A complete guide to restaurant real estate investment

The restaurant is a convenient commercial property for many investors:

1. Tenants often sign a lease of an absolutely triple net (NNN) for a very long period, for example 20 years. This means that besides rent, tenants pay property tax, insurance fee, and all maintenance fees. The only thing an investor must pay is mortgage, which in turn provides a highly predictable cash flow. Since the tenant is in charge of maintenance, the landlord has little or no responsibility. This allows investors to take more time in life, such as retirement. All you do is check the rent on the bank. This is one of the main advantages in investing in restaurants and single tenant assets.


2. Whether wealthy or poor, people need to eat. Americans are too busy to cook and clean up pots and dishes after being the worst part too often, so they eat out more often! According to the National Restaurant Association, the National Restaurant Industry currently has 937,000 restaurants and is expected to reach $ 331 billion in 2007 ($ 322 billion in 1997, $ 200 billion in 1987) . In 2006, 48 cents were spent at the restaurant for every dollar spent on food by Americans. As long as there is civilization on the ground there is a restaurant and investors will feel comfortable that the property is always in high demand.


3. Knowing that your tenant is very concerned about your property knows that you have the best interest in that. There are few people going to restaurants with dirty bathrooms and garbage boxes in the parking lot.

However, the restaurant is not made equally from an investment perspective.

Franchise versus independent

Nine out of ten new restaurants often fail in the first year. But this is exactly the myth of the city because there is no comprehensive study. HG Parsa, a hospitality associate professor at Ohio State University, has only a research and has tracked a new restaurant in Columbus, Ohio between 1996 and 1999 ( Caution Pulsa observed that the seafood restaurant is the safest venture and the Mexican restaurant experiences the highest failure rate in Columbus (OH). According to his survey, from 1996 to 1999, 26% of the new restaurant is closed in Columbus, Ohio. Economic failure, restaurant divorce closure, health problems, reasons not to spend a huge amount of time on business management. Based on this survey it may be safe to predict that the longer the restaurant's opening hours are, the more likely the landlord will be operating next year to continue receiving rent.

In the case of franchise stores, franchisees need to qualify for minimum debt cash / capital (eg, $ 300,000 for McDonald's). Franchisees need to pay about 30,000 to 50,000 dollars for a franchise once. In addition, merchants offer royalties and advertising costs equivalent to approximately 4% and 3% of sales, respectively. Next, the franchise receives training on how to set up and operate a proven, successful business without worrying about the marketing department. As a result, the franchise restaurant earns customers as soon as an open sign is placed. If the franchisee is unable to carry out the business at that location, the franchise can replace the current franchise with the new one. The king of the franchised hamburger restaurant is the fast food chain McDonald & # 39; s with more than 32,000 stores in 118 countries (about 14,000 in the US) as of 2010. Sales in 2011 are $ 34.2, with an average of $ 2.4 M. M. of revenue per location in the US. McDonald's now has over 50% market share of the US $ 64 billion hamburger restaurant market. This sales has increased by 26% over the past five years. Wendy's sales (average sales of $ 1.5 M) are behind far, sales are 8.5 B, the number of stores is 5904. Burger King is No. 3 with a sales of 8.4 billion dollars, 13% of 7264 stores (including all store chains) in the hamburger restaurant market share (average sales of 1.2 M dollars), sales are 11.4 B dollars, sales are 11.4 B dollars, stores Number 23,850 Starbucks 3 is sales 9.8 B, stores 11, 158). The success of McDonald's is obviously not a result of the taste of Big Mac, it is more complicated. In a survey of 28,000 online subscribers of Consumer Reports magazine, McDonald's hamburgers are ranked last among the fast food chains of 18 countries and regions. Jack in the Box (6.3), Burger King (6.3), Wendy (6.6), Sonic Drive In (6.6), Backyard Burger 7.6, Fiber Guy Burger 7.9, Inner Out Burger 7.9.

Fast-food chains tend to detect new trends more quickly. For example, Americans are planning to buy breakfast soon, so they are open early at 5 AM. They also sell more cafes. Latte; fruit smoothies compete with Starbucks and Jumba Juice. There is another salad in the menu. This will increase the reason for customers to drop in at a fast food restaurant and become more attractive to various customers.

