Leasing a restaurant is the most common way most restaurants find a location. Restaurant leases give independent restaurants access to commercial real estate in desirable locations for a much lower upfront cost than purchasing a location. There are several types of restaurant leases to know, with varying levels of risk and cost for restaurant owners. Restaurant leases generally range from $3,000 to over $10,000 per month, depending on size and location.
There are many ways to negotiate the best terms in your restaurant lease, and negotiating restaurant leases is not just common—it’s expected. This guide contains some of my best tips for negotiating a restaurant lease, but (spoiler alert) my biggest tip is: work with an experienced real estate agent and an attorney to negotiate your restaurant lease, especially if this is your first restaurant or if you are opening in a competitive area.
Steps for Leasing a Restaurant
Leasing a restaurant is not difficult, but it takes time. In my experience, you should give yourself at least three to six months to find and secure the right location. If you are in a competitive market like New York, Los Angeles, Chicago, or another major metropolitan area, your restaurant leasing journey could be nine to 12 months. Your total time frame (as well as budget and lease complexity) will vary widely based on your local market and desired location.
Here are the basic steps to securing a restaurant lease:
Step 1: Assess Your Needs
Defining your restaurant’s needs before you begin looking at spaces will help you and your broker move quickly when considering different spaces. Your specific needs will vary based on your restaurant type. There are some general features to consider when comparing restaurant spaces to rent:
- Square footage: Typically, the larger your square footage, the higher the rent will be. Also, a bigger location means your sales will need to be higher, since heating, cooling, and other costs will also be more expensive. Determine the size you need, and stick to it.
- Use ratios: Depending on your restaurant type, you will need varying amounts of space for your staff and your customers. Most full-service restaurants use 30%–40% of their square footage for the kitchen and 60%–70% for dining space.
- Parking: If customers can’t park easily near your restaurant, they won’t dine with you. Make sure the space you are leasing comes with a designated parking area or room for a valet stand.
- Drive-thru: Especially in the age of social distancing, drive-thru windows are priceless. If your concept needs drive-thru capabilities, ensure that the space has enough space to add one.
- Ventilation: This is a major consideration for your cooking equipment, fire safety plans, and for maintaining a sanitary environment for your customers and employees. If you have wood-burning ovens or smoke-producing equipment, ventilation is doubly important.
- Entrances and exits: A best practice is to have separate entrances for your customers and employees. If you are considering space in a shopping center or mixed-use building, you’ll also want to inquire about loading docks for suppliers and the location of dumpsters for garbage disposal.
- Location: Do you have a desired neighborhood? Is there a location that is most popular with your target customer? If you know that your restaurant must be in a specific neighborhood, add this to your preliminary considerations.
Create a list of features that your restaurant must have versus features that are simply nice to have. For example, a pizzeria must have a pizza oven (and the necessary ventilation for one). If you are developing a zero-waste restaurant concept, a designated place for recycling and composting materials would be a must-have. In either scenario, a horseshoe bar with track-lit cabinets might just be nice to have, not necessary.
Step 2: Create a Budget
To remain profitable, you’ll want to keep your monthly rent and fees to no more than 10% of your overall sales. If you’ve been operating a restaurant for a while, you’ll have historical sales numbers to build your budget from. If you are just starting your restaurant business, use the sales projections from your business plan to determine your budget.
Unless you are looking at locations that have served your exact style of food and beverage, you’ll also want to set aside a budget for renovations. In most cases, you’ll be responsible for all or most of the renovation costs to make a commercial space fit your restaurant.
Step 3: Find Available Locations
With your needs and budget figured, it’s time to find and choose restaurant locations. You can find these on listing sites like Loopnet and CityFeet. Or you may prefer to contact a commercial real estate agent (also referred to as a broker) directly. An agent might know about available spaces that aren’t yet listed and can also help explain lease terms that are unfamiliar. Commercial real estate brokers earn a fee based on the rental price (usually around 6%).
In most locations, you’ll mostly find brokers that work exclusively for property owners, in which case the property owner pays the broker’s fees. In busy commercial markets, you may also find tenant brokers. These independent brokers work exclusively for—and are paid by—tenants. If you can find a tenant’s broker in your area, they may be able to help you with your lease negotiations when you reach that step (though I always recommend that restaurants use an attorney for this).
You can find commercial real estate brokers by performing an internet search for your area. You can also check listing sites like The Broker List.
