This article hopes to give you the knowledge you need regarding Restaurants, to feel that you have a firm grasp on the subject. Restaurants really are a favorite commercial property for a lot of investors because: Tenants usually sign an extremely long term, e. g. two decades absolute triple net (NNN) leases. What this means is, form rent, tenants also purchase property taxes, insurance and all maintenance expenses. The one thing the investor needs to pay may be the mortgage, which offers very predictable income. You will find either no or few landlord responsibilities since the tenant accounts for maintenance. This enables the investor additional time to complete thing in life, e. g. retire. Whatever you do is just take the rent always check to the financial institution. This is among the key benefits in purchasing a restaurant or single-tenant property. Whether rich or poor, people have to eat. Americans are eating at restaurants more regularly because they are too busy to cook and cleanup the pots & pans afterward which happens to be the worst part! Based on the National Restaurant Association, the country's restaurant industry currently involves 937, 000 restaurants and is likely to reach $537 billion in sales in 2007, when compared with just $322 billion in 1997 and $200 billion in 1987 (in current dollars). In 2006, for each dollar Americans invest in foods, 48 cents were spent in restaurants. So long as there was civilization on the planet, you will see restaurants and the investor will feel at ease that the home is definitely in popular. You realize your tenants will require excellent care of one's property because it's within their most useful interest to do this. Few clients, if any, want to visit a restaurant which has a filthy bathroom and/or trash in the parking lot. However, restaurants aren't created equal, from an investment standpoint. Franchised versus Independent One usually hears that 9 out of 10 new restaurants will fail in the very first year; however, this is simply an urban myth as you will find no conclusive studies with this. There's merely a study by Associate Professor of Hospitality, Dr. H. G. Parsa of Ohio State University who tracked new restaurants positioned in the town Columbus, Ohio throughout the period from 1996 to 1999 (Note: you shouldn't draw the final outcome that the outcomes would be the same every-where else in america or throughout every other cycles. )#) Dr. Parsa observed that seafood restaurants were the safest ventures and that Mexican restaurants go through the highest rate of failure in Columbus, OH. His study also found 26% of new restaurants closed in the very first year in Columbus, OH throughout 1996 to 1999. Besides economic failure, the reason why for restaurants closing include divorce, illness, and unwillingness to commit immense time toward operation of the company. Predicated on this study, it might be safe to predict that the longer the restaurant has been around business, the much more likely it will likely be operating the next year so the landlord will continue steadily to have the rent. For franchised restaurants, a franchisee should have a particular minimal number of non-borrowed cash/capital, e. g. $300, 000 for McDonald's, to qualify. The franchisee needs to pay a one-time franchisee fee about $30, 000 to $50, 000. Additionally, the franchisee has contribute royalty and advertising fees add up to about 4% and 3% of sales revenue, respectively. Consequently, the franchisee receives training on how best to setup and operate an established and successful business without fretting about the marketing part. Consequently, a franchised restaurant gets clients the moment the open sign is set up. If the franchisee neglect to run the company at the place, the franchise might replace the present franchisee with a brand new one. The king of franchised hamburger restaurants may be the fast-food chain McDonald's with over 32000 locations in 118 countries (about 14, 000 in america) by 2010. It has $34. 2B in sales in 2011 with typically $2. 4M in revenue per US location. McDonald's currently captures over 50% market share of the $64 billion US hamburger restaurant market. Its sales are up 26% within the last 5 years. Distant behind is Wendy's (average sales of $1. 5M) with $8. 5B in sales and 5904 stores. Burger King ranks third (average sales of $1. 2M) with $8. 4B in sale, 7264 stores and 13% of the hamburger restaurant market share (among all restaurant chains, Subway is ranked number 2 with $11. 4B in sales, 23, 850 stores, and Star-bucks number three with $9. 8B in sales and 11, 158 stores). McDonald's success apparently isn't caused by how delicious its Big Mac tastes but another thing more complicated. Per a survey of 28, 000 on line subscribers of Consumer Report magazine, McDonald's hamburgers rank last among 18 national and regional junk food chains. It received a score of 5. 6 on a scale of just one to 10 with 10 being the very best, behind Jack In the Box (6. 3), Burger King (6. 3), Wendy's (6. 6), Sonic Drive In (6. 6), Carl's Jr (6. 9), Backyard Burgers (7. 6), Five Guys Burgers (7. 9), and In-N-Out Burgers (7. 