Restaurant Commercial Lease
Hi all, I'll be seeing a commercial property next week for my family who has been in the food business for 30+ years. They've been at the same location and are finally looking to expand out into another location. I will be meeting the broker at the property and would like to know if there are any questions I should ask that I may not be aware of.  Obviously If we would want to pursue further, we would have a RE Commercial Lawyer assist in reviewing and modifying the lease proposed.

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Some quick bullets about the location:

* There was a grocery store / market in there beforehand and it does seems to have a HVAC installed based on the pictures
* \~2,000 square feet and asking price is $35 a sq/ft/year NNN ($2.92 per square foot a month a month base rent)
* They will most likely need to install vent and grease trap in the location.
* Taxes are about \~$10k a year but the there are 2 units in the building based on the property assessors website. This unit is roughly 41% of the total gross leasable area so i'm assuming I would be liable for that percent amount for property taxes and CAM fees.

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So overall:

* It seems i'm paying \~$2.90 for base rent a month in addition to \~$0.18 center for taxes per square foot a month = $3.08 a month per square foot a month (rent/tax)
* Common Area Maintenance I'm not sure but i'm assuming the broker should have that on hand when we meet? Again that would be based on the GLA?
* Insurance we always paid our own restaurant insurance but it seems that NNN includes the building insurance. So would that mean that we would need to purchase our own restaurant insurance covering the builder and the landlord  in addition to paying their own building insurance part of the NNN? If so, the broker should have that information on hand correct?
* We would ask for some TI to updates and install the venting system. I believe this is common.

Any assistance or insight would be most helpful. Thank you.

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Edit: incorrectly stated taxes. Adjusted so it reflects \~0.18 cents per square foot a month.

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Thank you everyone for your insights. I think what I may do at this point is get a broker to represent my family. There is a lot I don't know and it's probably best to have someone who has more experience than me in this front. At least now I will bring up some valid points mentioned. Appreciate all the responses! Thank you!

