• Lease Terms Restaurant Tenants Need to Understand

    Standard commercial leases are generally 25-35 pages, and can be over 50 if a complex deal. As a restaurant tenant, you want to get into the center and start making money as soon as possible, but this is no reason to rush the negotiation process. Landlords want security in the deal, and the less negotiating power you have as a tenant the more likely it is a landlord will reserve extensive protections in the lease that could end up severely financially harming tenants who perform poorly. This blog highlights important lease terms in connection to commercial restaurant leases. Tenants should strongly consider hiring a lawyer and going over the entire lease with them, with specific attention paid to the below terms.

    Delivery Date
    Receiving the building from the landlord is obviously a critical component to being able to start operating your restaurant. The typical lease will present this as a specific date of time, but tenants need to be wary of things going wrong. Old tenants might not be out in time, the landlord might not finish their work in the building by the delivery date, construction might not be completed, permits not obtained, and so on. As a tenant, you should have the goal of negotiating termination rights if the building is not delivered on time, as well as commitments by the landlord to reimburse out-of-pocket expenses that may occur due to late delivery, including the return of any security deposit.

    Opening a new restaurant requires several levels of government approvals, licenses and permits. What can really hurt a restaurant tenant is not having the necessary permits to start selling food on the first day of your lease term. To avoid this, tenants should focus on negotiating a right to terminate the lease if they are unable to obtain needed licenses or permits. This contingency will have a variety of factors, including the length of the contingency period, a list of necessary approvals, whether additional time can be granted to seek the license/permit, and any fees in the event of termination.

    Gross Sales Termination Rights
    If you’re opening a restaurant, you should already have an idea of what your annual sales need to be to make a profit, and you should negotiate around this number before signing a lease. Typically referred to as a “gross sales kick-out clause”, this provision allows a tenant to terminate the lease if sales do not reach a breakpoint number. This is an exit strategy that obviously benefits the tenant, but you should be able to convince a landlord of its benefit to them as well. A landlord doesn’t want a failing tenant, and is almost exclusively concerned with collecting rent. If sales aren’t on track to meet the annual breakpoint, both parties have benefits in ending the lease. Important pieces of this provision should include the breakpoint number itself, the measuring period, lead-time before termination, and any fees associated with termination. As a tenant, you want to be able to exercise this right as early as possible, so you can terminate with as little lost money as possible.

    Assignments and Subleases
    A tenant’s ability to assign (transfer the lease interest to a new tenant) and sublease (lease out a portion of your space to another tenant) are important provisions because it allows for greater control of a tenant’s ability to exit the lease. Tenants should try to negotiate in a way that limits to the furthest extent possible a landlord’s ability to deny or delay assignments/subleases. Moreover, Tenants should try to carve out requirements that would not require landlord consent to transfer. Often, landlords allow tenants to transfer to subsidiary or affiliate companies under tenant’s control. If a landlord demands that their consent is required, tenants should focus on negotiating more specific rules for when a landlord may or may not withhold consent. These clauses should revolve around the financial situation and management/operating experience of the prospective transferee,

    Exclusive Uses
    An exclusive use clause restricts the landlord from bringing in business that competes with the tenant. For a restaurant tenant, how much you’ll reasonably be able to restrict the landlord in this way will depend on how national of a brand the tenant’s business is, how big the center is, and the landlord’s reputation. However, it’s very unlikely that you’ll be able to prevent other restaurants from operating in the center. However, a tenant should strongly negotiate for the right to be the only restaurant of their type in the shopping center, and prevent similar restaurants from coming into the center for the duration of the tenant’s lease. Other things to consider include the scope of the landlord’s obligation to protect exclusive use rights, and any termination rights in connection to exclusive uses.

    If your restaurant is located in a mall, or if free samples is a critical component of your business, then it’s important to get rights to sample food in the lease. Tenants who adopt this business model should request the right to offer free samples, and define in the lease the areas where they can offer such samples.

