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Episode XV - Percentage Leases and Restaurants: Are They A Good Fit? - YouTube
Channel: Ryn Longmaid: Deep Dish Live
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hi everybody my name is wren longmaid
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i'm a restaurant broker and consultant
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at
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long maid restaurant sales and
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consulting santa rosa business and
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commercial in sonoma county california
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i'm also the founder and host of this
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series deep dish live where we explore
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the business of restaurants for
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restaurant tours
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restaurant buyers and sellers and the
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restaurant curious
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[Music]
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today we're live streaming um this is
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episode 15. we're live streaming from
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legit provisions in downtown saint
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helena in the lovely napa valley and i'm
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going to be discussing percentage leases
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and restaurants are they a good fit
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so this series deep dish live streams
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once monthly
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it used to run between 30 and 40 minutes
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long but in 2022 we made the decision to
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shorten them up i'm going to try to do
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today's episode between 10 and 15
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minutes long
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we as i said we there's been
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let's see we've got 15 po we have 15
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episodes posted on my website i have a
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youtube channel please subscribe
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there's also a blog post which i'll talk
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about later
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so if you'd like a chance to win a 100
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gift card from our host
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restaurant today legit provisions
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you all you need to do is like and post
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a comment on this post either while it's
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live on facebook or after we post it
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later
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you can do this on linkedin
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you can do it on um youtube channel
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we'll look at all those we'll throw all
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your names into a basket not really a
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basket an electronic basket and the
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winners are randomly selected today
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we'll be announcing at the end of the
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show our 100 gift card winner from brick
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maiden breads where we live streamed in
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december
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out in point raise in marine county so
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without further ado i'm going to jump
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into today's today's topic
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so a percentage lisa i'm actually going
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to read this a percentage lease is a
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type of lease where a tenant pays base
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rent
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plus a percentage of gross sales over
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what's called a natural break point
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it's a common lease in large retail
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centers and it can be used by restaurant
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operators who are seeking to operate in
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a location that might be super expensive
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like maybe ten dollars a square foot if
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if a restaurant operator is going to
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have like a a
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a con gonna be
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executing on a concept that hasn't been
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tested yet it might be wise to negotiate
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a percentage lease with the landlord
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rather than get locked into
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a very expensive lease one thing that
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i'm that you should know out the onset a
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percentage lease is like a hybrid
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between
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if it'll be a fixed cost and a variable
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cost because there's always a base rent
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with a percentage lease and then there's
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a variable rent based on gross sales of
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the operator whereas rent generally is a
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fixed cost so
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a lot of operators kind of shy away from
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percentage lease because it sounds like
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it's going to be a lot of rent but
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you know if if the operator if the
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restaurant operator does their due
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diligence it can be a really
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good way to satisfy a landlord and
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secure a dynamite location so one thing
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i'm going to say whenever i'm discussing
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leases or the restaurant industry
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i'm usually thinking about an
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independent
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single unit operator
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in california so
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you know all those things differentiate
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or you know very
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depending on what the concept is and how
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they operate and where they operate
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these all the factors that i talk about
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are different so that's what i'm
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discussing so
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i'm gonna jump into this explanation i'm
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going to i have a blog post that always
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runs concurrent to it runs on the same
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topic as the deep dish live episode i
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write them out i don't they're not
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transcribed from the video so they're
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very clear and succinct so if you find
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this hard to track today which i think
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it's going to be hard to track
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jump on my blog post i'll have it up
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maybe in a
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week or so
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and you can get all the information
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there you can always reach out to direct
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to me directly i'm super busy
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texting is always best my contact
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information is on my website
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so
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i'm going to use an example i'm just
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going to jump into an example of what a
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percentage
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a lease looks like
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so prestigious lease there's always
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going to be a base rent so for this
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example let's just say base rent is five
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thousand dollars
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and the landlord and the restaurant
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operator have have negotiated that it's
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going to be a six percent lease
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so
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the break point
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that it's called a natural break point
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will be determined by those two the five
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thousand dollar
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base rent and the six percent
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percentage lease so what you do is you
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just
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divide five five thousand dollars by six
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percent point zero six and you get
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something of like eight
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eighty three thousand dollars eighty
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three thousand dollars eighty three 83
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333 000
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that's the
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gross sales that the restaurant will
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make anything above 83 000 and some
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change the difference the operator will
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pay six percent of the difference back
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to the landlord right you don't
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understand that do you ed
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so let's say the operator
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for one month typically we calculate
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this on an annual basis but for today
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i'm going to do it on a monthly basis
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if the operator had a hundred thousand
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dollars in gross sales
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for the month the way that the rent
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would be calculated would would be that
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a hundred thousand dollars less that
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break that natural break point the eight
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thousand eighty three thousand three
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hundred thirty three dollars which is a
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little over like sixteen thousand five
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hundred a little over that
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so the the operator will pay six percent
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of that sixteen thousand dollars which
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is roughly a thousand dollars so rent
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for that month will be the base rent of
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five thousand dollars
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six percent of the gross sales that were
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above the break the natural break point
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which is about a thousand dollars so
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that's six thousand dollars in rent so
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you see that five thousand dollars was a
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fixed cost
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the
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the percentage is a variable cost it
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runs in line with the gross sales
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so um again one of the reasons that this
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kind of lease isn't for everybody one it
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feels complicated but if you sit down
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with somebody who's qualified to explain
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it to you it's not that complicated