In an independent restaurant, it often takes time for customers to come and try the food. These facilities are particularly tough for the owner who has little or no proven track record, especially for the first 12 months of opening. Therefore, in general, "Mom and Pop" restaurant is a dangerous investment due to the initial weak income. If you choose to invest in a non-branded restaurant, please make sure that the revenue is proportional to the risk you take.

It may not be easy to judge whether a restaurant is a brand name or a non-brand name. Some restaurant chains only work in certain areas or are popular. For example, the WhatABurger restaurant chain with over 700 stores in 10 provinces is a very popular fast food chain chain in Texas and Georgia. However, as of 2012 it is not yet known on the west coast. Brand chains tend to have websites that list all places and other information. Therefore, if you can find the restaurant's website from Google or Yahoo, you can quickly determine if an unfamiliar name is a brand name. You can also get basic consumer information about Wikipedia's almost all US chain restaurants.

10 fastest growing chains in 2011
According to Technomic, the fastest growing ten restaurant chains among the changes in sales from 2010 to 2011 are as follows.

1. Five boy burgers and fried potatoes resulted in a sales of 921 million dollars and a change of 32.8%.
2. Chipotle Mexican Grill (sales of 2.261 billion dollars, turnover 23.4%)
3. Jimmy John's gourmet sandwich shop achieved $ 895 million in sales and 21.8% sales.
4. The yard house brought in sales of $ 262 million and a change of 21.5%.
5. The fire department has made $ 285 million in sales and 21.1% of changes.
6. BJ & # 39; s Restaurant & Brewhouse with sales of $ 621 million and 20.9% change.
7. Buffalo Wild Wings Grill & Bar $ 2.045 B (turnover 20.1%).
8. We procured stick chicken fingers with sales of 206 million dollars and sales 18.2%.
9. Noodles & Company (Noodles & Company). Sales were $ 300 million, and sales increased by 14.9%.
10. Wingstop brought about a change of 221%, with sales of $ 382 million.

Lease & rental warranty

Tenants often sign a long-term absolute triple net (NNN) lease. This means paying all operating expenses such as property tax, insurance, maintenance fee, etc. in addition to basic rent. For investors, there is no risk of uncertainty of maintenance costs and cash flow is predictable. Tenants can also guarantee their rent by themselves or corporate assets. Therefore, if you have to shut down your business, you will continue to pay rent during the lease term. The following is a thing to know about lease guarantee.

1. Generally, the stronger the guarantee, the lower the return on investment. Listed company's S & P company The strong "McDonald's Corporation" guarantee is far superior to small businesses owned by franchisees with few restaurants. As a result, restaurants with business leases of McDonald's usually have no upper limit of 4.5 to 5% (1 ^Cents With a franchisee warranty (more than 75% of McDonald's restaurants are owned by franchise stores), we have a maximum limit of 5-6%. So, you have a low risk of investment and you can not get a high return so please figure out the amount of risk you have.


2. Occasionally the multi-location franchise will be the parent company that owns all the restaurants. In order to protect the parent company from debt, each restaurant is in turn possessed by a single entity's limited liability company (LLC). Therefore, rental guarantee by a single entity LLC is meaningless as it does not have many assets.


3. A good, long warranty will not make lemon a good car. Likewise, strong guarantees do not make poor restaurants a good investment. It means that the tenant makes every effort to pay rent to you. Therefore, please do not mainly judge property concerning warranty.


4. Warranty is good until a company that guarantees it declares bankruptcy. At the time, companies reorganized their business by closing down low-profit areas and maintaining good places (ie places where sales are strong). Therefore, it is important to pick a property in a good location. If that happens, if you have a weak guarantee (eg from a small private company) you get two benefits, a time rent and a high reward.


5. When investing in "Mom & Pop" restaurant, please ensure that all principals (both mom and pops) guarantee the lease with assets. The warranty needs to be checked by a lawyer to see if you are adequately protected.

Place, place, place

Poor restaurants may work in good places, but those with good menus may fail in bad places. Good places bring great revenue for operators, and they are primarily important as investors. It requires the following characteristics.

1. Traffic volume is high This will bring in more customers to the restaurant, resulting in higher revenue. So it is always desirable for local shopping malls, restaurants at the entrance to Disney World, major shopping malls, or colleges.


2. Good visibility and signage : When the traffic volume is high, the visibility from the road must be good. This minimizes advertising costs and always reminds me of a diner coming.