Step 4: Visit and Assess Properties
This is the part of the process where you physically visit available properties to see if they are a fit for your restaurant. If you have other interested parties, like your executive chef or general manager, bring them along to site visits. They will likely notice the benefits and challenges of a location that you might miss.
You want to look specifically at:
- Size: Does the space have enough square footage for your projected sales and foot traffic? Is there enough room for your kitchen and storage needs?
- Layout: Is the basic footprint of the space in line with your restaurant floor plan? You can change some things (like removing non-load-bearing walls), but moving restrooms or upgrading the electrical system to accommodate a walk-in refrigerator can be costly.
- Condition: Is the space clean and structurally sound? Are surfaces like floors, walls, and ceilings in good condition? Do doors open and close easily?
- Growth potential: Is there room in this space for your restaurant to expand as your business grows? Are there other nearby units where you could one day add to your footprint?
- Location: You want a location that will bring in foot and street traffic but is not surrounded by competitors.
- Equipment: Is there existing cooking, refrigeration, or sanitation equipment? Will you be able to reuse any of it?
You’ll likely be viewing spaces with a landlord’s real estate agent, a property manager, or another representative. In some locations, though, the actual landlord might show you the space. Depending on who you meet, they may know a lot (or nothing) about the use and repair history of the space. It’s OK if you don’t have perfect information at this point; if you’re interested in the location, you’ll have time to take a deeper look at it before signing a lease.
Step 5: Review Lease Terms
When a space looks viable, ask to see the lease. You want to see an actual copy of the proposed lease, not an email with some bullet points of possible lease terms. The language of the actual lease you will sign may differ from even the landlord or property management company’s understanding of the terms. Review the lease documents carefully.
You’re looking specifically for:
- Base rent amount
- Percentage rent requested
- Breakpoint (in percentage leases)
- Lease duration and renewal options
- Maintenance and repair responsibilities (who repairs which items, you or the landlord?)
- Any restrictions on use, renovations, or alterations
- Sublease approvals (or restrictions)
- Termination and exit clauses
Step 6: Send a Letter of Intent (LOI)
If the lease terms seem reasonable (or like a reasonable jumping-off point for negotiations), you should send an LOI to let the landlord know you are seriously interested. An LOI is a letter that is written before the signing of a lease that memorializes the terms you and the property owner have discussed. An LOI can be drafted by you, the property owner, or either of your attorneys.
The wisest move is to have your attorney write the LOI. If negotiations fall through and you don’t continue with a lease agreement, the LOI could be considered legally binding in some places. Your attorney will ensure that your letter of intent is free of any binding language that could paint you into a corner.
If the property owner (or their agent or attorney) drafts the LOI, have your attorney look it over before you sign. If there is any language that you feel is unclear or suggests that you have agreed to something that you did not—such as paying for certain repairs, or future rent increases—let the property owner know in writing. It is important to record your disagreement over the terms in writing.
Remember, an LOI is part of the lease negotiation process. If there is anything about the LOI that you disagree with or understand differently, don’t sign it. Have your lawyer request adjustments. If the landlord gets impatient with you, remind yourself that it is better to lose a potential location than to be locked into an unfavorable restaurant lease.
Step 7: Negotiate Lease Terms
Now that the property owner has accepted your LOI, serious discussions can begin. Negotiating a restaurant lease is common and expected, so don’t be afraid to note things that you need to make the space and the lease work for your business.
When heading into a restaurant lease negotiation (or sending your attorney to negotiate for you), you’ll want to consider:
- Renovation (aka “build-out”) expenses: You should have a good idea of what needed repairs or renovations will cost so you can request build-out funds or a number of free months to offset these costs. Read our guide to commercial leasehold improvements for more information.
- Code compliance requirements: If any systems need to be upgraded to meet current health and safety codes or the ADA, have a list prepared.
- Cost of utilities: This is especially important if you are responsible for paying utilities. If the space will be expensive to heat, cool, or electrify, use these projections to request some relief on the base rent or any percentage rent requested.
- Your road to profitability: Do you need to be open early morning or late night hours to stay profitable? Will you need to add sidewalk or patio seating in the summer months? Does your business model include revenue from subleasing to pop-ups? Ensure that your lease allows for all your operational plans.
- Your willingness to extend a lease: Landlords tend to be much more flexible when negotiating longer-term leases. Do you have enough confidence in your business to sign a five-year (or longer) lease?