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one of the least attractive parts of
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this lease for an operator is you have
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to hand over your books to the landlord
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maybe not your full financial statement
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but certainly your gross sales
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so maybe your your pos
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statement for the month something like
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that not everybody wants to do that most
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restaurant operators don't like to hand
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their financial statements over to
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anybody
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one thing you might have noticed what i
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haven't mentioned in this percentage
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lease are triple nets or cam expenses
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which i've described in multiple
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episodes in the past but for our
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purposes here
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those are expenses that the land owner
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incurs as a function of owning the
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property
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property tax insurance
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based on the building
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and
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common area fees which might be
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maintenance of the parking lot or
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utilities like lighting for the parking
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lot
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admin fees property management fees
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maintenance fees fees that the landlord
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incurs almost always get passed on to
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the tenants on a pro rata basis
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i'm not going to explain that for now
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because i'm trying to do this in 10 to
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15 minutes
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so
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a percentage lease still includes
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generally triple net and cam so you can
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see this lease is a little bit of
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everything
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you've got your base rent you have your
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percentage rent that gets added on top
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of it and then you still have your
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triple net the restaurant tour still has
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the triple net or cam fees
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so
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those of you who are really familiar
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with the restaurant industry or who have
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watched my series you know that there's
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no secrets to the margins the success
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margins operation margins of the
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restaurant industry those are changing
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due to covid and concept changes
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restaurants are changing how they do
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business quite frankly i'm going to
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throw these out because they've been the
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standard for so long but i think they're
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going to change so in northern
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california occupancy costs restaurant
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occupancy costs the amount that that the
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restaurant should dedicate to
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securing the the premises that would be
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base rent plus triple net and a couple
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other fees should be between seven and
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nine percent ten percent in a dynamite
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dynamite dynamite location where you
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have high gross sales ten percent for
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most people
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they'll never be able to achieve
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profitability but you know the
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the thing about a percentage lease is
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the restaurant tour might be misled
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thinking i'm only ever going to pay six
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percent of my gross sales that's not
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true because you're not think because
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the operator needs to be thinking about
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those triple nets and cam so the way
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that you calculate
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occupancy costs or the gross sales
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needed to support your occupancy costs
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versus that
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lease are different i'm not going to go
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into it now but
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just don't get confused just for the
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most part like that example i said let's
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say triple net fees and expenses monthly
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were fifteen hundred dollars my guess is
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that the occupancy cost there would be
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seven percent maybe seven and a half
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percent not six percent which is still
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fine for that operator but the operator
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needs to the restaurant operator really
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needs to get in there and muck around
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with the numbers to make sure when
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they're negotiating with the landlord
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that they're negotiating terms that
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they'll be able to support
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for long-term success
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so
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as i said let's see
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so the other thing that you can that
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operators can negotiate with the
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landlord when they're negotiating these
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terms we you that five thousand dollars
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that's the base rent that can be
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negotiated it could be higher or lower
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that can be negotiated so that's a
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bottom cap there's also a top cap right
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so rather than
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the
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up the restaurant operator being liable
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for that percentage rent up into you
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know five million dollars worth of sales
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you they can cap it at once we get to
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three million in sales that's it you
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know
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landlords don't usually like to do that
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but operators can negotiate that other
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things they can negotiate is well the
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thing to be aware of i'm going to say
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this and then i'm going to wrap it up
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is that the reconciliation for
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the percentage rent being applied to the
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restaurant operator can happen monthly
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it can happen
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quarterly it can happen semi-annually or
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it can happen annually however it's
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reconciled what that means is you're
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paying that 5 000 the restaurant
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operator is paying the 5 000 plus triple
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net and expenses writing that check out
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every month to the landlord no matter
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what
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then
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you the operator hands over their
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financial statements the
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landlord's
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uh property manager or accountant or
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somebody figures out what the percentage
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rent do is from the operator
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and is charge that so what you don't
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want to do as a restaurant operator is
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count
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all of your income as income because a
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chunk of that is going to have to be
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applied to the rent at some point either
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monthly semi annually semi-annually or
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annually
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the way that i see restaurants fail is
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when those costs another cost that's
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very similar to that is retail sales tax
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if you if an operator treats percentage
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rent or retail sales tax if they
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treating that money that's coming in as
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income
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then they might find themselves unable
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to pay the retail sales tax or that
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additional rent when it comes due and
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they'll go out of business so you want
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somebody in your corner
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that either a restaurant broker or a
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real estate professional or cba or an
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attorney that
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understands the mechanics of a
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percentage lease and keeps you on track
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throughout the year
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so again if you're just joining me i'm
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going and i'm going to go ahead and
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announce the winner from brickmaid and
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breads who's my very close friend jenny
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mcclellan she's a real estate agent at
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vanguard
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in sebastopol
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jen i can't wait to give you the gift
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card she's one of my besties um
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thank you for joining me today my name
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is wren longmaid i'm the founder and
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host of this series deep dish live where
[772]
we explore the business of restaurants
[774]
for restaurant tours restaurant buyers
[776]
and sellers and the restaurant curious
[778]
if you want to win 100 gift card to my
[781]
host restaurant today legit provisions
[784]
in downtown saint helena and napa county
[786]
please like and post a comment on this
[789]
episode any time between now and the
[792]
next time that ed and i will see you
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which will be on wednesday i think march
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16th next month bye everybody
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[Music]
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