    Landlord’s often will have provisions in the lease giving them the right to relocate you if they wish, and this is often a restaurant’s tenant’s worst nightmare, as we can assume a tenant wants a specific space for good reasons. Your first goal as a tenant should be to remove this clause altogether, but this isn’t always possible. If you cannot convince a landlord to eliminate a provision like this, then you should have the following goals: restrict how often landlord can do this to once during the term; require advance notice; require the landlord to pay for everything relating to the relocation to the fullest extent possible; require that the new site be as similar as possible; and obtain the right to terminate in the event of relocation.

    Percentage Rent Exclusions
    Sometimes a landlord will demand a tenant to pay, in addition to other rent under the lease, “percentage rent.” This is simply a percentage of gross sales or revenue generated at the restaurant. Tenants should try to avoid having to pay percentage rent, but if you’re dealing with a landlord who has a good bit more negotiating leverage, it might be unavoidable. If a tenant has to end up paying percentage rent, try to negotiate the following exclusions:
    • Excise taxes on sales or services where such taxes are paid by the tenant directly to the taxing authority.
    • Any cash or credit refunds from sales that are later returned by the purchaser and accepted by the tenant.
    • Transfers of merchandise between the tenant’s restaurants solely made for the convenient operation of the tenant's business.
    • Any returns to shippers, distributors, or manufacturers.
    • Sales of equipment, fixtures, or other property after they have exhausted their substantial use in the tenant's business, but this does not include any stock sales or transfers.
    • Gift cards before they have been redeemed.
    • Insurance proceeds or other sums/losses received or paid in connection to a settlement or legal claim.
    • Contributions/donations to nonprofit or charitable organizations unless such contributions result in profit to the tenant.
    • The value of any promotional sales.
    • The value of automatic gratuities, tips, service fees and commissions, including any ATM service fees. 

    Common Area Charges
    If a tenant is operating in a shopping center, there are going to be areas designated for common use, and a landlord will almost always charge the tenants to repair and maintain these common areas. In negotiations, a tenant’s goal should be to minimize such charges. A tenant can try to do so by limiting the following expenses:
    • Exclude certain costs from the definition of common area charges.
    • Reduce what is included in the definition of the common areas.
    • Limit the landlord’s ability to exclude certain portions of the shopping center.
    • Implement a cap that prevents a tenant’s share of common area charges from increasing on a year-to-year basis by more than a specific percentage.
      • This might be a fixed percentage.
      • Or, this might be a variable number, based on a consumer price index.
      • Landlords will want to exclude from any cap uncontrollable costs such as taxes, insurance, and utilities.
      • Landlords will also want to apply caps on a cumulative basis, and a tenant should try to avoid this because it allows the landlord to carryover costs from previous years. 

    Personal Guaranty
    Landlords often require tenants to obtain a personal guaranty - someone who will perform the tenant's obligations (mostly its monetary obligations) if the tenant fails to do so. Depending on the bargaining strength of the respective parties, there are a few ways a tenant might be able to limit liability under a personal guaranty.
    Implementing a burn-off clause terminates personal liability of the guarantor if the tenant does not default in a certain amount of time (e.g., the first two years of the lease).
    Implementing a rollover clause that terminates the personal guarantor’s liability after a certain amount of time and only up to a certain amount of rent (e.g., up to two years of rent for the first four years).

    Security Deposit
    While security deposits are often the first month or two of rent, sometimes landlord’s will require large security deposits to feel safe entering into the deal. If a landlord is demanding a tenant to pay a particularly large amount, try to negotiate a provision that requires the landlord to refund the tenant if it does not default on the lease after a certain period of time (e.g., 50% of the security deposit will be refunded after one year of no uncured defaults, with the remaining 50% to be refunded after three years of the same).
  • What Grade of Beef Should a Restaurant Buy?

    When you’re buying food for your restaurant, you need to be thinking about whether that product is a commodity or speciality.  When cooking with specialities, higher grade products are going to have a major impact on the taste of your final dish.  Beef is a prime example of a speciality product, and restaurant owners should strongly consider buying premium beef to enhance the flavor of their red-meat meals.  If you are looking to present high-quality brisket to the customer, spending some extra money on higher-grade beef will go a long way to enhance customer satisfaction. 

    For more on this topic, check out our blog about Why you Should Buy Commodity Pork

  • What Kind of Pork Should a Restaurant Buy?

