Article

Is bigger better? Footprint vs. sales

Restaurant tenants often find that a larger commercial space results in a bigger problem than not profiting.

November 25, 2015

By Jeff Grandfield and Dale Willerton – The Lease Coach

Does leasing a larger commercial space lead to increased business? Not necessarily. In fact, restaurant tenants often find that a larger commercial space results in a bigger problem than not profiting. They often aren't making any money because their rent is too high or the restaurateur has simply leased too many square feet.

One client was leasing 8,000 square feet of space who couldn’t afford to pay the rent. When we checked with neighboring tenants it turned out he was actually paying less per square foot than anyone else. It wasn’t the rent per square foot that was killing his business but the amount of area he had been talked into leasing by the landlord’s leasing representative. It's a common problem since leasing representatives and real estate agents, typically, receive a commission from the landlord for signed lease deals (the incentive increases with a tenant signing for a longer term, agreeing to pay a higher rent or leasing more space); however, the unknowing tenant often signs the lease agreement and becomes legally bound to the terms. Additionally, in most cases, you will also be paying operating costs or CAM (common area maintenance) fees based on a square footage basis.

Occasionally, the reverse is true as well. A tenant told us his space was too small. If we could expand the business he could generate more revenue. We negotiated for this tenant to lease the adjacent space (which meant relocating the neighboring tenant) and he achieved his goal. Landlords, generally, prefer to work with a tenant who wants to expand versus one who needs to downsize.

It has been our experience that the main reason restaurant tenants end up leasing the wrong amount of square footage is due to availability … or lack thereof. If you need about 1,800 square feet for your restaurant but the only two spaces remaining available for lease are smaller and larger you will have a dilemma. A smaller space often has less frontage as well. This gives you less storefront exposure can be critical for your type of business – reduced frontage results in reduced visibility for customers.

When choosing between locations that are modestly too big or too small, restaurant tenants should almost always decide which space is in the better location. With adjacent and very comparable units, we would normally advise the tenant to be more conservative and lease the smaller location. Tenants who tell us their location is too small are usually profiting but want to expand to increase their sales. Whereas tenants who tell us their location is too big often want to downsize to reduce rent payments as a means of improving their bottom line.

On a related note, consider also the functional shape of the premises for your restaurant. In one situation, the landlord was expanding his strip mall claiming that only one CRU (commercial retail unit) was left. Unfortunately, this unit housed a large utility room in the back — making that area unusable for almost any tenant. Since the expansion portion of the project was only in the construction phase, we suspected the landlord still had time to move other newly-interested tenants around and suggested to the tenant we walk away from the deal as a negotiating strategy. As expected, within a few days the landlord reconsidered his position and predictably came up with a much better location for the tenant.

When it comes to leasing commercial space, choose wisely and recognize that bigger is not always better. If you have too large of a space, you may not only be paying too much rent, you may end up with routinely empty tables. If you have too small of a space, you may be squeezed in and maneuvering around may become difficult.

Dale Willerton and Jeff Grandfield - The Lease Coach are Commercial Lease Consultants who work exclusively for tenants.