What type lease would be advisable for landlord of restaurant/bar that needs rehab?

In Leasing Property - Asked by Mark T. - Nov 4, 2010
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Answer(s)

Rob B.
Chandler, AZ

Mark....
The simple answer to this question is an NNN lease, (triple net = tenant pays everything). However, as is said the devil is in the detail,. Here are questions that lead to the detail:
(1) How long has your restaurant/bar been empty?
(2) How much will it improve the value of your property to have it leased?
(3) What is the financial strength of the prospective tenant?
(4) What is the credit history of the prospective tenant?
(5) How much are the rehab costs going to be?
(6) What is the proposed term of the lease?
(7) What is the likelihood of the new tenant being successful at this location?
What you are trying to achieve by reviewing these questions is risk and reward for both the landlord and the tenant. When you have a good handle on some of the answers, you can then let the fun begin!
That fun is the negotiations that lead to an executed lease. I suspect that the conclusion will be a negotiated lease whereby the tenant covers and controls the cost of the rehab; and the landlord provides concessions through early entry occupancy and perhaps some discounted or abated rent during each of the years of the lease.
The more qualified the prospect and the longer the term of the lease, the easier it is to come to a good middle ground on the rehabilitation costs.
Lastly, keep in mind that while an empty space does you no good as regards income, a marginal tenant may be worse; and a bad tenant must definitely be avoided! Good luck.....
Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA)
951 515-5855

Nov 4, 2010
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Michael J.
Fort Lauderdale, FL

An "Absolute" net lease or a Ground Lease could be more beneficial to the Landlord than a standard NNN lease. The difference between the NNN lease and the absolute and ground leases is primarily the liability the landlord has regarding structural repairs and CapEx (capital expenditures). There are many capital intensive costs that a Landlord may be responsible for in a standard NNN lease, such as HVAC, roof, and parking lot repairs and maintenance. Absolute net leases and Ground Leases would be the best form of lease to limit a Landlord's potential cost liability for anything related to the improvements of the Subject property.

Nov 4, 2010
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David A.
Broker/Agent
Atlanta, GA

Mark,
Rob B. gave you a great list of key elements to consider when negotiating a restaurant/bar deal. Many restaurant leases are indeed structured as NNN. If I were you, I'd consider a N or NN lease (sometimes referred to as "modified gross"). In this type of lease, the landlord typically pays taxes (N) and/or certain maintenance expenses (NN). I prefer this lease type because (as the landlord) you're collecting $$ each month to put toward taxes, roof replacement, etc. In an absolute NNN lease, you're depending on the tenant to take care of your investment and you'll inevitably be disappointed.
If your bar/restaurant tenant is having a hard time, property taxes and quality repairs will be the last thing on their mind. By the time you're able to enforce your legal rights, you may find yourself standing in line to collect damages.
In one of my personal restaurant leasing experiences, it took 12 months from the date of filing a dispossessory to receive a favorable decision from a judge and get the property back on course. During that period, we had to pay legal fees and property taxes (to avoid a tax sale)...all while collecting no rent. After regaining possession, we had to replace windows, resurface the parking lot, etc.
Like Rob B. suggested, be ready to make concessions for a solid tenant who has enough cash to do a quality renovation and keep the business afloat during the first couple of years.

Jan 10, 2011
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