Options For A Restaurateur Whose Landlord Is Selling The Building
QUESTION FROM: Guillermo In CA
“Our 1st 7 year option ended last week, we have 2 more 5 year options for a total of 10 years.
Our business is making it but barely. CA wages are too high not to mention Workers Comp and other fees and taxes.
My landlord is selling the property and currently on escrow. The new buyer already came at me and offer to buy me out of the contract. He lowballed me of course.
I said I had no answer for him right now and moved on to ask what he wants to do with the property. He said he wants to tear the building down and built 2 other commercial spaces. Maybe a new restaurant. The new buyer owns several restaurants in a couple different states. All in premium locations. My location isn’t premium but there is a very large development happening here o. the next few years and the entire area is set to go up in value and undergo a ‘gentrification’.
My question is this: How do I value what I have? A friend suggested I request what we invested 7 years ago plus a premium for the money we could project to make in net income the following 10 years.
I think he is exaggerating but who knows.
Our restaurant has been here 50 years and my rent is probably 40% of what I would have pay if I wanted to move. The last 2 years all property for lease around here skyrocketed.
Thanks in advance.”
First of all, his answer to your question with regard to what he wants to do there is a relevant. He does not have to - nor does he have any incentive to - be honest with you.
If you are paying below market rent in an area that’s poised to explode you could be sitting on a gold mine.
The opportunity cost of your lease over the next 10 years is equal, if not greater than, The cost of a 10 year lease elsewhere Dash in a firmly established and highly visible/trafficked location of equal size.
If this owner/developer has other successful restaurants and very popular locations, chances are they expect this location to produce similar results for them.
The downside is that, if they are savvy, they have already forecasted the worst case scenario of you staying put for 10 more years which means the acquisition probably makes sense for them even if you don’t move.
That being said, your “barely making it” sales could be severely impacted if this new buyer plans to develop around or above you and choke off your foot traffic supply and/or Visibility. Check your existing Lease to see if there is any rent abatement or “stopping the clock” on your term in such instances. If there isn’t, you may find yourself regretting the opportunity they are presenting you with now.
Not saying they will be a jerk - but they absolutely can make your life hell if they want to - and since this isn’t their first rodeo, probably know how to make your business a money pit.
To get really specific and provide sound advice someone would have to see your Lease and your P&L
It’d also be incredibly helpful to know how much 6 years of rent in the hottest location nearby + a move and new buildout (similar to the one you’ve got now) would cost you - and what the other concepts this individual owns/operates
I’ve been involved in some similar situations and would be remiss in not mentioning that a strategic partnership with this developer might also be an option. You stated they have multiple other food and beverage outlets and one thing that all multi-unit operators have in common is a need for more management. If you design a mutually beneficial / profitable arrangement it could be quite compelling as it never hurts to partner with someone if their goals are in alignment and it doesn’t cost them anything. Since assisting with these types of arrangements is something I get paid to do, I won’t lay it ALL out on the table but I’ll gladly point you in the right direction by telling you that if you position yourself and frame your lack of success there as being the result of needing some refreshing/capital infusion - you’d have a pretty strong argument for a leaseback with the Seller or an equity partnership with the Buyer.
Depending on your liabilities and debt - and considering the fact that you’re barely making it - I would start by calculating the discount value of your Lease and the cash value of your business over the next 10yrs (based on Net Earnings) and build an ask (or contribution value) from there.
I.E., If you have a 4,000sqft fully (and intelligently) fit-out restaurant and the going rate for such in your market is $100,000/yr and you are paying $60,000/yr then you have a $40.000/yr of value there. Multiplied by 10 years and it’s a total value of $400,000. Add to that $400k your net profit (let’s say, for argument sake that 4% is you barely making it.) If your sales are $2.5MM/yr then your 2% net would be $50k/yr x 10yrs = $500,000. If you add the opportunity value of $400k + conservative net gain proj of $500k you’re at close to $1MM…or more than enough to justify an equity position.
And remember…first offers are never the best as I’m sure you know.
Let me know if you’d like me to get involved,