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The Advantage of Being Your Business’s Landlord

By in 2014 - Volume 16

One of the biggest challenges restaurant, bar and club operators face is the cost of spiraling occupancy costs. I have seen many good operators over the years lose their successful business because they couldn’t continue to absorb the increased occupancy costs they have experienced. Unless you have a long term lease in place with reasonable fixed rent increases you can afford you are vulnerable to being priced out of the market. Under ideal circumstances your rent shouldn’t exceed five percent (5%) of net sales (gross sales less sales tax). However in many sections of the San Francisco Bay Area and in many expensive sections of Southern California I have seen rents in excess of ten percent (10%) and sometimes as high as fifteen percent (15%+) or more of sales. Needless to say businesses paying these expensive rents are being forced to sell at lower prices and/or chance the risk of going out of business as the increased operating costs they are experiencing with product costs, labor costs and other costs are putting pressures on them to absorb many of these costs as the market will not bear many increased prices. Consumer’s available discretionary cash flow for food and beverage consumption away from home is limited due to the increased costs they are experiencing across the board for many of their daily expenses versus the minimal income increases they are experiencing.

The advantages of owning your own business and building are indicated below.

  1. You can assure yourself that your rent will be at an affordable level.
  2. If you have a mortgage on the building you own you can write off the interest expense to reduce your taxable income.
  3. If the building is located in a good location you will benefit from the increased real estate appreciation you will experience as property values in the area increase which will increase your net worth.
  4. You are motivated to make improvements to the building and maintain the building in a first class manner as the improvements you make will most likely improve the value of your building.
  5. You can control your destiny and assure yourself that your business will be around for many years and maintain a good cash flow for yourself.
  6. The Small Business Administration (SBA) has some very affordable loan programs where you can finance up to eighty percent (80%) of the purchase price of the business and building. Conventional lenders also like to finance these opportunities.
  7. If you should choose to sell in the future you have the option of selling the business only and becoming the landlord and receiving rental income or you can sell the business and building together and perhaps obtain a premium as there are few businesses available with the real estate.
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About The Author
Steven Zimmerman, CBI, M&AMI, CBB, FIBBA

Steve is the Founder, Principal Broker and Chief Executive Officer of Restaurant Realty Company. Steve has personally sold/leased over 1,000 restaurant, bar and/or nightclub businesses and many related commercial buildings totaling 2+ million square feet of commercial space, collaborated with over 2,000 clients and completed over 3,000 valuations since 1996.His real estate experience also includes sales, acquisitions, management and ownership of numerous properties throughout California including restaurants, hotels, apartment buildings, single family houses, an office building and a multi-use retail building. Steve is also the author of Restaurant Dealmaker – An Insider’s Trade Secrets for Buying a Restaurant, Bar or Club available on Amazon. Prior to starting Restaurant Realty Company Steve had over 20 years of restaurant experience and was President and Chief Executive officer of Zim’s Restaurants, which was one of the largest privately owned restaurant chains in the San Francisco Bay Area. READ FULL BIO | HIRE EXPERT WITNESS - LEARN MORE