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Should you lease or purchase commercial space for your restaurant business?

The decision to lease or to purchase commercial property is not always clear cut. When making the decision to purchase or lease, don’t buy simply for the sake of owning real estate.

July 13, 2015

By Dale Willerton & Jeff Grandfield, commercial lease consultants 

Should you lease or purchase commercial space for your restaurant business? It’s a question The Lease Coach frequently gets asked when we speak at restaurant shows throughout North America. While we can best advise on a case-by-case basis, rather than globally, we understand that the most common reason restaurant owners lease space instead of buying a location is that 95 percent of all commercial space is for lease and not for sale. It really is that simple (supply and demand)!

Considering the importance of this matter and how it can weigh heavily on the minds of new and current restaurant operators, we have explored it in greater detail in our new book, Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013). From those pages, here is our advice:

Restaurant tenants able to purchase commercial property are in an enviable position. Before you jump into making a decision, here a few pros and cons of ownership to consider.

First, the benefits:

• Paying a mortgage is better than paying rent. Lease payments are forever, but your mortgage will eventually be paid off (hopefully). Often, your mortgage payment may be very close to your rent obligation.
• In most cases, you will gain equity in your property and over time, your property may double or even triple in value. This increase in value is in addition to the value of your restaurant business contained within the property.
• You’re in charge and don’t have to deal with the potential hassles of a landlord or property manager.

Now, for the drawbacks:

• There may be some sacrifice on location desirability, because many of the prime locations may be available for lease, but not for sale.
• If you are vacating an existing location, you may be leaving a great opportunity for a competitor to move into your location.
• You’re in charge and will be the one responsible for all maintenance and repairs that a commercial landlord might normally handle for you.

As we write this article, we are reminded of a recent (and relevant) situation. Our tenant client (a Denny’s Franchisee) had been leasing commercial space in a free-standing building on a pad site beside a hotel. His franchisor – Denny’s corporate – was on the head lease, meaning they were subleasing the property to our client, the franchisee. As the lease expiry date drew near, it became evident that the franchisor did not want to remain on the head lease, so we approached the landlord about a new lease for the franchisee tenant. In response, the landlord explained that our client tenant could continue leasing the property or purchase it outright. Although the asking price of $1.68 million (for both the building and the land) was steep, we did our due diligence and shared both options with the tenant. Over the course of time and with exercising numerous strategies, we negotiated the purchase price down to less than one-third and closed the sale transaction.

If you are currently leasing a freestanding building on a pad site, The Lease Coach recommends that you negotiate a first right of refusal should the landlord ever wants to sell the building.

The decision to lease or to purchase commercial property is not always clear cut. When making the decision to purchase or lease, don’t buy simply for the sake of owning real estate. Only consider purchasing commercial space or property if you're prepared to lease that same location anyway. Look before you lease (or purchase).

Dale Willerton and Jeff Grandfield are commercial lease consultants who work exclusively for tenants at The Lease Coach. Dale and Jeff are professional speakers and co-authors of Negotiating Commercial Leases & Renewals For Dummies (Wiley, 2013).