A complete guide to investment in restaurant real estate

Restaurants are a popular commercial property for many investors because:

  1. Tenants often sign long-term, 20 Year Absolute Triple Net (NNN) Lease. This means that, besides rents, tenants also pay property taxes, insurance and all maintenance costs. The investor must only pay the mortgage, which in turn offers a very predictable cash flow. There is no or no owner's responsibility because the tenant is responsible for maintenance. This allows an investor to take more time in life, for example. retreat. All you have to do is check the rent for the rent. This is one of the most important advantages in investing in a restaurant or a tenant.
  2. Whether rich or poor, people need to eat. Americans eat more often because they are too busy cooking and cleaning dishes and pots, which is often the worst! According to the National Restaurant Association, the nation's restaurant now includes 937,000 restaurants and is expected to reach $ 537 billion in 2007, compared to $ 322 billion in 1997 and $ 200 billion in the current US dollar in 1987. In 2006, every US dollar for food consumed 48 cents in restaurants. As long as there is civilization on earth, there will be restaurants and the investor can feel comfortable that the property always enjoys great demand.
  3. You know your tenants are taking good care of the property because they have the best interest in doing so. Some buyers, if any, want to go to a restaurant with a dirty bathroom and / or garbage in the parking lot.

However, restaurants are not the same from the point of view of investment.

Franchise versus Independent

] One often finds out of the 10 new restaurants that 9 will fail in the first year; but this is just a city myth, as there is no hard-working study. The University of Ohio State Dr. Pars HG has just studied the new restaurants in Columbus, Ohio, between 1996 and 1999. (19459008) Note: : you should not draw the conclusion that the results are the same everywhere in the US or any other period.) Dr. Parsa has found that seafood restaurants are the safest businesses and Mexican restaurants experience the highest failure in Columbus, OH. According to his study, 26% of restaurants closed in Columbus, Ohio, between 1996 and 1999. In addition to economic failure, the closure of restaurants is also due to divorce, bad health and dedication to skills. Based on this study, it can be safely predicted that the longer the restaurant is in the store, the more likely it is that the next year will work to let the lessor continue to receive the rent.

the franchise owner must have a minimum amount of non-borrowed cash / capital, eg $ 300,000 for McDonald's to qualify. Franchise customers have to pay a one-time franchise fee from $ 30,000 to $ 50,000. In addition, the franchisor owns royalty and advertising fees about 4% and 3% of sales revenue. A reseller is trained in how to create and operate a proven and successful business without worrying about marketing. As a result, a franchise restaurant will get customers as soon as the open sign is placed. If the franchise partner does not work on the site, the franchise can replace a new one with the current franchise. King of the franchise hamburger restaurants is McDonald's fast food chain, which in 2010 has more than 32,000 places in 118 countries (about 14,000 in the United States). In 2010, sales were $ 34.2 billion, averaging $ 2.4 million in revenue. McDonald's currently has more than 50% market share in the $ 64 billion US hamburger restaurant market. Sales in the last 5 years increased by 26%. Behind the distance Wendy (average sales: $ 1.5M), $ 8.5 billion sales and 5904 stores. Burger King ranks third (averaging $ 1.2 million), $ 8.4 billion in sales, 7264 stores, and 13 percent of the market share of the Hamburger restaurant (subway stores among the chains are the second, 11, $ 4 billion sales, 23,850 stores and Starbucks 3, $ 9.8B in dollars and 11,158 stores). McDonald's success is obviously not the result of the delicate Big Mac, but something more complicated. According to a survey of 28,000 online subscribers from the Consumer Report magazine, McDonald's hamburger is among 18 domestic and regional fast food chains. 5.6 on 10, 10 of them were the best in Jack In the Box (6.3), Burger King (6.3), Wendy (6.6), Sonic Drive In (6.6), Carl's Jr 6.9), Back Yard Burgers (7.6), Five Guys Burgers (7.9) and In-N-Out Burgers (7.9).

