— By David Gabbai —
How restaurant tenants can be built to save.
Due to challenges like high interest rates and construction costs, the price of owning, building, remodeling and leasing restaurant space has gone through the roof.
It can be a difficult time to own and maintain a restaurant business and restaurant space. However, forward-thinking restaurant tenants and retail landlords are finding creative ways to make things work.
We are seeing these imaginative solutions play out in lease terms and structures, which can be done in a way that makes both parties comfortable.
One particular area of note, and the focus of this article, is how restaurant tenants can negotiate certain buildout preferences when submitting their letter of intent (LOI) to lease pre-construction space. Restaurant tenants that successfully do this can save both money and time, which is more important than ever in today’s unpredictable economic landscape.
Ways to Save on Your Buildout
Restaurant owners and operators know that their space needs are quite different than those of a traditional retailer. Differing requirements between the two types of usage range from the number of bathrooms to compliance with the Americans with Disability Act (ADA) to fire safety and many others.
That’s why it’s advantageous for restaurant tenants to negotiate certain buildout preferences that meet their specific needs in ways that a traditional retail space wouldn’t, before the building is constructed.
Simply put — and illustrated further below — when a restaurant tenant can specify their needs pre-construction, they may achieve savings in the form of:
1. Tenant improvement allowance (TIA) credits from the landlord, because the landlord saves on unnecessary construction costs.
2. Not having to undo aspects of the just-built space to meet their specific needs (such as tearing up concrete floors to upgrade the plumbing). This, alone, could save a restaurant tenant from 10% to 30% as compared to renovating a traditional retail space for their needs.
Buildout Preferences to Request
There are three core areas in which restaurant construction needs vary drastically from that of traditional retail: plumbing, amperage and HVAC. As such, restaurant tenants should consider requesting the following buildout preferences in their letter of intent for leasing space in a pre-construction property.
1. Request a Dirt Floor
Restaurants have greater plumbing needs than what is typically available in a traditional retail build. These include an upsized water line and meter for cooking, cleaning and sanitation; grease interceptors due to cooking with fats and oils; more fire sprinklers because of the heightened fire risk; and additional plumbing fixtures to support dishwashing and a greater number of bathrooms with toilets and sinks.
Restaurant tenants who sign a lease in a space built for traditional retail will need to tear up the concrete floor, upgrade the plumbing for their needs and then install a new floor.
Those who request the developer deliver a dirt floor can avoid the unnecessary expense — and additional time — of tearing up a floor that was just put down. And the landlord could also offer a TIA credit due to avoiding the expense of pouring concrete during the build.
2. Ask to Leave Cut-Outs for AC and Skip Duct Work
Restaurant tenants also have more complex and demanding HVAC needs than traditional retailers. These relate to heat and odor management, ventilation needs, extended operating hours, increased humidity and indoor air quality concerns, and cooling challenges due to kitchen operations generating heat.
HVAC upgrades to existing space can be very expensive. Restaurant tenants can negotiate that the builder provide additional cut-outs for HVAC units and to skip the duct work. Then, the tenant can benefit from a TIA credit and have the HVAC system installed exactly to their specifications.
3. Negotiate for Power Needs
Restaurants, due to their kitchen equipment and extensive electrical needs for cooking, refrigeration and other operations, often require significantly more amperage than traditional retail spaces. In fact, inline retail space traditionally offers 200-watt amperage, while restaurant space can require 600 amps or more.
This could be a costly upgrade for restaurant tenants to make after the space has been built, so the power (no pun intended) of negotiating amperage needs upfront is crucial. At the onset of the LOI submittal process, restaurant tenants should aim to negotiate their specific electrical needs as part of the landlord/developer’s delivery requirements.
Often, this can result in the landlord installing additional electrical transformers onsite and/or gas lines for cooking equipment. In many regions of the country, gas providers themselves will agree to extend gas lines to the building facility in favor of the restaurant tenant’s promise to purchase gas from that provider.
Getting the Unfinished Work Finished
Keep in mind, restaurant tenants that negotiate aspects of unfinished construction in their pre-construction space typically shoulder the cost and responsibility of hiring their own general contractor to finish the work when the time comes.
However, given the potential savings in TIA credits and not having to demolish just-completed work, restaurant tenants will likely still come out on top.
— David Gabbai is executive vice president, retail services at Colliers and is based in Orlando, Florida. He can be reached at [email protected].