3. Ease of entry and exit : The restaurant located on a one-way service road parallel to the highway has a lot of traffic and good sight, but it's not a wonderful place. If a potential customer missed the entry, it is difficult to come back. Also, you can not turn left. On the other hand, restaurants located just outside the motorway exit are more convenient for our guests.


4. Excellent demographics The restaurant should work well in big cities with an increasing population and high incomes. Because the number of people consuming it is increasing. The business should generate more and more income to pay higher rent.


5. Lots of parking spaces In most chain restaurants, there is a private parking lot to accommodate customers at peak hours. If the customer is unable to find the parking space within minutes, it may not skip that space or return frequently. A typical fast food restaurant will require about 10 to 20 parking spaces per 1000 square foot space. Fast food restaurants, such as McDonald's, need more parking space than sitting in restaurants like the olive garden.


6. High sales : Total income for a year alone does not show so much after a large scale of sq. Ft. Restaurants tend to have high revenues. So the ratio of rent and income is a better indicator of success. For more information, please refer to the rent and revenue ratio in the due diligence section.


7. High barriers to entry This simply means that it is not easy to duplicate this place for various reasons. Whether there is no developable land in this area, the master plan does not allow construction of commercial real estate, or the cost of land and construction materials is high and it is expensive to construct similar property. For these reasons, if the business is profitable, the tenant is likely to renew the lease.

Finance considerations

Generally, interest rates are single tenant assets, so it is slightly higher than average restaurant. For lenders, there is a perceived risk as the restaurant is closed, potentially losing 100% of your income from the restaurant. Lenders also prefer restaurants nationwide brand name. In addition, some lenders will not lend to overseas investors, especially if there are restaurants in small cities. So investing in franchise stores in metropolitan areas such as Atlanta and Dallas is a good idea. In 2009, it was a very difficult task to raise funds for the tight credit market, especially for the acquisition of a sitting restaurant at mom, pop, regional restaurant. However, it seems that things improved a bit in 2010. Let's go to a nationwide restaurant in a metropolitan franchise if you want to maximize the interest rate and conditions of the loan.

If the cap rate is higher than the interest rate of the loan, for example, the cap rate is 7.5% while the interest rate is 6.5%, you should consider borrowing as much as possible. For your borrowed money you will get 7.5% Returns and 1% Returns for your prepayment. Here, your total return (cash cash) will be higher than cap rate. In addition, as the cost of fuel rises, it is expected that the inflation rate in the near future will rise, so the funds borrowed to borrow purchase funds will be less valuable. Now it is even more beneficial to maximize leverage.

Due diligence survey

Before deciding to proceed with purchasing, you need to consider the following factors:

1. Tenant financial information : The restaurant's business is labor intensive. Average employees earn approximately $ 55,000 in revenue every year. The cost of goods such as foods and food items should be about 30 to 35% of the income. Labor costs are 45-50%. About 7 - 12% rent. If possible, please review the income statement (P & L) with the accountant. In the profit and loss statement, the acronym EBITDAR is displayed. that is, E Coalition B Before Me Conviction T Axis, D Equipment depreciation, A Amortization of capital, R ent. If you do not see royalties on P & L in a franchise restaurant or in P & L advertising expenses in an independent restaurant, you may want to understand why. Of course, you will want to confirm that the restaurant is profitable after paying rent. Ideally, net profit will be 10 to 20% of total revenue. The economy has been hit in recent years. As a result, the gross profit of eating and drinking establishments decreased by approximately 3 - 4%. This seems to have influenced most of the restaurant anywhere, if not all. We may also use a new restaurant in the coming years to achieve potential revenue targets. Do not think in a chain restaurant that a new place will immediately make a profit.


2. Tenant's credit history : If the tenant is a private company, you can acquire tenant's credit history from Dun & Bradstreet (D & B). D & B will provide Paydex score, which is equivalent to FICO, ie personal credit history score. The score ranges from 1 to 100, with higher scores improving payment performance. Paydex score 75 corresponds to FICO score 700. Therefore, if your tenant's Paydex score is 80, you may immediately receive a rent check.


