Restaurant tenants are a landlord’s best friend and worst nightmare depending on the day. They drive foot traffic, they sign longer leases, and they invest heavily in their build-out. But they also fail at alarming rates, they beat up the space, and when they leave, the space is a mess.
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Document restaurant tenure: How long have they been operating? Three years + survival = reasonable confidence for renewal. Under one year = pricing in replacement risk. -
Verify personal guarantee: Confirm lease has personal guarantee from the owner(s). Without it, you’re unsecured creditor if the business fails. -
Research operator background: How many restaurants has this operator run? Success history? First-timer? Previous failures? Background affects your risk assessment. -
Understand food service impact: Know what specialized build-out is in place (commercial kitchen, hood system, grease trap, specialized HVAC). Conversion cost to non-food use if tenant fails.
The upside
A successful restaurant is the best anchor a strip center can have. People come for lunch, dinner, takeout. They see the other tenants while they’re there. The foot traffic benefits everyone. And restaurant tenants tend to invest $50-100K+ in their build-out (kitchen equipment, hoods, plumbing, finishes), which means they’re not leaving lightly.
The Hard Truth About Restaurant Tenants
Restaurants will beat up your space. Grease, moisture, heavy foot traffic, delivery trucks — it takes a toll. A build-out worth $80K when installed is worth close to zero when a new operator wants to rip it out and start fresh. You should charge restaurant tenants higher rent per SF to compensate for this reality. And you should evaluate the operator’s track record carefully. A proven operator with three successful restaurants is dramatically less risky than a first-timer with a great idea.
Restaurant rents are also typically higher per square foot than other retail tenants. They can afford it because their revenue per square foot is higher. In Raleigh retail, a good restaurant space might command $16-20 NNN while adjacent non-food retail is $12-14 NNN.
The downside
Restaurants fail. A lot. Industry stats say about 60% close within the first year. First-time operators are even riskier. If your restaurant tenant fails, you’re left with a space that has a commercial kitchen, grease traps, specialized HVAC, and a layout that’s very specific to food service. Converting it back to general retail is expensive. Finding another restaurant tenant willing to take over someone else’s kitchen is hit or miss.
The wear and tear is real too. Grease, moisture, heavy foot traffic, delivery trucks. Restaurant spaces take a beating. The build-out might be worth $80K when it’s installed but it’s worth close to zero when a different restaurant wants to rip it out and start over.
Related: Vacant vs. Leased: How It Changes the Deal When You Sell
How I evaluate restaurants in a strip center
I look at how long they’ve been operating. A restaurant that’s survived three years is likely going to survive another five. A restaurant that opened six months ago? I’m pricing in the risk that it might not make it.
I also look at the lease terms. A restaurant with a personal guarantee from the owner is better than one where a fresh LLC is the only party on the lease. If the LLC folds, there’s nobody to collect from.
Seller takeaway
If your strip center has restaurant tenants, call Jim at 980-600-3839 to discuss how to structure the lease and how buyers like him underwrite food service risk. Personal guarantees and operator background matter more than the restaurant concept.
Selling a strip center with restaurant tenants in Greenville or elsewhere? Call me. I know how to underwrite food service risk. 980-600-3839.
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