The chain of fast foods can detect new trends faster. For example, they are already open at 5 o'clock as Americans are increasingly buying breakfast. They also sell several cafes; It has seen; fruit sweater to compete with Starbucks and Jumba Juice. You can see more salads in the menu. This gives several reasons to stop fast restaurants and make them more attractive to different customers.

Independent restaurants often take some time for customers to come in and try the food. These facilities are particularly hard in the first 12 months, especially for owners with minimal or untested results. So in general, "mother and pop" restaurants are a risky investment due to the initial low income. If you decide to invest in a non-branded restaurant, make sure that your return is proportionate to the risks you face.

Sometimes it's not easy to say that a restaurant is a brand or not, a brand name. Some restaurant chains are only working or popular in a particular region. For example, in more than 700 places in the 10 states, the WhatABurger chain is a very popular fast-food restaurant chain in Texas and Georgia. However, it is still unknown in 2012 on the West Coast. Trademark chains usually contain a site listing all the places and other information. So if you find a restaurant website from Google or Yahoo, you can quickly recognize if an unknown name is a brand name or not. You can also get basic consumer information about almost every chain restaurant in the United States.

The ten fastest-growing chain in 2011 with over $ 200 million in sales

According to Technomic, the following 10 fastest growing chains of trade between 2010 and 2011:

  1. Five boys with hamburger and potatoes, $ 921 million sales and 32.8 percent change
  2. Chipotle Mexican Grill sales and With a 23.4% change.
  3. Jimmy John's Gourmet Sandwich Shop $ 895 million sales and 21.8 percent change
  4. Yard House $ 262 million sales and 21.5 percent change
  5. Firehouse Subs $ 285 million in sales and 21 , With 1% change
  6. BJ's Restaurant & Brewhouse with $ 621 million sales and 20.9 percent change
  7. Buffalo Wild Wings Grill & Bar $ 2,045 and 20.1 percent change
  8. Raising Cane & Chicken 206M sellers and 18.2% change
  9. Noodles & Company $ 300M sales and 14.9% change.
  10. Wingstop with $ 382 million sales and 22.1% change.

Wage Guarantee

Tenants often sign long-term absolute triple net (NNN) lease. This means that rents, besides rents, also pay all operating costs: property taxes, insurance and maintenance costs. For investors, the risk of maintenance costs is eliminated and their cash flow can be calculated. Tenants can also guarantee their own or corporate assets. Therefore, in case you have to close the business, you will continue to pay the rental fee for the lease. Below are some of the things that need to be known about the lease guarantee:

  1. Generally, the stronger the guarantee, the lower the return on investment. McDonald's Corporation's strong corporate rating "A" S & P rating is far better than a small company that has a franchise owner with some restaurants. As a result, a McDonald's corporate lease contract generally has a low 4.5-5% coverage (return on investment in 1 year of 19459012), while McDonald's franchise ( McDonalds restaurants with more than 75% franchises) can offer a 5-6% cap. So let's figure out how much you take on because you do not get both the risks and the high return on an investment.
  2. Sometimes a multi-location franchise is a parent company that owns all the restaurants. Each restaurant, however, is owned by a sole proprietor of a Limited Liability Company (LLC) to protect the parent company from the obligations. Thus, the rent of one entity to LLC does not mean much, as it does not have many tools.
  3. A good, long warranty does not make lemons a good car. Likewise, a strong guarantee does not make an unpleasant restaurant a good investment. This only means that the tenant will do his utmost to pay the rent. So do not condemn a property primarily on the guarantee.
  4. The warranty is good as long as the company that warrants it is bankrupt. At that time, the company reorganizes its operations by closing down low-income sites and retaining good places (ie strong sales). So much more important is to choose a good property. If you have a weak guarantee (for example, a small private enterprise), you get two benefits: time paid rent and high return on investment.
  5. If you invest in a "mama & pop" restaurant, make sure all the customers, including mum and pop, guarantee their lease assets. The guarantee must be verified by a lawyer to ensure that you are well protected.

