2009 Complete Guide For Restaurant Real Estate Investments

The restaurants are a popular commercial real estate for many investors, because:

Tenants often sign long-term, for example 20 years absolute triple net (NNN) leases. This means, besides the rent, tenants also for real estate taxes, insurance and pay all maintenance costs. The only thing the investor has to pay the mortgage, which in turn provides a very predictable cash flows. There is a responsibility or not, or only a few landowners, because the tenant is responsible for maintenance. This allowsinvestors more time to do important things in life such as retirement. All you have to do is to review the rent to the bank. This is one of the main advantages of investing in a restaurant or single-tenant property. If you are rich or poor, people need to eat. Americans eat more often, because they are too busy to cook and clean the pots and pans on what are often the worst part! According to the National Restaurant Association, the nation's restaurant industry is currently involves937, 000Restaurants and expected to reach $ 537 billion in revenue in 2007, compared to only $ 322 billion in 1997 and $ 200 billion in 1987 (at current prices and exchange rates). In 2006, for every dollar Americans spend on food, 48 cents was spent in restaurants. As long as it is the civilization on earth, there will be restaurants and investors feel comfortable that the property is always in high demand. You know your tenants will take very good care of your property because it is in their interest to do so. Only a few customers, if they ever wanted in a restaurant, a dirty bathroom and / or waste in the parking lot must go.

Attorneys In Columbus Ohio

However, restaurants are not the same ... from the perspective of investment.

2009 Complete Guide For Restaurant Real Estate Investments

Compared Independent Franchise

We often hear that 9 out of 10 new restaurants not in the first year, but this is just an urban legend, because there are no conclusive studies on this issue. There is only one study of hospitality Associate Professor, Dr. HG Parsa of> Ohio State University, the new restaurants in the city of Columbus, Ohio, is pursued during the period from 1996 to 1999 (Note: it must be concluded that the results are the same everywhere in the United States or other periods). Dr. Parsa found that the fish restaurants are more secure and joint Mexican restaurants you'll experience the highest failure rate in Columbus, OH. His study also found 26% of new restaurantsclosed in the first year in Columbus, OH with a maximum of 1996 to 1999. In addition to economic failure, the reasons for divorce are restaurants nearby, poor health, and the refusal to commit a lot of time on the functioning of society. Based on this study, we can predict with certainty that the more time the restaurant is in the business, the more likely they will be operational next year, so that the landlord continues to rent obtained.

For franchised restaurants, a franchiseecertain minimal amount of non-borrowed money / capital, including $ 300,000 for McDonald's to qualify. The franchisee has a franchise fee to pay only about $ 30,000 to $ 50,000 and royalties of 4-12% of current sales. In return, the franchisee receives training on how to set up and manage a business and successfully tested in part, without worrying about marketing. As a result, gets a restaurant franchise customers, once set, the open nature. If the franchisee,conduct the activities at the headquarters of the franchise to replace the current series with a new one. The king of franchising restaurants, the fast food chain McDonalds, with more than 32,000 locations in 118 countries (about 14,000 U.S.) from 2010. It has an average of $ 2M of revenue per seat in the United States. McDonalds now cover a market share of 46% of $ 58.88 billion U.S. fast-food market. Distant parts of Burger King behind with 14.3% market share. Success of McDonalds' is obviously not the resulthow his tastes delicious Big Macs, but otherwise much more complex. A survey of 28,000 online subscribers to Consumer Reports magazine ranked McDonald's hamburgers last among the 18 national and regional chains of fast food. He received a score of 5.6 on a scale of 1 to 10, with 10 being the best, behind 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 Burger (7.9).

Fast food chainstend to identify new trends faster. For example, are open until 5.00, as Americans increasingly buy their breakfast earlier. They are also selling more milk, coffee and fruit smoothies compete with Starbucks and Jumba juice. You may also see more salads on the menu. This will give customers more reasons to fast-food restaurants to stop and their appeal to different customers.

With independent restaurants, it often takes a while 'to come to its clients andlook for food. These structures are particularly harsh in the first 12 months of opening, in particular with the owners of little or no proven track record. So, in general, "mom and pop" restaurants risky investment because of weak initial sales. If you want to invest in a non-brand name of the restaurant, make sure that the return is proportional to the risks you take.

Sometimes it is not easy to tell if a restaurant is a trademark or brand. Some restaurant chains onlyoperate, or in a certain region is very popular. For example, Whataburger restaurant chain with over 700 offices in 10 countries and a popular fast-food restaurant chain in Texas and Georgia. It is not known on the West Coast in 2010. Branded chains tend to have a website, where all sites and for more information. So if there is a restaurant by Google or Yahoo, you quickly realize, when an unknown name is a trademark or not. They receive basicConsumer information on almost all chain restaurants in the United States on Wikipedia.