9). Fast-food chains often detect new trends faster. For instance, they're open as soon as 5AM as Americans are increasingly buying their breakfasts earlier in the day. Also, they are trying to sell more cafe; latte; fresh fruit smoothies to contend with Star-bucks and Jumba Juice. Additionally you see more salads on the menu. Thus giving clients more reasons to prevent by at fast-food restaurants and make sure they are more desirable to different clients. With independent restaurants, it usually requires a while to for clients in the future around and try the meals. These establishments are specifically tough in the very first 12 months of opening, particularly with owners of minimal or no proven background. So generally, "mom and pop" restaurants are risky investment because of initial weak revenue. If you opt to buy non-brand name restaurant, make certain the get back is proportional to the risks that you'll be taking. It is sometimes difficult for you yourself to tell if your restaurant is really a brand or non-brand name. Some restaurant chains only operate, or are popular in a particular region. For instance, WhatABurger restaurant chain with over 700 locations in 10 states is really a extremely popular fast-food restaurant chain in Texas and Georgia. However, it continues to be not known on the West Coast by 2012. Brand chains are apt to have an internet site listing all of the locations plus other information. If you will find a restaurant web site from Google or Yahoo you are able to quickly discern if a new name is really a brand or maybe not. You may also obtain basic consumer details about nearly every chain restaurants in america on Wikipedia. The Ten Fastest-Growing Chains in 2011 with Sales Over $200 Million Based on Technomic, the next may be the 10 fastest growing restaurant chains when it comes to revenue vary from 2010 to 2011: Five Guys Burgers and Fries with $921M in sales and 32. 8% change. Chipotle Mexican Grill with $2. 261B in sales and 23. 4% change. Jimmy John's Gourmet Sandwich Shop with $895M in sales and 21. 8% change. Yard Home with $262M in sales and 21. 5% change. Firehouse Subs with $285M in sales and 21. 1% change. BJ's Restaurant & Brewhouse with $621M in sales and 20. 9% change. Buffalo Wild Wings Grill & Bar with $2. 045B in sales and 20. 1% change. Raising Cane's Chicken Fingers with $206M in sales and 18. 2% change. Noodles & Company with $300M in sales and 14. 9% vary from. Wingstop with $382M in sales and 22. 1% change. Lease & Rent Guaranty The tenants usually sign an extended term absolute triple net (NNN) lease. What this means is, form base rent, additionally they purchase all operating expenses: property taxes, insurance and maintenance expenses. For investors, the danger of maintenance expenses uncertainty is eradicated and their income is predictable. The tenants could also guarantee the rent using their own or corporate assets. Therefore, just in case they need to close down the company, they'll carry on paying rent for the life span of the lease. Here are some things you'll want to learn about the lease guaranty: Generally, the stronger the guaranty the low the get back of one's investment. The guaranty by McDonald's Corporation with a powerful "A" S&P corporate rating of a public company is more preferable than the usual small corporation owned with a franchisee with several restaurants. Consequently, a restaurant with a McDonald's corporate lease normally offers low 4. 5-5% cap (get back of investment in the first year of ownership) while McDonald's with a franchisee guaranty (over 75% of McDonalds restaurants are owned by franchisees) might offer 5-6% cap. So determine the quantity of risks you are prepared to just take as you will not get both low risks and high returns within an investment. Sometimes a multi-location franchise will form a parent company to possess all of the restaurants. Each restaurant consequently is owned with a single-entity Limited Liabilities Company (LLC) to shield the parent company from liabilities. Therefore the rent guaranty by the single-entity LLC doesn't mean much since it doesn't have much assets. A great, long guaranty doesn't create a lemon a great car. Similarly, a powerful guaranty does maybe not create a lousy restaurant a great investment. It only means the tenant will make sure you pay you the rent. So do not judge a house primarily on the guaranty. The guaranty is good before corporation that guarantees it declares bankruptcy. In those days, the organization reorganizes its operations by closing locations with low revenue and keeping the great locations, (i. e. ones with strong sales). Therefore it is more critical for you yourself to select a property at a great location. If it happens to truly have a weak guaranty, (e. g. from the small, private company), you are getting double benefits: promptly rent payment and high get back. If you buy "mom & pop" restaurant, make certain all of the principals, e. g. both mom and pop, guarantee the lease using their assets. The guaranty should be reviewed by a lawyer to ensure you're well protected. Location, Location, Location A lousy restaurant can do well at a great location while individuals with a great menu might fail at a poor location. A great location will create strong revenue for the operator and is primarily vital that you you being an investor. It will have these faculties: High traffic volume: this can draw more clients to the restaurant and thus high revenue. So a restaurant at the entrance to a regional mall or Disney World, a significant retail center, or colleges is definitely desirable. Good visibility & signage: high traffic volume should be associated with good visibility from the road. This can minmise advertising expenses and is really a constant reminder for diners in the future in. Easy ingress and egress: a restaurant found on a one-way service road running parallel to a freeway will receive a large amount of traffic and it has great visibility but isn't at an excellent location. It's hard for potential prospects to obtain right back when they skip the