By Joel Pfyffer
Signing your first lease for a restaurant?
Ready to fulfill your lifelong dream of owning a pizzeria? There are a lot of challenges ahead, and some can be pretty daunting. Signing your first lease is very intimidating. Trust me, I remember mine like it was yesterday.
As a longtime restaurateur and consultant, I’m often asked for advice on this subject. The first point that new business owners make is that they are afraid of committing to a long-term lease without knowing what the future holds. That’s a completely understandable concern.
A lease is a legal document crafted to protect everyone involved. The landlord is looking to secure his or her property for as long as possible, to recoup any investments made in the fit-up, and to keep their bottom line healthy.
For the lessee, the lease offers protections to make sure that your restaurant’s rug cannot be pulled from out beneath you.
First, you may have to sign a letter of intent that serves as a virtual handshake between you and the landlord. This gives both parties additional time to hammer out the leasing details, such as pricing, timing and responsibilities tied to each party. It also shows your landlord that you are ready to move forward with this project. Once the letter of intent is signed, you can negotiate the terms more closely.
Before signing the lease, you want it to be structured in your favor as much as possible. And the landlord is looking to do the same exact thing for himself. But with some knowledge and research you can come to an agreement that benefits both parties.
Ideally, your lease should be structured in time-block segments called option periods. An option period is basically a pre-negotiated extension of the lease term that you can choose to exercise—it gives you the right, but not the obligation, to continue leasing that space for a longer amount of time.
Negotiating a 2-year + 2-year + 5-year agreement is a great start. That means you’re negotiating an initial term of two years, with the option to extend it for an additional two years, and then, if all goes well, five more years.
This approach gives you some needed flexibility. Within the first two years, you will have a better idea of how well your restaurant is performing and whether the location is living up to its promise. Some operators, after two years, might even decide that this lifestyle is not for them, so they can cancel cleanly after 24 months without being locked into a long-term commitment.
Now, let’s assume business is banging. You accept the second option on your lease for another two years and continue building. After your first two segments—a total of four years—are up, you should be pretty sure about how well your business is performing and what direction it’s heading in. You’ll either feel pretty confident in or miserable about your location.
When I signed my lease that I currently operate under, I started with two 2-year options and two 4-year options. After 15 years my landlord reached out and was ready to offer another 10 years (or two 5-year options). I happily signed the agreement, thus assuring both the landlord and myself that I was here to stay for at least another 10 years.
In November I will celebrate my 20th year at Prosciutto’s Pizzeria & Pub!
In my next article, I will discuss quite a few pitfalls to look out for during negotiations.
Joel Pfyffer is a veteran restaurateur with close to three decades of experience in the food industry. Since 2000, he has owned and operated multiple restaurants, including Prosciutto’s Pizzeria & Pub in Cornelius, North Carolina, a beloved local institution celebrating 20 years of service. Joel also co-founded Culinary Compass, a consulting firm that helps fellow restaurateurs tackle the real-world challenges of restaurant ownership with practical, proven strategies. Happily married and a proud father of two daughters, Joel combines deep industry knowledge with a personal passion for hospitality and community. You can reach Joel at [email protected].
