement in Philadelphia and only works because a significant portion of the building lease revenue is generated through non hospitality rent revenue, I control liquor licenses and the buildings value allow the additional costs to be absorbed into a refinance.