    When you’re buying food for your restaurant, you need to be thinking about whether that product is a commodity or specialty.  When cooking with commodities, the difference between a cheaper and more expensive quality will be minimal in the taste of the final product.  There is no need to spend money on the highest quality commodities when doing so makes no change to the final product.  Pork is an example of a commodity where moving from mid-to-high grade pork will have little impact on the taste of your final dish.  Restaurant owners should be hunting for the lowest price, mid-grade pork they can find and do not fall into the trap of buying the highest quality pork with expectations it’s going to elevate your dishes. 

    For more on this, check out our blog about Why the Cheese Melt You Buy Doesn’t Matter

  • What Cheese Melt Should you Buy for a Restaurant?

    When you’re buying food for your restaurant, you need to be thinking about whether that product is a commodity or speciality.  When cooking with commodities, the difference between a cheaper and more expensive quality will be minimal in the taste of the final product.  There is no need to spend money on the highest quality commodities when doing so makes no change to the final product.  

    A cheese melt is an example of a commodity, and one melt to the next will have very little impact on your final dish.  Vendors will get cheese melts and package it differently for different prices, but as a restaurant owner, you should be hunting the lowest price, don’t fall for claims that higher quality will yield better results in your food.

    For more on this, check out our blog about Why you Should Buy Commodity Pork

  • How to Open a BBQ Restaurant in Michigan

    The first thing you need to do is negotiate a contract with a landlord, assuming you don’t already own the building. After your space is secure, the next step will be to order the necessary equipment, remembering to plan at least 2-3 months for delivery. As you wait on your equipment, reach out to a qualified architect to provide you with a drawing. These drawings will lay out the particulars for your space, including where to place your equipment, which permits you will need, and how to properly move any electrical or plumbing lines.

    At this point, you’re ready to move into the final phases. Start by sending over your drawings to the Health, Building and Mechanical Departments and await their approval. As you await approval, reach out to contractors and establish a proper time for them to come and make any necessary changes to your space and install your equipment. Remember that the contractors should only do this after approvals are obtained. After all of this, reach out to the Health Department so they can conduct their initial walkthrough. With their sign off, it is time to order food and open up your restaurant. Once opened, reach out one more time to the Health Department for a second walkthrough. If there are no issues, you are in the clear, and it is time to start selling your delicious food to the masses!

  • Why Do Restaurants Fail so Often? There’s a Silent Killer

    You often see stats like, “80% of Restaurants Fail in Their First Three Years”. There are countless clips of investors saying never to invest in a restaurant. So why do they so often fail?

    Sales Tax. It sounds absurd, but not accounting for it properly can quickly become the kill shot in a company that relies on thin margins. In Michigan the Sales Tax is 6%, the average (successful) restaurant has 3-5% profit margins. This means forgetting to account for sales tax can take what looks like a profitable business and quickly put it in a desperate situation.

  • How to Build a Restaurant Kitchen

    The first step to building a kitchen is determining the equipment needed. To do this, take an honest look at your menu items and decide which pieces of equipment are imperative and which tools will hardly ever be used.

    If all it takes to avoid purchasing an expensive piece of equipment is losing one or two menu items, it may be a great idea to cut those menu items. Especially if you want to expand in the future. It isn’t just saving thousands of dollars one time, it’s saving it that money every time you open another restaurant, it’s saving money and hassle every time the equipment breaks, it’s saving time training every new employee.

    Here is a list of the equipment in our kitchens:

    • 6 Burner Range with Oven
    • Single Door Convection Oven
    • Small Fryer
    • Hot Box
    • Sandwich Cooler
    • Low Boy Cooler
    • Dish Room
    • Undercounter Dishmachine
    • Triple Sink
    • Prep Sink

    The next step in building your kitchen is to plan the flow of the kitchen. You want to minimize unnecessary movement. Every extra step employees have to take leads to longer ticket times, and more chances of bumping, spilling, and injury.

    This step is demonstrated brilliantly by the movie The Founder.

  • How to Pick a Restaurant Location?

    When selecting new locations there are a few key aspects to looks for.