Situation, Location, Location

A malicious restaurant can work well in the right place, while those who have a good menu fail in bad places. A good place will generate huge revenue for the operator, and this is important as an investor. These features need to be:

  1. High traffic : this brings more guests to the restaurant and as a result it is a big revenue. Thus, a restaurant is always desirable at the entrance of the regional shopping mall or Disney World, a large shopping center or dormitory.
  2. Good visibility and signs : The volume of a busy volume must be clearly visible to the street. This minimizes advertising costs and is a constant reminder for incoming restaurants.
  3. Simple Access and Exit : A parallel, one-way service on a highway provides a lot of traffic that is large and visible, but not in a great location. It is difficult for potential customers to return if they miss the entrance. Also, you can not turn left. On the other hand, the restaurant at the exit of the highway is more comfortable for customers.
  4. Excellent Demographics : The restaurant needs to work well with a large, growing population and high income area as more people spend money. Your business needs to generate more and more income to pay increasing rents.
  5. Many parking spaces : Most chained restaurants have their own parking lot for guests to stay in peak hours. If the customer does not find the parking space within a few minutes, he will miss it and / or will not return so often. In a typical fast-food restaurant, ca. 10-20 parking spaces required for 1000 square meters of area. Fast-food, eg. McDonald's will need more parking spaces than restaurants, for example. Olive Garden
  6. High Revenue : Annual gross revenue does not sell much on its own, as its restaurant usually means more traffic. Thus, the rent and revenue ratio is a success for success. Please see the rental rate at the screening stage for further discussion.
  7. Large Intrusions Limits : This simply means that this place can not be easily reproduced in many ways: the area simply has no more land for development or the master plan no longer allows commercial real estate to be built or more expensive construction of similar properties due to high land and building materials. For these reasons, the tenant will probably renew the lease if the deal is profitable.

Financing considerations

Generally speaking, interest rates are somewhat higher because of the average of restaurants, with one-tenant properties. It poses a risk to creditors, because if you close a restaurant, you may lose 100% of your income from the restaurant. Lenders also like national branded restaurants. In addition, some lenders will not lend to public investors, especially when restaurants are located in smaller towns. So it's a good idea to invest in a franchise restaurant in the larger subway areas, for example. Atlanta, Dallas. In 2009, it is challenging to get funding for downgraded restaurant purchases, especially for mothers, pop and regional restaurants due to the tight credit market. Things, however, seem to have improved in 2010. If you want to get the best price and terms of a loan, you need to stick to the national franchise restaurants for larger metros.

If the cap ratio is higher than the interest rate on the loan, eg the interest rate is 7.5% and the interest rate is 6.5%, then the borrower should take the utmost account. Get a 7% return on your down payment and 1% return on your lender's money. Therefore, the total return (cash on cash) is higher than the cap rate. Furthermore, as inflation is likely to be higher in the near future due to higher fuel costs, the money you want to buy will be less. So it is even better to maximize leverage.

Due Diligence Investigation

You might consider these factors before deciding to go shopping: Tenant Financial Information : The restaurant's business is labor-intensive. The average worker generates revenue of around $ 55,000 each year. Cost of goods, eg. around 30-35% of food and stock should be revenue; labor and operating costs 45-50%; rent 7-12%. So, look at statements of profit and loss (P & L), if any, with the accountant. The P & L statement shows the EBITDAR abbreviation. This number E E E I D 19659045] The mortification (capital increase) and R ent. If you do not see a royalties at the franchise restaurant in P & L or an independent restaurant's P & L advertising costs, you may want to understand why. Of course, we want to make sure that the restaurant will be profitable after paying the rent. Ideally, you want to see that your net profit is equal to 10-20% of gross revenue. In recent years, the economy hesitated. As a result, restaurants have experienced a decline of gross revenue of around 3-4 percent. It seems this has affected most, but not all, restaurants. In addition, it can take a new restaurant for several years to reach the potential revenue target. So do not expect new sites to be immediately profitable for chained restaurants as well.