3. Rent against rate of return This is the ratio of the basic rent to the total annual sales of the store. It is a quick way to judge whether the restaurant is profitable. In other words, the lower the ratio, the better the location. As a rule of thumb, we keep this ratio below 10%, indicating that the place gains a strong income. If the ratio is less than 7%, the operator is likely to earn a lot of money after paying the rent. In this case, the rent guarantee is probably not important. However, the rent income ratio is not a direct way to judge whether a tenant is generating a profit. We do not consider property tax expense as part of rent. Property tax is calculated as a percentage of value valued and it varies from state to state. For example, in California it is highly valued as about 1.25% of the value evaluated, 3% in Texas and 10% in Illinois. And a restaurant with a rent and income ratio of 8% can make a profit in one state, but another state may lose money.


4. Parking space : Most diners tend to stop in a small time window, so the restaurant tends to require more parking space. At least 8 parking spaces per 1000 square feet (SF) of restaurant space are required. About 15 to 18 spaces may be required per 1000 SF in the fast food restaurant.


5. Ending phrase Some long-term leases give the tenant the option to terminate the lease in the event of a fire that destroys a certain percentage of the real estate. Of course, if this percentage is too low, for example 10%, this is not desirable. So please make sure you are reading the lease. Also, in case insurance is damaged by fire or natural disaster, please make sure to include insurance loss of rental income for 12-24 months.


6. Price per SF : It is necessary to pay about 200 to 500 dollars per SF. In California, Starbucks restaurants, which are usually sold at very high prices per SF, must pay a premium of $ 1,000 per SF. If you pay more than $ 500 per restaurant first floor please check the validity of doing so.


7. Rent per SF Ideally, you should invest in a property with a low rent per SF, for example $ 2-3 per month per SF. This creates room for raising rent in the future. Also, because the low rent guarantee that the tenant's business will benefit, I will pay the rent. Starbucks tends to pay premium rents every two to four dollars per SF every month because it is often located in a highly visited premium location with a lot of traffic. If you plan to invest in restaurants where tenants pay more than $ 4 a month for SF, it is difficult to profit from the restaurant business when tenants pay higher rents, so whether you can justify your decision Please Confirm. Some restaurants may have a percentage phrase. In addition to the minimum standard rent, this means paying a part of revenue when a certain threshold is reached.


8. Rent rises : Restaurant landlords usually receive an annual rent increase of 2% or a 10% increase every 5 years. As an investor, it is a long time to wait for funds for 5 years, so 2% of annual rent should be given priority. Also, you can receive more rent with an annual rent of 2%, which is 10% higher every 5 years. The value of your investment is flat as rents rise each year. The value of the restaurant is often based on the generation's rent. If rents are raised with the market capitalization remaining the same, your investment will be highly valued. Therefore, there are no significant advantages when investing in restaurants in certain areas (such as California). It is important to choose a restaurant in a wonderful place.


9. Lease duration : In general, investors prefer long-term leases, for example 20 years, so you do not have to worry about finding new tenants. For low inflation rates, for example 1% to 2%, this is fine. However, if the inflation rate is high, for example 4%, if the rent rise is only 2%, the rent will decrease technically. Therefore, do not exclude lease period properties several years ago. There is a strong potential possibility. If the lease expires without options, the tenant may have to pay higher market rent.


10. Risk versus ROI : As an investor, you like properties that provide very high returns, for example 8% ~ 9% cap rate. And you may be attracted to the new franchise restaurant that developers are offering to sell. In this case, the developer will fully construct the restaurant using the franchisees furniture, fixtures and equipment (FFE) according to the franchise specification. The franchisee has an absolute NNN lease agreement for 20 years with SF paying monthly payment of very generous rent, such as $ 4 to $ 5 per month. The new franchisee is willing to do so because it does not need cash to open a business. Investors are excited about the high rate of return. However, this may be a very dangerous investment. People who are guaranteed to earn money are developers. Because there is no equity interest in real estate, franchisees may not have the intention to hold in difficult times. If the franchise's business fails you will not be able to find a tenant paying a high rent and you may end up with an empty restaurant.


11. Track operator record : A restaurant operated by an operator with one or two recently opened restaurants will probably be a risky investment. On the other hand, business establishments in 20 years and 30 businesses may be around next year to pay rent.


12. Trade equipment Since some restaurants are sold as trade equipment, please document in writing what is included in the sale.