A restaurant lease negotiation typically requires several rounds of phone calls or in-person meetings and follow-up emails. Don’t take it personally if a landlord cannot agree to all of your requests. They are a business owner, too, and their business model may not support some of your requests. But, you never know where there is wiggle room unless you ask.
Restaurant lease negotiations have a lot of industry terms and common workarounds. I’ve included a detailed list of negotiation tips below. Scroll down for more information about restaurant lease negotiation strategies.
Step 8: Conduct Due Diligence
Due diligence is the process of inspecting your proposed rental space to ensure it meets your business needs. In most cases, you’ll want to hire a professional business inspector to look at the main structure and all of the major systems to ensure they are in good working order. In some locations, new restaurants can get a brief initial inspection from the fire and health departments too.
After your inspections, you might need to return to the negotiating table to discuss how you and the landlord will cover any needed repairs that your inspections uncovered. Sometimes your due diligence process will reveal some issues that are deal breakers for you (like a rodent infestation or a costly repair). It can be difficult to walk away from a rental location so far along in the process, but if repairs will be too costly or keep you from opening your restaurant for too long, it may be best to start over from step one with a new location.
Step 9: Finalize Financing (If Needed)
If you are leasing the space as part of opening a new restaurant, some of your financing may be contingent upon securing your restaurant location. If that is the case for you, now is the time to finalize those details. Alternatively, you may find that you need to raise more money to cover unexpected repairs or renovations.
Not all restaurant owners will need to take this step. If you already have the funds you need to cover your initial lease costs, you can skip ahead to the final step.
Step 10: Sign Lease
Now you’re ready to go! Sign your lease with confidence. Depending on your lease terms, write a check for your security deposit or first month’s rent and move into your new restaurant space.
Types of Restaurant Leases
There are four main types of restaurant leases; percentage lease, triple net lease, gross lease, and modified gross lease. What type of lease to expect depends on the competitiveness of your local commercial real estate market, the type of location, and the landlord’s preferences.
Here’s what to expect from each of the major restaurant lease types.
1. Percentage Lease
In a percentage lease, you pay a base rent plus a percentage of your monthly sales. Percentage leases are popular in competitive markets (New York, Boston, Los Angeles) and in restaurant spaces inside shopping malls or mixed-use buildings. Percentage leases are incredibly common in the restaurant industry. They have some major pros, such as lower base rent, and some major cons, like how your landlord essentially gets to see your sales performance.
With a percentage lease, there are a couple of terms that are customary to negotiate, the breakpoint (the point in your sales after which the percentage rent kicks in) and what revenue is actually included in the term “sales.” It is customary to ask to exclude costs like credit card processing fees, delivery platform commissions, and discounts. The landlord might say no to your requests, but you’ll never know unless you ask.
A percentage lease is commonly seen as a win-win for both the restaurant owner and landlord. The restaurant gets to pay lower upfront costs and ongoing rent that tracks with their sales. The landlord is compensated in real time for the wear and tear on their building. There are some potential drawbacks you’ll want to consider, though, most notably that you are essentially giving your landlord a direct look at your books.
Percentage Lease Pros and Cons
|Has a lower upfront cost||Means that the landlord can scrutinize your finances|
|Lowers the rent when your sales are lower||Could make budgeting difficult|
2. Triple Net Lease
A triple net lease (also called NNN) is an arrangement where you are responsible for the monthly rent and also all of the additional operating expenses like utilities, maintenance, and sometimes even a portion of the property taxes. NNNs are very common in free-standing restaurant locations and are attractive to property owners who like to be hands-off. They have the benefit of relatively low base rent, but the drawback is that you are responsible for all repairs and maintenance.
Triple Net Lease Pros and Cons
|Comes with a monthly rent rate that tends to be low||Makes you responsible for nearly all repairs|
|Can be incredibly cost-effective if you can keep utility and repairs costs low||Can add unexpected costs for maintenance and repairs|
3. Gross Lease
With a gross lease, you pay a fixed monthly rent that covers both the location and operating expenses. In most gross leases, “operating expenses” include utilities, plus any maintenance fees or other fees the landlord might pass on to tenants. Gross leases tend to be a higher flat rate rent than percentage leases, but they make your budget predictable month to month. While that makes budgeting easier, with a gross lease, you’ll need to pay the same amount of rent in your slowest month as in your busiest one.
