Restaurant Development & Design

FALL 2014

restaurant development + design is a user-driven resource for restaurant professionals charged with building new locations and remodeling existing units.

Issue link: https://rddmag.epubxp.com/i/452387

Contents of this Issue

Navigation

Page 59 of 75

5 8 • R E S T A U R A N T D E V E L O P M E N T + D E S I G N • F A L L 2 0 1 4 How To in occupancy costs as a result of the scarcity of new space. New space has always been the great equalizer relative to moderating rent infation. rd+d: How long has this been the case? MN: New-store development came to a grinding halt between 2008 and 2009. At the time, demand was falling faster than supply and rents remained favorable almost through 2012. Since then, there has been a resurgence of demand almost back to pre-recession levels. At the same time, supply has remained very low on new builds, starting with regional malls, power centers, grocery-anchored shopping centers, etc. The second problem that's giving restaurant companies headaches is everything we are touching now is second- or third-generation space. rd+d: What are the implications from a cost standpoint? MN: First, let me say there were several things that were really attractive during the shopping-center development craze from the '90s to the recession. New shopping centers were the vehicles to grow rapidly, and the space came with an attractive fnish-out package. Its delivery could be to our spec [because] if it was done as part of the construction, it was at no added cost to developers. New construction not only provided an abundance of space, it moder- ated infation. That's no longer the case. rd+d: What's different about dealing with today's existing space? MN: The restaurant space is capital intensive and often the deals are "as is." An operating restaurant is a great example. Everyone knows the space is available, so everyone competes for it. Yet based on the fact that it has an existing lease and an occupant, no one can get in to do an inspection. When you fnally demo it, you fnd the walls may be flled with mold and the sani- tary line burst and now there's a sink hole. So taking existing space means driving up the improvement invest- ment [without] TI allowance because landlords are not fush with cash from new construction. You've taken the space "as is", and now you're going to fght with the landlord as to what the landlord's responsibility is. rd+d: Some see the Letter of Intent (LOI) as merely a form-letter document while others believe it's where signifcant responsibilities should be negotiated ahead of the lease. What's your take? MN: Real negotiation is at the LOI stage, but some franchisees will go right to lease. They are in a hurry and believe the LOI doesn't serve any purpose. Yet the LOI is a risk mitigation tool, and used properly it is hugely valuable in avoiding deals that will die later on. Equally impor- tant, it stops you from going forward on deals that make no economic sense, be- cause you raise issues that are important. rd+d: Let's say you really like a space that's nearly perfect. How much time are you going to spend on the LOI? MN: It's like buying a home you've fallen in love with. You walk out and forget to fnd out about a sewer assess- ment. The issue is to not get emotional. Our philosophy is to take all the things that are hard to negotiate in the lease and take the time needed to get them discussed at the LOI stage. rd+d: Such as? MN: Continuous operation, for example. The typical franchisee hasn't thought about that in the context of the LOI. Once they've signed the lease, it requires them to operate the restaurant continu- ously throughout the life of the lease. Our LOI form includes guidelines for all the diffcult items in the lease. For example, the LOI is broken into two pieces: the con- tractual component, which includes rent, square feet, and dimensions and the work letter, which is essentially a clear defni- tion of who does the work and who pays for it. For instance, who takes the foor slab out if the site is an existing space? Or who pays for digging a 300-yard trench through a parking lot for a T1 phone line? California is huge on taxes. I've seen impact fees in very small communities as high as $175,000 to $250,000. It's like buying a liquor license in New Jersey. rd+d: How can chains avoid paying for such things? MN: Our work letter runs 8 to 10 pages. It's exhaustive and covers all utilities, storefront with 1-inch glass, patio con- struction, branding, awnings, x-amount of air-conditioning tonnage, demolition of existing space. It is not so much that we get everything we ask for but its scope covers costs and who's respon- sible for paying for them. We negotiate a cold dark shell with allowance for HVAC, and so in existing space that means the landlord is doing a quite a bit of work to demo it back. rd+d: Are some developers more amenable to negotiation? MN: There's motivation on the part of both parties to shift the burden. In today's market with existing space, the landlord's position is that you take the space "as is" and assume all risk. It becomes an issue of strength of negotiation, moving the deal toward more shared responsibility. Still-sluggish shopping center development is the toughest real estate challenge faced by fast-growing chains such as Corner Bakery Café.

Articles in this issue

Archives of this issue

view archives of Restaurant Development & Design - FALL 2014