13. Fast food versus sit down : Fast food restaurants such as McDonald's will work well during the recession, but sit-down family restaurants tend to be sensitive to recession due to high prices and high expenses. In these restaurants, annual sales may decline by two orders of magnitude. As a result, many sitting restaurants were closed during the economic downturn. If you consider investing in a restaurant where you sit, you should choose one in high income and high population areas.

Sale & Lease Back

In some cases, the operator of the restaurant sells the real estate part and sometimes leases the property for a long period, for example 20 years. A typical investor wonders if the operator is in financial difficulties, so he must sell his property and pay the debt. It may or may not be the case. But this is a quick and easy way for restaurant businesses to sell shares. It is business expansion. Of course, the operator can refinance the property in cash, but it may not be the best option:

1. He can not maximize cash out, as lenders often lend just 65% of real estate value in a refinancing situation.
2. Loans are displayed as long-term debt in the balance sheet, but this is often not the case with positive light.
3. If the restaurant operator does not have a strong balance sheet, the interest rate may not be that much advantageous.
4. He may not be able to find a lender for a tough credit market.

Looking at the rent paid by restaurant operator, you can see two different cash out strategies well:

1. Conservative Market Rent : The operator wishes to pay low rent because his restaurant business is more likely to make a profit. He also provides investors with discreet cap rates, for example 7% caps. As a result, his cash out amount is small to medium. This is likely to be a low risk investment for investors, as tenants are more likely to pay rent.


2. Significantly higher than market rent ：オペレータは、その市場価値よりもはるかに高い物件を価格設定することによって現金出庫を最大限にしたいと考えています。たとえば、$ 1Mの物件の場合は$ 2Mです。投資家には時には10％といった高い上限額が与えられることがあります。オペレータは、同等の物件の家賃が1平方フィート当たり3ドルである区域で、1平方フィート当たり5ドルの賃料を支払うことができる。結果として、この場所のレストラン事業は、より高い料金のために損失を被る可能性があります。しかし、オペレーターはできるだけ多くのお金を得る。このプロパティは非常に危険です。テナントの事業がそれを行なわず、破産を命じる場合、建物を賃貸するためには、より低い家賃を別のテナントに提供しなければなりません。

グラウンドリース

あなたは地上のレストランを見ています。地上のリースという用語は、それが意味することができるように混乱する可能性があります

1. 建物を購入し、別の投資家が所有する土地を長期間（例えば50年）の土地リースでリースします。


2. あなたはテナントが建物を所有する土地を購入します。これが最も可能性の高いシナリオです。テナントは自分のお金でレストランを建設し、その後20年のNNNリース契約を締結しています。テナントがリースを更新しない場合、建物は土地所有者に戻されます。土地と建物の両方を購入するレストランと比較して、キャップレートはしばしば1％低くなります（例：6〜7.25％）。

テナントは建物の建設に多額の資金（自らの資金であろうと借り入れた資金であろうと）を投資しなければならないので、これがビジネスにとって正しい場所であることを確実にしなければならない。また、テナントが家賃の支払いに失敗した場合や、リースを更新できない場合は、相当額の建物が土地所有者としてあなたに戻ってきます。したがって、義務を果たさなければ、テナントはビジネスとビルディングの両方をさらに失うでしょう。そしてそれは家賃のチェックを送らないことについて2回考えている。その意味では、これはあなたが土地と改良の両方を所有するレストランよりも少し安全な投資です。低いキャップレートに沿って、地上リースの主な欠点は、

1. IRSは土地価値を下げることを認めていないため、税務上の償却はありません。したがって、あなたの税金負債はより高くなります。一方、テナントは建物や設備の価値を100％下げて、利益を相殺することができます。


2. 竜巻などの火災や自然災害によって建物が損害を受けた場合、リースによっては、リースの最後の数年で不動産を再建することなく、テナントが保険金を回収し、リースを終了させる場合があります。残念ながら、この作者はあなたが建物を所有していないので、火災保険を販売する保険会社は知らない。したがって、収入がなく非常に高価な空き地を所有し、財産税の法案が巨額になる可能性があるため、リスクは相当です。


3. リースのいくつかは、テナントがリースの最後の数年間に何らかの構造、例えば屋根を修理する必要がないことを可能にする。これにより、投資家は繰延保守費用に費用を費やす必要があり、それは財産のキャッシュフローに悪影響を及ぼします。

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