  • Loan Loan History : If the tenant is a private venture, you may be able to obtain the tenant's credit history from Dun & Bradstreet (D & B). D & B provides the Paydex score, the FICO business equivalent, ie the personal credit rating. This score ranges from 1 to 100, with a higher score for better pay performance. Paydex score 75 is equal to 700 FICO score. So if your tenant's Paydex score is 80, he's likely to get rents right away.
  • Rental Rate Rate : This is the base rental rate above the gross annual sales of the store. A quick way to determine whether a restaurant is profitable, the lower the rate, the better the venue. Obviously you want the ratio to stay below 10%, indicating that your site has a strong revenue. If the rate is less than 7%, the operator will pay a lot of money after paying the rent. In this case, the rent guarantee is probably not important. However, the rent rate is not an accurate way to determine if the tenant is profiting or not. It does not take into account the property tax costs that are part of the rental fee. Property taxes range from states to states, as a percentage of the estimated value. For example, in California, 1.25% of the estimated value, in Texas 3% And in Illinois, 10%. Thus, the 8% rent and earnings ratio may be profitable in one state and would lose money in another. : Restaurants need more parking spaces, as most dinners stop within a few time windows. The restaurant area will need at least 8 parking spaces per 1,000 square meters (SF). Fast-food restaurants can reach 15-18 square feet per 1000 SFs
  • Termination clause : Some long-term lease agreements give the tenant the opportunity to terminate the lease when a fire is generated, the property. Of course, this is not desirable if this percentage is too low, e.g. 10%. So make sure you read the pass. You also want to make sure that the insurance policy also includes a 12 to 24-month lease in a property if the property is damaged by fire or natural disasters.
  • SF price : You have to pay $ 500 for $ 200 for SF. California has to pay a premium, for example. $ 1000 per SF for Starbucks restaurants, which are usually sold at very high prices for SF. If you pay more than $ 500 per SF for a restaurant, make sure you confirm this.
  • SF Rental : Ideally invest in real estate with a lower SF rent, for example $ 2 and $ 3 per SF per month. This will give you a place to raise your rent in the future. In addition, low rent ensures that the tenant's business is profitable, so the tenant will pay. Starbucks is willing to pay a premium rental fee of $ 2 to $ 4 per month, as there is often a premium location with lots of traffic and high visibility. If you want to invest in a restaurant where the tenant pays more than $ 4 per month per SF, make sure you can justify your decision because the restaurant business is difficult to profit when the tenant pays higher rent. Some restaurants may have a percentage clause. This means that, in addition to the minimum rent, the operator pays a percentage of its revenue when it reaches a certain threshold.
  • Wage Growth : A restaurant landlord typically receives a 2% annual rental fee or a 5% increase of 10%. As an investor, you want a 2% annual rent increase because it's 5 years long to wait for a raise. You can also get more rent 2% annual growth than a 10% increase every 5 years. In addition, as the rent increases annually, so the value of the investment. The value of the restaurant is often based on rent. If the rent rises, while the market cap remains the same, your investment will appreciate. So there is no substantial advantage in investing in a restaurant in a given area, California. It's important to choose a restaurant in a great location. [196459009] Leasing Time : In general, investors are given a long-term advantage, 20 years rent, so you do not have to worry about finding new tenants. With low inflation, eg. Between 1% and 2%, that's fine. However, if inflation is high, eg. 4%, which means that it will technically receive less rent if the rent increase is only 2%. So do not exclude the features, some years after the rental, because you have a strong upward potential. If the lease expires without options, the tenant will have to pay a much higher market rent.
  • Risks Against Return on Investments : You love investing in real estate that offers a very high yield, for example. From 8% to 9%. And so you can be attracted to a brand new franchise restaurant that is offered by a developer. In this case, the developer franchise-based franchise-based Furniture, Lamps and Equipment (FFEs) completely builds the restaurants. The franchisor describes a 20-year absolute NNN lease that pays a very generous rental fee per SF, for example. $ 4 to $ 5 SF per month. The new franchise is ready to do this because it does not have to offer a cash for a deal. Investors are excited about high returns; this can be a very risky investment. The one who earns money is the developer. The franchisee does not want to keep it in difficult times because he does not own real estate. If the franchise business fails, you will not be able to find a tenant who is willing to pay such a high rental fee and you can go to an empty restaurant. Tracking the Operator : The restaurant manager at one or two recently opened restaurants is likely to be a riskier investment. On the other hand, 20 years of business and 30 sites are more likely to be paid next year to pay the rent.
  • Commercial Equipment : Some restaurants are commercially available so be sure to write in writing what's on sale.
  • Fast Food Planting : while fast foods, eg. McDonalds performs well during the recession, sloping family restaurants tend to have a greater sensitivity to the recession due to higher prices and high costs. These restaurants show a double-digit decline in annual revenue. As a result, many restaurants were shut down during the recession. If you invest in a seated restaurant, you have to choose a large income and large population.
  • For Sale And Rent Back