entrance. Additionally, it isn't possible to create a left turn. However, the restaurant just off freeway exit is easier for clients. Exceptional demographics: a restaurant must do well within an area with a sizable, growing populace and high incomes since it has more folks with money to invest. Its business should generate increasingly more income to cover increasing higher rents. Plenty of parking spaces: most chained restaurants have their very own parking lot to support clients at peak hours. If customer can't look for a parking space within minutes, there's a good chance they'll skip it and/or won’t return as frequently. An average junk food restaurant will require about 10 to 20 parking spaces per 1000 square feet of space. Junk food restaurants, e. g. McDonald's will require more parking spaces than take a seat restaurants, e. g. Olive Garden. High sales revenue: the annual gross revenue alone doesn't let you know much since larger--in term of square footage--restaurant has a tendency to have higher revenue. Therefore the rent to revenue ratio is really a better gauge of success. Please make reference to rent to revenue ratio in the research section for further discussion. High barriers to entry: this simply implies that it isn't simple to replicate this location nearby for various reasons: the region simply doesn't have anymore developable land, or the master plan doesn't allow anymore construction of commercial properties, or it's more costly to construct an identical property because of high cost of land and construction materials. Therefore, the tenant will probably renew the lease if the company is profitable. Financing Considerations Generally, the rate of interest is really a bit greater than average for restaurants because of the fact that they're single-tenant properties. To lenders, there's a perceived risk because if the restaurant is closed down, you may choose to lose 100% of one's income from that restaurant. Lenders also prefer national brand restaurants. Additionally, some lenders wont loan to out-of-state investors particularly if the restaurants are found in smaller cities. So it might be advisable for you yourself to buy franchised restaurant in major metro areas, e. g. Atlanta, Dallas. Last year it's a significant challenge to get financing for sit-down restaurant acquisitions, specifically for mom and pop and regional restaurants because of the tight credit market. However, things appear to have improved a little this year. If you wish to obtain the most useful rate and terms for the loan, you need to adhere to national franchised restaurants in major metros. When the cap rate is greater than the rate of interest of the loan, e. g. cap rate is 7. 5% while rate of interest is 6. 5%, then you should look at borrowing whenever possible. You are getting 7. 5% get back in your deposit plus 1% get back your money can buy you borrow. Ergo your total get back (cash on cash) is going to be greater than the cap rate. Additionally, because the inflation soon is likely to be higher because of rising costs of fuel, the cash that you simply borrow to finance your purchase is going to be worth less. Therefore it is much more good for maximize leverage now. Research Investigation You might want to examine these facets before making a decision to move forward with the purchase: Tenant's financial information: The restaurant business is labor intensive. The typical employee generates no more than $55, 000 in revenue yearly. The price of goods, e. g. foods and supplies must be around 30-35% of revenue; labor and operating expenses 45-50%; rent about 7-12%. So do review the earnings and loss (P&L) statements, if available, together with your accountant. In the P&L statement, you might begin to see the acronym EBITDAR. It means Earnings Before Taxes, Depreciation (of equipment), Amortization (of capital improvement), and Rent. If you do not see royalty fees in P&L of a franchised restaurant or advertising expenses in the P&L of a completely independent restaurant, you might want to comprehend the key reason why. Obviously, we shall want to make certain that the restaurant is profitable right after paying the rent. Ideally, you'd like to see net profits add up to 10-20% of the gross revenue. Within the last couple of years the economy has had a beating. Consequently, restaurants have observed a reduction in gross revenue of around 3-4%. This appears to have impacted most, or even all, restaurants every-where. Additionally, it might take a brand new restaurant many years to achieve potential revenue target. So do not are expecting new locations to be profitable immediately even for chained restaurants. Tenant's credit rating: if the tenant is really a private corporation, you might be able to have the tenant's credit rating from Dun & Bradstreet (D&B). D&B provides Paydex score, the company exact carbon copy of FICO, i. e. personal credit rating score. This score ranges from 1 to 100, with higher scores indicating better payment performance. A Paydex score of 75 is the same as FICO score of 700. So if your tenant includes a Paydex score of 80, you'll probably have the rent checks promptly. Rent to revenue ratio: this is actually the ratio of base rent within the annual product sales of the store. It's a quick method to determine if the restaurant is profitable, i. e. the low the ratio, the greater the place. Usually of thumb you will need to keep this ratio significantly less than 10% which indicates that the place has strong revenue. If the ratio is significantly less than 7%, the operator will very possible make lots of money right after paying the rent. The rent guaranty may not be essential in this instance. However, the rent to revenue ratio isn't an exact method to determine if the tenant is creating a profit or maybe not. It doesn't look at the property taxes expense included in the rent. Property taxes--computed as a portion of assessed value--vary from states to states. For instance, in California it's about 1. 