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[{"id": "egxd5lm", "text": "Ask about annual escalations. It\u2019s typically 1.5-3%. ", "replies": [{"id": "egxdbvh", "text": "Thanks for the response. You mean in regard to the base rent correct?", "replies": [{"id": "egxeccj", "text": "Yes for base rent. Keep in mind CAMs will probably increase every year too. They won\u2019t be able to tell you the exact amount but you might be able to ask for a cap on controllable expenses. ", "replies": [{"id": "egxfatj", "text": "Thank you. Should i bring up the annual escalation during this first meet as well as capping controllable expenses?", "replies": [{"id": "egxh3s2", "text": "I would let them bring up base rent escalations. ", "replies": [], "depth": 5}, {"id": "egzeenb", "text": "Yeah, bring it up, because like anything, it's negotiable. Also, make sure you get an CAPEX improvement schedule and an up to date maintenance sheet. This way you have an idea when  major projects are going to be needed and what you think they will cost you.   \n\n\n Also, since you are sharing the building, find out if the utilities are separately metered (usually are). ", "replies": [], "depth": 5}], "depth": 4}, {"id": "egxiue3", "text": "Seconding the cap on controllable expenses. Those things can be lifesavers", "replies": [], "depth": 4}, {"id": "egyv2wi", "text": "Depending on your negotiating leverage, you may be able to get caps on certain expenses- both in terms of how much can be passed through and the annual increase. For example, you would cap management fees at 3% of EGI and cap annual increases in controllable expenses at 5%.", "replies": [], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "egxd6bm", "text": "Yes the manager should have a record of the CAM charges in the past and what they project them to be. \n\nYes you will need separate insurance to cover building damage. Business liability insurance generally doesnt cover damage to the building. Ask your insurance guy he can help you make sure you have the required insurance based on the lease. \n\nI would definitely try and get them to install the vent/hood system. They can be very expensive to install. \n\nMy recommendation is to be very cautious moving forward. As a commercial broker I have seen many many successful restaurants think they can open a 2nd location and it just doesnt do well. Happens ALOT. Sometimes bad enough to sink the first one. \n\nJust because your 30 year old restaurant is killing it, doesn't mean you will double how much business you are doing by getting a second one. I'm sure you thought of this but just wanted to throw that in there. \n\nIt's kind of a phenomenon. But sometimes it's hard to pin down exactly what makes your restaurant successful to begin with. Such as maybe it's the location, the people working their, people in the neighborhood or combination of all. All of which will change when you expand. \n\nGood luck! ", "replies": [{"id": "egxdgwt", "text": "Thanks baumbach19. Just to confirm, I would be paying the landlords insurances in addition to my own insurance coverage correct? And if so, the broker should be able to provide the details of the monthly insurance cost per square foot that the landlord pays?", "replies": [{"id": "egxdtoa", "text": "Sorry with the insurance I was thinking single tenant. But you mention there are other tenants. \n\nGenerally the insurance then will be included in the CAM fees you pay to cover taxes and insurance etc , or just a direct other fee for insurance. They should be able to show you the cost of the policy for the whole building so you can make sure they aren't overcharging you. ", "replies": [{"id": "egxf6l8", "text": "Thank you for the insight. I'll ask to provide the full cost of the CAM that includes insurance policy and taxes. As for the venting/hood, is this something I should bring up to the broker at this initial meeting to gauge whether or not the owner would consider  helping pay for all or some of the cost? Also Ideally I'd like to see if they could reduce the lease a bit as well.", "replies": [{"id": "egxfohs", "text": "Yes keep in mind any convo you have with the listing broker will be shared with the owner. So you are basically negotiating from step one. Anything you say they will be judging whether or not you are a solid tenant. \n\nI would frame all negotiations on the premise that you would NEED them to do the hood system etc, or rather other properties have that so that's what you are looking for. \n\nSo next, it would help to find another property or two that are a price you rather pay, or they already have a good system etc. Even if it's not somewhere you want to go. \n\nThat way if they balk at anything you offer, you can casually mention \"well we looked at X building and Y building and they had this or that, so we will have to think about it. \n\nKeep in mind how long the property has been on the market. If it's a highly desirable property and the owner thinks it will lease fast you probably have less room to negotiate. If its been on for 8 months with not much action they are more likely to deal. ", "replies": [], "depth": 5}], "depth": 4}], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "egxdqes", "text": "Will your rent be around 10% of projected sales?", "replies": [{"id": "egxf0ch", "text": "If it's anymore than we probably should look for another location ;)", "replies": [], "depth": 2}], "depth": 1}, {"id": "egxe3yn", "text": "Yes, annual base rent. Is the broker representing you or the landlord?", "replies": [{"id": "egxf7sj", "text": "The landlord", "replies": [], "depth": 2}], "depth": 1}, {"id": "egxfp4l", "text": "You should have a broker representing you as a tenant. They would be negotiating on your behalf, especially all the lease terms in the LOI (letter of intent) prior to getting into a lease. You don't have to pay a commission, it will be paid by the landlord. But at least you will have someone negotiating with your best interest in mind. ", "replies": [], "depth": 1}, {"id": "egxj1iu", "text": "Health permits? Grease Trap? These all take time, like 6 months to 8 months. \n\nWhat term is your lease? You want about 10 years.\n\nSignage? Parking? \n\nIs it a free standing building or a shopping center? \n\nIf it is a shopping center are there any lease restrictions on food? If there is a mexican place there already, they will not allow you to cook food that competes. If there is a grocery store anchor they can limit your options too. \n\nMost restaurants fail, and you are spending a lot of time and money to change the use of this building. It takes time, make sure you are not paying rent on a space you cannot use until all the conditions are met. ", "replies": [], "depth": 1}, {"id": "egxkzof", "text": "Ask if they\u2019re gonna \u201cgross-up\u201d the expenses.  What this means is that if the other two units are vacant, they may charge you all, or some of the CAM.  It\u2019s not uncommon to gross-up expenses to 90% for a building if there is large vacancies.", "replies": [{"id": "egyvhqk", "text": "In addition to this, make sure your pro rata sf is based on the correct % - the smaller the numerator and the larger the denominator is better for you. For example, are they measuring interior walls to interior walls for your space (vs exterior)? Does the denominator get measured on lease-able versus leased? If the building is half leased, then the latter method means you\u2019re paying all of it. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "egxpe3v", "text": "Ask for a Tenant Improvement Allowance. If you are putting money into their building they can contribute as well.   If not, ask for some months of free rent as compensation for your improvements. Landlord can extend the term. 5 year lease = 60 months. Add 6 months free rent for a 66 month lease. \n \nLots of inspections. Fire suppression system, electrical, walk in refrigerator, HVAC, roof. I\u2019ve seen one if these items kill a new restaurant start up. Have the Landlord certify that all mechanical items are in good working order and will warranty repairs for the first two years. \n \nIf I\u2019m California, add property tax protection in the lease terms. Make a base year property tax and pay only annual increases spelled out for property taxes. If the property is sold and reassessed those taxes will increase, possibly significantly. \n \n", "replies": [], "depth": 1}, {"id": "egygbom", "text": "You seem to have a good idea but 2.15/ft for prop taxes seem high... Or even for CAM.  What city are you in?\n\nThat's almost $26/ft per year.  So if prop tax is 2% your building is assessed at 1300/ft?", "replies": [], "depth": 1}, {"id": "egyiisn", "text": "Something is wrong here.  You're saying taxes are 10k per year and you'll owe 41% but then say it's about $2.15 per month.  It is really $2.15 per year right?  Or about $.18 per month which makes much more sense.  ", "replies": [{"id": "eh03sdg", "text": "That's right, per month it would be roughly $0.18 center per square foot. ", "replies": [], "depth": 2}], "depth": 1}, {"id": "egykjcl", "text": "You should honestly seek out a broker for yourself as they are professionals at this", "replies": [], "depth": 1}, {"id": "egyxka1", "text": "Caution on a former market/grocery. Depending on the locale, groceries are a major demand driver so the fact that they are gone could mean you'll ha e no traffic. ", "replies": [], "depth": 1}, {"id": "eh1r6aj", "text": "get AC reports, and even a roof report if you can.  Also ask for some half rent and free rent, it is easier to get then TI dollars.  also check into monument signage, and if there is any room for you.  ", "replies": [], "depth": 1}]