Part II of Ingredients for Success - Opening a Restaurant in DC
Where to open your restaurant and tips on getting it financed.
Click here for Part I
There was some great info put forth by the panelists regarding how to decide WHERE to put your resaturant. Some of it is below.
Don’t choose a location based on the proximity to your house.
You can choose to work with a broker. They have done a lot of the homework below already and are experienced, but you have to keep in mind that they make money regardless of the type of deal they’ve worked out for you.
Choosing a location in an up and coming neighborhood may be a bargain as far as rent is concerned, but if you do the math and consider foot-traffic and being busy during the week vs. only being full on Friday and Saturday nights you may find it to your advantage to choose a location in a higher rent area. Look at your business plan and your estimated sales per seat. Can you make it work if you’re less than full all the time?
Base it on the following criteria:
• Population – office and daytime as well as night time. Spend an evening hanging out by the front door. Does it have the feel your target audience will feel comfortable with?
• How many households are with ½ a mile?
• What is the disposable income for those households?
• What are the food expenditures for those households?
• What is the Metro pedestrian count?
• What is the vehicular traffic count?
• What is the average age?
• Are there nightlife/activity generators in the area? Entertainment, theaters, universities, hospitals, other restaurants, what is the retail density? Is it a tourist area?
• The Washington DC Economic Partnership provides free resources to help you with your choices here: http://www.wdcep.com/tools-research
• Some of the suggestions from the group included the Rhode Island Ave. N.E. development area, Lower Georgia Ave. N.W. corridor, Ward 5, and Anacostia.
Regarding site-specific criteria once you’ve chose a general area:
• What is the size? Is it big enough to do what you want to do? Does it have enough seats to make the numbers in your business plan work? Does it have too many for your production capabilities/desires? Can you adjust your business plan to fit the space? If not, find another space.
• What kind of exposure does it have? We’ve seen multi-million dollar flops because they were a block in the wrong direction or on the second floor of a building with no exposure.
• What is the frontage?
• What is the ceiling height?
• Is the HVAC suitable for a restaurant with a kitchen putting out lots of heat?
• Does it have the proper gas lines? 2.5” lines are required for a commercial kitchen.
• Is the electrical up to spec? It needs to be 225 amps of 120/208 volt, 3 phase-4 wire service.
• Does it have parking? If not, it had better be near a Metro stop or in a high pedestrian-volume area.
• Does it allow signage? Check with your landlord. Also see the note about historical districts in the first post in this series.
• Co-tenancy: give preference to super regional destination oriented venues; key national tenants; transportation complexes.
• Outside seating…we’ve got some nice weather here. It’s so DC!
• Is it highly visible from major access points?
The majority of the people on the panel who voiced an opinion said it’s a good idea to buy the building rather than lease. It gives you some extra stability and proves to the banks that you’ve got skin in the game.
Consider the following regarding leasing:
• The typical commercial lease is what they call Triple Net. That means the tenant pays base rent and expenses including common area maintenance (CAM), taxes, and insurance.
• Space size – identify spaces that support what you want to do. Don’t lease excess space unless you know you’re going to need it in the short-term.
• Base Rent – Annual rental amount. Always check the rents in the area to make sure it’s in line with comparable properties around yours. Find out what they are BEFORE you start negotiations.
• T.I. Dollars – Tenant Improvement Dollars. Always negotiate to get the landlord to contribute to the cost of the build-out.
• Lease/Rent Commencement – Lease commencement will begin upon lease execution, but rent commencement should begin 4-6 months after lease execution. This gives you time for design, build-out, and permitting.
• Term – Length of the lease. Take into consideration the cost of the build-out and amortization period, along with the amount of time it takes to build up the business. Typical terms are between 5-10 years. Always attempt to negotiate option terms equivalent to the primary terms.
Other lease negotiation points:
• Try to get a cap on your CAM costs – helps to control expenses throughout the terms of the lease.
• Percentage rent – use as a negotiating point if you’re trying to get lower base rent or escalations.
• Assignment rights – In the event that you want to transfer the business to someone else because it fails, you want out, or you want to bring in a partner, this needs to be in the contract.
• Make sure there is no rent acceleration in the lease. This is the right of a landlord to accelerate the rent in the of default.
• Restriction of hours – be sure that the lease does not specify hours that you’re not willing to conform to. If you’re trying to open a nightclub and can’t serve past 11:00pm you’re in trouble. Always get the maximum number of hours of business you can specified on your lease as you may want to open early or close late for special events. Make sure you do the same on your business licenses.
• Signage – Be sure you are allowed to have signage that presents your business in the manner you choose.
• Use – Be sure that your use clause is flexible enough to be able to improvise your product mix or business plan as needs warrant.
• Termination rights – Make sure you can terminate without major penalties and without being liable for remaining rent in the event that the business fails.
There are multiple ways to finance a start-up. Some start with the 3F’s. Friends, Family and Fools. Once you’ve exhausted those, you have to go to a bank or run up your credit cards, or be independently wealthy. Usually the vanity restaurants opened by the latter fail as there isn’t the passion driving the business that scrappy independents have.
What do banks want to see?
• 3 years of financial statements and tax returns
• SBA504 financing requires 10% equity
• Credit-debt service 1.2X at a minimum
• Source of repayment – Will you have the cash flow?
• Collateral – what are you willing to put up? You may be able to amass collateral that isn’t worth anything to anyone else, but still has value as collateral.
• Guarantee – who is going to guarantee the loan? Try not to sign a personal guarantee. If you do and the business fails, you might lose a lot more than the business.
• You have to have cash in the deal to show commitment.
That’s it for location and leasing. In part III I’ll go over the build-out, marketing/branding, and more.
Stay tuned! Part three is coming soon and will focus on