Keep as Restaurant or Convert to another use?

[Jonathan Bethel]

Hi all.  I currently have a contract and am in due diligence on a foreclosed commercial property that was a popular deli/sandwich restaurant.  It still has almost all of the equipment as it looks like the owner cleaned up and closed the doors.  I do not have a desire to be an operator of a restaurant and my plan is to lease the space.  To do a cosmetic rehab it will cost around $30k.  But in order to get it back to restaurant ready it will require several other fixes and upgrades to meet health inspection requirements. I do not know yet exactly how much this would cost but my thoughts are $10-$25k.  

My question for everyone is do I repair and update and lease as a restaurant?  Or do I sell the used equipment, rehab and target a broader type of tenant?  The building is capable of being split into 2-3 units and would obviously cost above $30k to rehab because of the framing, wiring, plumbing etc of the separate units.  

The reason I am having some trouble with this decision is the dynamics of the market the property is located in.  It is a very small town. Most of the residents are low-middle class(20k-45k income) or they are 2nd home owners and retirees.  It is a tough market for a restaurant as well as most types of non professional business.  Another concern is that the property is set up as a deli style establishment so other restaurant concepts may not work without changing the layout.  For example, a Japanese steakhouse most likely would require some different features and/or layout.

Maybe I am jumping the gun and overthinking all of this but any advice or input would be greatly appreciated.

[Ryan McGowan]

Leave that up to the tenant. You have space that is available and can be marketed to retail, office, AND food service. Spaces that can market retail and office space have less potential demand than one that can also include food service. It is much harder to convert a space from retail/office into food service, so if a restaurant owner wants to lease, they have a slight advantage if they can make it mostly turn-key. They have the grease trap, the parking ratio is already there, etc.

Usually the owner will give an allowance for the T.I. and leave the remainder up to the tenant to come up with. Besides, a Quiznos is going to build out a very different setup than a Coffee Bean. I would liquidate the equipment, gut anything not bolted down, and just market it to everyone. Leave the hotline hood and the dishwashing sink. Those are really the only equipment that ever seems to get reused.