    Sometimes the restaurant operator can sell real estate, and then rent it for longer, eg 20 years. A typical investor would imagine the operator's financial difficulties in selling the property for paying his debts. This may not be the case; but this is a quick and easy way for a restaurant manager to make money out of stock for good reasons: business expansion. Of course, the operator may refinance the property by cash, but this is not necessarily the best option because:

    1. He can not maximize the funds because creditors often provide only 65% ​​of the value of the property in the refinancing position. Credit appears as a long-term debt in the balance sheet, which is often not positive.
    2. Interest rates can not be so favorable if the restaurant manager does not have a strong balance. because of the tight credit market they can not find creditors.

    Rents paid by the operator of the restaurant are often seen as two different cash strategies:

    1. Conservative Market Rental : The operator wants to make sure he is paying a low rent so that his restaurant business has a good chance is to be profitable. He also provides a conservative premium to investors, for example. 7% cap. As a result, your cash amount is small or moderate. This can be a low-risk investment for an investor because the tenant is more likely to be able to pay the rent. Significantly higher than market rent : Operator maximizes cash as its market value, for example $ 2M for a $ 1M property. Investors sometimes offer a high leverage ratio, for example. 10%. The operator will pay a $ 5 rental per square foot in an area where the rent for similar property is $ 3 square feet. As a result, the restaurant business in this area may result from a higher rental fee. However, the operator gets as much money as possible. This property may be very risky for you. If the tenant's business does not do it and announces bankruptcy, it will have to pay a lower rent to another tenant to lease the building.

    Land lease

    We sometimes see a leased business on land. The term land lease may be confusing, as this may include:

    1. You buy the building and lease the long-term ownership of the other investor, for example. 50 years, land lease
    2. You buy the land where the tenant is the owner of the building. This is the most likely scenario. The renter builds his own money on the restaurant and then describes a 20 year NNN lease to lease the plot. If the tenant does not renew the lease then the landlord restores the building. The cap ratio is often 1% lower, e.g. From 6 to 7.25 percent, compared to restaurants where you buy both lots and buildings.

    Because the tenant must invest a significant amount of money (or his or her borrowed funds) to build the building, he must be twice as sure that this is the right place for the business. In addition, if the tenant refuses to pay the rent or does not renew the rent, the building will be of great value as the landowner. So the tenant will lose much more of the business and the building if he does not fulfill his obligations. And so you think twice you do not send the rents. In that sense, this is a safer investment than a restaurant owned by both land and development. The major disadvantages of land leasing compared to lower interest rates

    1. There are no tax incentives, as the IRS does not allow lowering its land value. Thus, tax liabilities are higher. Tenants, on the other hand, can reduce the value of buildings and equipment by 100% to offset their profits.
    2. If the property is damaged by fire or natural disasters, eg. tornadoes, some rental contracts can allow tenants to collect insurance proceeds and terminate the lease without rebuilding properties in the last year of the lease. Unfortunately, this author does not know insurance companies that provide fire insurance because they are not the owner of the building. So the risk is material, as you can get a very expensive empty lot without a huge real estate tax bill.
    3. Some leases allow tenants to have no structure, roof, repair over the past few years for the lease. Ez megkövetelheti a befektetők számára, hogy pénzt költsenek a halasztott karbantartási költségekre, és ezáltal negatív hatást gyakorolnak az ingatlan cash flow-jára.

    Source by sbobet

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