    • Size – Maybe the most crucial step, learn more here.
    • Rent – We like to look at the cost per square foot.
    • Equipment – What is included in the building? What equipment do you need to purchase? MAIN EQUIPMENT TO LOOK FOR – Hood System and Refrigeration.
    • Foot Traffic – How many people are walking by the restaurant (A good practice is to sit outside the property in question and count how many people walk by at lunch and dinner. Try this on weekdays and weekends).
    • Car Traffic – How many people are driving by the restaurant. Use the same tip mentioned above for foot traffic.
    • Demographics – Be sure to check out the most recent census. Does this town look like it’s growing or shrinking? Do your menu items fit in the average person’s price point?
    • Cannibalizing – How far away are you from your other restaurants? You want to make sure that you’re not pulling sales away from other locations.

    After you pick a location, it’s time to plan your kitchen. We discuss that extensively!

  • How Large Should Your Restaurant Be?

    When you walk into a large restaurant that’s well decorated and filled with people, it can be a thing of beauty. But this is the exception, not the rule. When you start planning the opening of a new restaurant it’s incredibly exciting. Mistakes made in the early period of planning can quickly lead to a failed restaurant.

    Saddleback takes an atypical approach to opening new restaurants. We try to keep our emotions out of decision making. This isn’t a house. This is a business. We try to bootstrap EVERYTHING. We try to NEVER take on debt. We pick small spaces over large spaces. We would rather have a line at the door, than have the restaurant feel empty.

    Anytime you are making a decision about the future of the restaurant keep in mind 60% of restaurants fail in their first year, 80% fail in their first five years. This is largely because restaurants take on too much debt, have too large of floor plan, don’t accurately calculate food costs, and aren’t paying attention to labor.

    For more on picking the right restaurant location, we go into much more detail here!

  • What is a Packer Brisket? What is the Point and Flat?

    A full brisket can be classified as a “Packer Brisket”. This means it contains both main muscles the point and the flat. Rarely do I hear of people smoking just the “point” but you can find the “flat” at grocery stores. That can be good for pickling and making corn beef.

    The brisket point and flat confused me when I started barbecue. I always got them mixed up. Flat means just what it sounds like, it’s flat. The brisket kind of forms a point and that is what always confused me but the flat part or the part that is slim is considered the Flat. The hump or part that seems a little meatier is the Point. Both are great when it comes to brisket. Typically the flat is known for being a little leaner. The Point is known for being a little fattier. Neither are wrong choices and both have their benefits. For pictures, I like showing off the flat, but to eat I am more of a point kind of guy.

  • What Kind of Brisket Should I Buy?

    One of the things that you should pay close attention to is the USDA grading system. It’s broken down into three main classifications:

    Prime – Best

    Choice – Second Best

    Select – Worst

    The main aspect that separates each score is marbling. The best way to describe marbling is the white streaks that flow in your steak. The more streaks of fat the better the grade.

    When shopping you may notice meats that don’t fall in this category. One example is Certified Angus Beef or CAB.

    Certified Angus beef is a brand that has its own grading scale. CAB comes mostly from black Angus cattle. When graded on the traditional USDA system, CAB typically falls somewhere between Prime and Choice.

    Another example of something outside of the USDA classification system is Kobe/Wagyu. When it comes to these two categories it is good to have an educated butcher in your back pocket.

    Alight, so here it goes…. Kobe beef is actually a place in Japan that is known for its Waygu or translated to “Japanese Cattle.” True Kobe beef is very very hard to come by in the US. Maybe, just maybe the high-end, big-city steakhouse might carry it. If they do, ask for documentation before buying it.

    American Waygu is probably what most people are commonly seeing at their local Costco or maybe on TV. American Waygu is typically a breed of Japanese Waygu crossbreed with an American Black Angus.

  • Toast Reward Points - Triple Points

    Mondays are TRIPLE REWARDS Points Mondays!

    When you place an order on Mondays you will receive TRIPLE the normal rewards amount. That means that for every dollar you spend, you’ll receive 3 points instead of 1! What does that mean? Basically that means that you will be getting 15% back for all of your orders placed on Mondays! That’s a pretty sweet deal if we do say so ourself. Available at both locations on Mondays.