How to Find National Restaurant Tenant in Small Town

Question

Hey guys,

I have a family member that has a nice commercial building that's currently rented as a restaurant. It's an attractive building, built in 2003, and has some recent updates (bar addition, new HVAC).

The problem is, it's rented to the wrong tenant. Right now it's a Chinese restaurant. It use to be a Chinese/Japanese Combo with Sushi and a bar, but the Japanese partner left and it's been going down hill since.

This building is 4600 sqft and right now the Chinese restaurant owner is struggling to pay even half of the rent. They've expressed interest in leaving, but right now they're just keeping them around so there's some income.

My family member has had it listed for sale for over a year with minor interest, but just recently put it up for lease as well. The building is on a main road, right across the street from Menards and directly in front of a major shopping center. The population of this town is only around 20,000.

They have a broker who has listed it, but he's located over 200 miles away and I don't think he has much knowledge of restaurants nor has the network to the national chain's tenant reps. He's even said it might be best to find someone else to try and sell/lease the property.

What are some steps we can take to find a National Restaurant tenant or find a broker that has the connections to get it leased?

Joel Owens · Answer

You have a lot going on there. Is the 4,600 sq ft inline with other buildings or is it free standing sitting on it's own building and dirt parcel? Is this mom and pop tenant a one location owner or do they have other locations? Does the business per the lease have to disclose sales and update ongoing business and personal financials? Was the business profitable before with a Japanese and Chinese combo? If so what did most of the business and where did the main profit generation come from? Example the stats might tell you that Japanese did 40% of the sales but Chinese did 60% of sales and had barely any profit compared to triple the profit with the Japanese concept. Do you know how many Japanese/ Chinese restaurants (competition) in a 3 mile ring radius? When you say population of town is 20,000 is that 1,3,5 mile ring radius? Someone might say population is 20,000 within city limits but then outside of city limits there is another 40,000 in a few mile ring radius etc. 4,600 is a large space for a restaurant concept. Most are half that space these days. If a mom and pop operator takes on that property likely they want very low rent. The owner might want to do a split conversion to make a 2 or 3 tenant type property at possibly higher rents per ft. As for a national tenant going into the space that is highly doubtful. Most stick to main metro areas that are urban to strong suburban with at least 50,000 population in a 5 mile radius and traffic counts minimum of about 20,000 cars per day. Your city or county economic department should know the traffic count stats. If not the state DOT (department of transportation) usually has a site with traffic counts year over year to see if growing, stagnant, or declining. You should also check on any slated DOT right away projects to potentially put in curb cuts, traffic lights, road widening and see if that takes away land from your families parcel and affects parking or building functionality and layout ratios. Another key component is how long the ongoing construction will last? If the project is slated for say 1 year generally because of weather, workers, and funding the timelines can often go into 1.5 to 2 years to complete. Mom and pop tenants tend to live hand to mouth so construction can deter consumers to not go to buildings for business (hassle factor) until construction is completed. Mom and pop tenants sales take a dive and they can't hold on and space goes dark. National tenants can usually weather the storm well with heavy reserves in place from larger franchisees or parent corporate operators. The broker 200 miles away and a small property like this likely isn't going to put much time into it at all. Leasing is a very low income activity for a commercial broker which is just right above property management. Sales typically gets the broker the highest return on time. You need to know if the current in place rents are at, above, or below current market rents and what the highest and best use for the property is with a (void analysis report) for the area. In your lease did the Japanese operator stay on the hook even when sold off? Is their a personal guarantee? Even if Japanese operator sold off you might still have kept him on the hook for the lease and might of helped with an early termination fee to get another tenant in where the costs of lost rents, tenant improvements, attorney legal fees, and any leasing commissions were covered. At this point you really have to look at what does the lease and all amendments say to see what options are available. Is it a gross lease, NN, absolute NNN? If an operator has a personal guarantee what is their net worth? Is it all tied up into retirement accounts that are virtually untouchable? If it's a single entity corporate guarantee they can likely remote bankrupt it and walk away from the business. Does the operator own their equipment inside the space or is it a bunch of UCC liens with loans on it? If they own and leave the equipment you might get 10 to 15 cents on the dollar for it. If another tenant with the same concept can come in that can usually save tenant improvements dollars landlord might have to pay because concept is almost identical. When you have to change box size and concept then more work, time, and money is involved. Good luck. No legal advice given.

Josh Ridpath · Answer

Reach out to a broker with a national firm who specializes in leasing to national restaurant tenants.