November 12, 2018 |
Restaurants by and large have always operated on a fixed rent model with landlords. They calculate their running costs and projected sales to determine where they can afford to rent, how much they’re willing to pay, how much the rent will eat out of their profits, and then negotiate a contract with the landlord through a broker. The landlord has to look at variables such as how successful they expect the restaurant to be, the restaurant owner’s credit quality, and how they’ll operate as a business. But with a wide variety other businesses switching to revenue-split models of operation, is fixed-rent outdated, and should landlords look at embracing rev-share as an option for leasing?
One potential advantage for switching to a revenue-split model of rent is immediately apparent for landlords. If the restaurant becomes wildly successful, the landlord could expect to see a greater amount of profit than they may have otherwise taken on a fixed rent model. An advantage for the tenant would be that the landlord would likely want to play a more proactive and helpful role in ensuring the restaurant is a success, and may help them to clear many of the hurdles restaurants face during setup. And if the landlord had been struggling to rent their unit initially, a revenue-split model could be an attractive incentive to startup restaurants. An unrented establishment makes no money, and the longer it goes unrented, the worse the location looks.
The landlord’s reputation would also increase upon the success of their leased unit, and would make any other units they have more attractive to other potential tenants. The general rule of thumb for restaurants in that their total cost of occupancy shouldn’t exceed 6-10% of their gross sales. So landlords could cut a deal with the restaurant owners to receive 6-10% of the gross sales cost.
Conflict could arise though if the restaurant does not perform as well as expected. And there’s quite a high chance of that happening, considering the restaurant industry is notoriously high risk and they often fail. The landlord would need adequate clauses in the contract in event of that happening, perhaps agreeing to a minimum amount of rent to be paid, and factoring the amount of credit tenants have available if things go pear-shaped.
Equally, conflict could arise if the restaurant has a sustained period of wild success. They may feel that they are paying way above the odds for their rent and that it’s taking too big a bite out of their profits. However, caps could be negotiated into contracts at the beginning to mitigate this. The landlord may also have other properties, where they could negotiate a second restaurant branch with the tenant, for a lower revenue split. Or, with the trust and reputation the tenant has built operating one successful restaurant, it would stand them in good stead to negotiate opening another, with a different landlord.
However, negotiating contracts between restaurant tenants and landlords is already notoriously complicated. For the restaurant to operate as a commercial space, many variables already need to be considered, such as fit-out costs, permits, alcohol licences, zoning arrangements, parking, and a huge array of other factors. Complicated does not equal impossible though, and if both parties were able to bash out a deal with an excellent broker, it could set them both up for success. Revenue split models are already in operation at some condos and malls, and turning great profits. There is no reason why similar models cannot be replicated between restaurant tenants and landlords.