Gross Lease Pros and Cons
|Makes it easy to budget for monthly rent||Is typically much higher base rent than a percentage lease|
|Includes utilities and other fees||Can eat into your profits on slower months|
4. Modified Gross Lease
A modified gross lease can be viewed as a cross between the percentage lease and the NNN. With a modified gross lease, you and the landlord split operating expenses. For example, in a shared building, the landlord might cover heating costs while you pay for water and electricity.
Modified gross leases let you share the burden of building maintenance more equitably with your landlord, but the terms of modified leases vary a lot from landlord to landlord. You’ll likely spend a lot more time negotiating a modified gross lease than any of the others. If you are good at negotiations, though, a modified gross lease might be your best fit.
Modified Gross Lease Pros and Cons
|Has lease terms that tend to be flexible||May make negotiations complicated|
|Means that the landlord shares some operational costs||Has a potential for ill-will with your landlord if negotiations become tense|
Factors to Consider When Leasing a Restaurant
There are a lot of variables to a restaurant lease and the lease negotiating process. You’ll want to consider several factors before venturing into a lease agreement.
- Location: Location is a huge priority for your restaurant. Does the surrounding neighborhood suit your concept? Is there enough foot traffic? Are there complementary businesses nearby that cater to a similar clientele?
- Accessibility: Is the restaurant easy to access for customers, staff, and vendors? Does it comply with the Americans with Disabilities Act (ADA)? Is there enough parking for your staff and customers? Does getting to the location require taking a one-way street or making U-turns across a median?
- Zoning restrictions: Many municipalities have regulations about what businesses can operate near schools and churches. Some neighborhoods also have restrictions about quiet hours that might limit your hours of operation. All of these could affect your profitability. Don’t take a landlord’s word as law when it comes to zoning, check with the local zoning board to be sure you can sell alcohol or have an outdoor patio if that is part of your business plan.
- Visibility and signage: Customers need to be able to easily see your business from the street or sidewalk. Make sure the landlord (and local zoning laws) allow you to place adequate signage to draw attention.
- Layout: Ensure the layout will work for your concept. Look for the layout of water and power lines in addition to the overall floor plan to ensure your restaurant equipment will be well supported.
- Landlord reputation: Research the landlord or property management company. Find out what current tenants have to say about them. Are they responsive when there is a problem?
- Nearby competition: Sometimes nearby competitors can actually drive overflow to your business, but too many competitors in a small area might leave you hearing crickets in your dining room.
- Affordability: If a location is favorable in all those other categories, you’ll also want to consider whether you can afford the rent and fees. The best location for your restaurant will ultimately be the one you can afford.
Tips for Negotiating a Restaurant Lease
All restaurant leases come with the expectation of some negotiation. All restaurant businesses operate a little differently, and making your restaurant work in a particular space may require some serious renovations.
If you are a desirable tenant, then any landlord should be open to negotiating lease terms to help earn your business. If this is your first time opening a restaurant, remember that the first lease you see from a prospective landlord is just the beginning of the conversation. If the terms seem unreachable for you, don’t walk away; negotiate.
There are a lot of angles to approach a restaurant lease negotiation. Here are just a few.
Many unique phrases pop up in the course of discussing general commercial leases. Our article How to Lease Commercial Real Estate: The Ultimate Guide contains a comprehensive list of them. Restaurant renting, however, has specific language that can be quite different from a traditional retail or office rental situation. It is important to understand these before negotiating a restaurant lease.
- Start date of rent: Many restaurant landlords will waive restaurant renting payments during your restaurant build-out. Typically you can get 60 to 90 days, or until you open for business, whichever comes first.
- Liquidated damages: If a landlord’s failure to make repairs delays your restaurant opening, they may owe you for your time and lost revenue.
- Liquor license contingency: If part of your restaurant business is tied to your ability to obtain licenses like a liquor license, you can note this in your lease. Then, if you are not approved for the necessary license, you can get out of the lease.
- Kick-Out Clause: This language allows you to terminate the lease if your gross sales fail to meet a pre-negotiated dollar amount by a set time.
- Sub-lease Agreement: The ability to sub-lease to another tenant is useful. If your restaurant is struggling, you can find another business to take over the space from you.
- Exclusive use: If you are located in a shopping center or mall location, an exclusive use clause prevents the landlord from placing a similar tenant near your restaurant.
- Kiosk/ Food truck protection: Another concern for restaurants in shopping centers is direct competition from kiosks or food trucks. This is similar to the exclusive use clause, but directs language toward food trucks or kiosks being parked within a certain distance from your restaurant.