25% of the assessed value, 3% in Texas, so that as high as 10% in Illinois. And thus a restaurant with rent to income ratio of 8% might be profitable in a single state but be taking a loss in yet another. Parking spaces: restaurants often require a higher quantity of parking spaces because most diners often visit inside a small time window. You'll need at the very least 8 parking spaces per 1000 Square Feet (SF) of restaurant space. Junk food restaurants may require about 15 to 18 spaces per 1000 SF. Termination Clause: a few of the longterm leases provide the tenant a choice to terminate the lease should there be considered a fire destroying a particular percentage of the home. Obviously, this isn't desirable for you if that percentage is too low, e. g. 10%. So be sure you browse the lease. Additionally you want to ensure the insurance plan also covers rental income loss for 12-24 months just in case the home is damaged by fire or natural disasters. Price per SF: you need to pay about $200 to $500 per SF. In California you need to pay reasonably limited, e. g. $1000 per SF for Star-bucks restaurants which are usually sold at high price per SF. In the event that you pay a lot more than $500 per SF for the restaurant, be sure you have justification for doing this. Rent per SF: ideally you need to buy property where the rent per SF is low, e. g. $2 to $3 per SF monthly. Thus giving you room to boost the rent later on. Besides, the reduced rent ensures the tenant's business is profitable, so he'll be around to help keep paying the rent. Star-bucks often pay reasonably limited rent $2 to 4 per SF monthly being that they are usually located at reasonably limited location with plenty of traffic and high visibility. In the event that you plan to purchase a restaurant where the tenant pays a lot more than $4 per SF monthly, be sure you could justify your final decision because it's hard to create a profit in the restaurant business once the tenant is paying higher rent. Some restaurants might have a portion clause. What this means is form minimum base rent, the operator also pays you a portion of his revenue when it reaches a particular threshold. Rent increase: A restaurant landlord will normally receive whether 2% annual rent increase or perhaps a 10% increase every 5 years. Being an investor you need to prefer 2% annual rent increase because 5 years is quite a long time to hold back for a raise. Additionally, you will receive more rent with 2% annual increase than 10% increase every 5 years. Besides, since the rent increases each year so does the worthiness of one's investment. The worthiness of restaurant is usually in line with the rent it creates. If the rent is increased as the market cap remains the same, your investment will appreciate in value. So there was no key advantage for purchasing a restaurant in a particular area, e. g. California. It's more vital that you select a restaurant at an excellent location. Lease term: generally investors favor longterm, e. g. 20 year lease so that they do not have to be worried about finding new tenants. Throughout a period with low inflation, e. g. 1% to 2%, this really is fine. However, once the inflation is high, e. g. 4%, what this means is you will technically get less rent if the rent increase is just 2%. So do not eliminate properties with a couple of years left of the lease as there might be strong upside potential. Once the lease expires without options, the tenant might have to pay higher market rent. Risks versus Investment Returns: being an investor, you prefer properties that provide high get back, e. g. 8% to 9% cap rate. Which means you might be drawn to a fresh franchised restaurant offered available with a developer. In this instance, the developer builds the restaurants completely with Furniture, Fixtures and Equipment (FFEs) for the franchisee in line with the franchise specifications. The franchisee signs a two decades absolute NNN lease paying very generous rent per SF, e. g. $4 to $5 per SF monthly. The brand new franchisee is willing to do this because that he doesn't need to generate any cash to open a company. Investors are worked up about the high get back; however, this can be an extremely risky investment. The main one who's fully guaranteed to create money may be the developer. The franchisee might not be prepared to hang on throughout a down economy as that he doesn't have any equity in the home. If the franchisee's business fails, you might not have the ability to look for a tenant prepared to pay such high rent, and you'll end up getting a vacant restaurant. Track records of the operator: the restaurant being run by an operator with one or two recently-open restaurants will likely be a riskier investment. However, an operator with two decades in the commercial and 30 locations might be prone to be around next year to pay for you the rent. Trade fixtures: some restaurants can be purchased with trade fixtures so be sure you document on paper what's contained in the sale. Fast-food versus Sit-down: while fast-food restaurants, e. g. McDonalds prosper throughout the downturn, sit-down family restaurants tend to be sensitive and painful to the recession because of higher prices and high expenses. These restaurants might experience double-digit drop in year-to-year revenue. Consequently, many sit-down restaurants were turn off throughout the recession. In the event that you consider purchasing a sit-down restaurant, you need to choose one within an area with high income and large populace. Sale & Lease Right back Sometimes the restaurant operator might sell the actual estate part after which lease right back the home for a long period, e. g. two decades. An average investor would wonder if the operator is in financial trouble to ensure that he's to market the home to cover his debts. It might or might not be the case; however, this can be a fast and simple method for the restaurant operator to obtain cash from the equities permanently reason: business expansion. Obviously, the operator could refinance the home with cash out but that might not be your best option because: That he can't maximize the money out as lenders usually lend only 65% of the home value in a refinance situation. The loan will show so long term debt in the total amount sheet that is usually maybe not viewed in an optimistic light. The rates of interest might not be as favorable if the restaurant operator doesn't have a powerful balance sheet. That he might not be in a position to find any lenders because of the tight credit market. You will frequently see 2 different cash out strategies whenever you consider the rent paid by the restaurant operator: Conservative market rent: the operator wants to ensure that he pays a decreased rent so his restaurant business includes a good possibility of being profitable. That he offers conservative cap rate to investors, e. g. 7% cap. Consequently, his cash out amount is small to moderate. This can be a minimal risk investment for an investor since the tenant is prone to have the ability to pay the rent. Dramatically greater than market rent: the operator really wants to maximize his cash out by pricing the home higher than its market value, e. g. $2M for a $1M property. Investors are occasionally offered high cap rate, e. g. 10%. The operator might pay $5 of rent per square foot within an area where in fact the rent for comparable properties is $3 per square foot. Consequently, the restaurant business only at that location might suffer a loss because of higher rents. However, the operator gets just as much money as you are able to. This property might be very risky for you personally. If the tenant's business does maybe not allow it to be and that he declares bankruptcy, you'll have to offer lower rent to a different tenant to lease your building. Ground Lease Sporadically you visit a restaurant on ground lease available. The word ground lease might be confusing since it could mean You purchase the building and lease the land owned by yet another investor on a long-term, e. g. 50 years, ground lease. You purchase the land where the tenant owns the building. This is actually the probably scenario. The tenant builds the restaurant using its own money after which an average of signs a two decades NNN lease to lease the lot. If the tenant does maybe not renew the lease then your building is reverted to the landowner. The cap rate is usually 1% lower, e. g. 6 to 7. 25 %, when compared with restaurants by which you purchase both land and building. Helpful Tip: Are you trying to search for more tips and tricks about “Birmingham bars”? Do may know that you can find a lot of information regarding this topic area if you can copy and paste the keyword “afternoon tea in Birmingham” into the search box of this article directory? Because the tenant needs to invest a lot of money (whether its or borrowed funds) for the construction of the building, it needs to be double sure this is actually the right location because of its business. Additionally, if the tenant fail to help make the rent payment or neglect to renew the lease, the building with substantial value will revert for you while the landowner. Therefore the tenant will eventually lose much more, both business and building, if it doesn't fulfill its obligation. And therefore it thinks twice about maybe not submitting the rent checks. For the reason that sense, this can be a bit safer investment than the usual restaurant that you simply own both land and improvements. Form lower cap rate, the major drawbacks for ground lease are You will find no tax write-offs since the IRS does maybe not permit you to depreciate its land value. So that your tax liabilities are higher. The tenants, however, can depreciate 100% the worthiness of the buildings and equipments to offset the earnings from the company. If the home is damaged by fire or natural disasters, e. g. tornados, some leases might permit the tenants to gather insurance proceeds and terminate the lease without rebuilding the properties within the last couple of years of the lease. Regrettably, this author isn't conscious of any insurance providers that could sell fire insurance for you because you do not own the building. Therefore the risk is substantial since you may wind up running a very costly vacant lot without any income and an enormous property taxes bill. A few of the leases permit the tenants lacking to create any structure, e. g. roof, repairs within the last couple of years of the lease. This might require investors to put money into deferred maintenance expenses and therefore may have negative effect on the money flow of the home. No matter which way you look at it, having a firm understanding of this topic area regarding Restaurants will benefit you, even if it is just slightly.
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