Before a restaurant lease negotiation, inspect the building’s systems carefully. By systems, I’m talking about plumbing, electricity, wastewater, and heating, ventilation, and air conditioning (HVAC). Your health and fire safety permit approvals will hinge on these systems, so they need to be in excellent operational condition for you to get the necessary permits.
You want to know if the hot water tank is large enough to feed all your dishwashers and hand wash sinks and if the building already has a grease trap. If any of these systems need to be repaired or replaced, you can usually negotiate with the landlord to update them before you move in, or back out the costs of repairs from your first few months rent.
Most landlords are more amenable to temporarily lower (or even free) rent than lowering the rent for the duration of your lease. If you need time for renovations or some lead time to get a liquor license (or other operating permit), ask for a month or more of free rent to help offset the costs.
With progressive rent, you start paying a lower rent rate for the first six months, followed by a stepped up rent rate for another three to six months. Really, you could progress to paying the full rental rate at whatever time frame you and the landlord agree on. Progressive rental clauses give startup restaurants some breathing room to make renovations and get permits and licenses before opening to the public.
A favorable lease is the cornerstone of your restaurant’s profitability. There are few variables more important than negotiating your lease. An experienced attorney can catch details in a commercial lease that might go over your head, and they can be a great buffer between you and your landlord during a lease negotiation. It’s not you drawing a hard line—it’s your attorney.
Ideally, you want an attorney with restaurant lease experience, as restaurants have a much more complex operational style than a standard retail storefront. Ask other restaurant owners for recommendations. Search attorney directories on legal service sites like LegalZoom and RocketLawyer for attorneys who specialize in real estate law. Call a few of these attorneys and ask about their experience negotiating restaurant leases.
Asking for references from past clients is also a good idea. You want an attorney who knows the restaurant industry well enough to lead the way in protecting your interests when you are not in the room.
Re-Negotiating a Restaurant Lease
Re-negotiating your existing restaurant lease is even more important than negotiating your initial lease. When you reach the re-negotiation phase, you have already invested years of time and money into your current location, so you have a lot to lose if you can’t reach an equitable deal with your landlord. I don’t say this to frighten you—but if this is your first time heading into a lease re-negotiation, it is crucial that you take it seriously and do your homework before you begin the conversation with your landlord.
- Look at current, comparable locations: If you were looking at a new lease in the same neighborhood, what would you expect to pay? Look for vacant restaurant spaces of a similar size within a few miles of your location, and see what the rental rates are.
- Consider your past business: Look at how much rent you could afford to pay in years past. Have you easily managed to pay the rent and fees your landlord requires, or has it been a stretch?
- Consider your future sales forecast: It helps to have some official sales forecasts before renegotiating your lease. The forecasting process forces you to take into consideration any upcoming issues—like scheduled road repairs and detours—that might negatively impact your business. Likewise, if you are adding a new revenue stream like a food truck or catering service, you may have some increased costs in the short term but expect a steadier business flow in the long term.
- Consider upcoming renovations or repairs: Know what repairs or renovations your space needs and what those repairs will cost. Lease re-negotiations are about more than just the dollar amount on the monthly rent line; you can also define who is responsible for necessary repairs.
Just as you did when negotiating your initial lease, it never hurts to work with a real estate attorney to handle your lease re-negotiation. It is not uncommon for restaurants to close due to a bad lease re-negotiation, so you should throw every asset you have behind getting or maintaining favorable lease terms.
Buying Versus Leasing a Restaurant
Most restaurants lease their location. The major reason for leasing is that commercial real estate in high-traffic areas is wildly expensive, and starting a restaurant is expensive enough as it is.
If you have the funds, buying a restaurant location has its benefits—it’s just not currently very common in the restaurant industry. Whether you choose to buy or lease a restaurant depends on your available funds, your tolerance for building maintenance, and what commercial real estate is available in your area.
Buying Versus Leasing a Restaurant Location
Buying a Restaurant
Leasing a Restaurant
Leasing a restaurant space has many advantages over buying a location. Leases cost much less upfront and allow your restaurant to be more flexible. If you know your needs, stick to your budget, and are not afraid to negotiate with prospective landlords, then you’ll end up with a lease that supports your restaurant’s profitability.
Take your restaurant lease seriously, and don’t be afraid to ask for help. A real estate attorney with experience negotiating restaurant leases will be worth every penny when negotiating your restaurant lease.