Lease and rental guarantee

Tenants often sign a lease term absolute triple net (NNN). Property taxes, insurance and maintenance: This means that in addition to basic rent, but also to pay all operating expenses. For investors, the risk of maintenance eliminates the uncertainty and cash flow is more predictable. The tenant can also guarantee the rent with his orCorporate values. Therefore, if too close, have a business that will continue to pay rent for the duration of the lease. Here are some things you need to know about the lease agreement:

In general, the more the guarantee is the lower the return on investment. The guarantee of McDonalds Corporation, with a strong "A" by S & P corporate rating of a public company is much better than a small company owned by an affiliate with several restaurants. Consequently, aMcDonalds Restaurant with the leasing company usually offers low-Cap 6-7% (return on investment in the first year after purchase), while McDonald affiliated with a guarantee (over 75% of McDonald's restaurants owned by franchisees) of 6 in able to offer 5 to 7.5% ceiling. How to determine the level of risk you are willing to take because you do not get, is low risk and high yield in a plant. Sometimes a multi-location franchise is forming a parent has for all restaurants. Each restaurant is in turnowned by a single unit of a limited liability company (LLC) to protect the parent company of liability. So the guarantee rent from Budget LLC does not mean much, because there is not much wealth. A good, long warranty is not a lemon, a good car. Similarly, a strong guarantee is not a lousy restaurant a good investment. It simply means that the tenant agrees to pay you rent. So do not judge a property mainly on warranty. The warranty is good untilThe company guarantees that filed for bankruptcy. At that time, the company has reorganized its operations by closing sites with low turnover and retain the documentation (such as those with high turnover). So it's more important for you to choose a property in a good position. If there is a low coverage (for example, from a small, private companies) are the case, you get two benefits: payment of rent on time and with high efficiency. If you happen to invest in a restaurant "Mom & Pop", make sureall customers, for example, both mom and pop to ensure the lease with the property. The guarantee in case of a lawyer, so they are well protected to control.

Location, Location, Location

The worst restaurant could be in a good position to fail, while those with a good menu in a bad place. A good position is strong revenue for the operator and is especially important that you as an investor. It 'was thisFeatures:

High volume of traffic this way to attract more customers to the restaurant and as a result of higher income. So, a restaurant at the entrance of a regional shopping center or Disney World, a large shopping center, or university is always desirable. Good visibility and signage: a high volume of traffic must be accompanied by a good visibility from the street. This minimizes the costs of advertising and on arrival is a constant reminder for the guests SimpleDrop-off: a restaurant on a one-way service road parallel to get away with a lot of highway traffic and good visibility, but not in an ideal location. It 'difficult for potential customers to return in case of no entry. In addition, you can not make a left turn. On the other side is the restaurant directly at the exit of the motorway convenient for customers. Excellent demographics: a restaurant should be good in an area with a large,population growth and high incomes, because it must spend more and more people with money. The company should generate more income to pay for the increase in higher rents. Plenty of parking: Most restaurants are chained to house its own parking for customers during peak hours. If the customer fails to find a parking space in a few minutes, there will be a good chance to jump and / or does not return so often. A typical fast-food restaurant take about 10 to 20 carsSpaces per 1,000 square feet of space. Fast-food restaurants is, for example, need to sit down cars than McDonalds restaurants, like Olive Garden. High turnover: the annual gross income does not say much by itself as the largest - have tended to increase restaurant revenue - in the name of the square footage. Thus, the rent income ratio is a measure of success. Please note that we rent to income ratio in the due diligence for further discussion. HighBarriers to entry: This just means that it is not easy to replicate, this neighborhood for several reasons: the surface is no longer simply be extended to the country or the plan does not allow any further construction of commercial property, or is it more expensive, a similar property to build because of the high cost of land and construction materials. For these reasons, the tenant is likely to renew the lease if the business is profitable.

FinancingConsiderations

In general, the interest rate is slightly above average for the hospitality industry due to the fact that they are single-tenant properties. For the lender, there is a perceived risk, because if the restaurant is closed, you could lose 100% of the income from that restaurant. Lenders also prefer national brand restaurants. In addition, some lenders do not loan out-of-state investors, especially if the restaurants are located in smaller towns. So it ismay be a good idea for you to invest in a franchise restaurants in major metropolitan areas, like Atlanta, Dallas. In 2009, there is a big challenge, funding for the sit-down restaurant for acquisitions, especially for the mom and pop restaurants and regional due to the tight credit market. However, things seem to have improved somewhat in 2010. If you want to get the best rate and terms for the loan, you should keep the national franchise restaurants in major metropolitan.

If the maximum rate is higher than theRate of the loan, for example, maximum rate of 7.5%, while the interest rate is 6.5%, should be taken into account then borrow as much as possible. You get the 7.5% return on your deposit plus 1% return for the money to lend. Therefore, the total return (cash bar) will be higher than the cap rate. Furthermore, because inflation in the near future should be higher because of fuel costs, the money borrowed to finance your purchase from a lower value. So it is even moreTo maximize use of time.

Due Diligence

You may want to consider these factors before deciding to go ahead with the purchase:

Tenant financial information: The restaurant is labor intensive. The average employee makes only about $ 55000 in sales annually. Labor costs and operating of 45-50%, about 7-12% of the rental cost of goods should be like the food and supplies to about 30-35% of sales. So you see the profitsand loss (P & L) statements, where appropriate, with your tax advisor. In the income statement, you can view the abbreviation EBITDAR. IB stands for rhyming AND WARNINGS Ncome T axes, epreciation D (device), A mortization (capital improvement) and R ENT. If you do not see royalties to P & L of a franchise or restaurant expenses related to P & L of an independent stateRestaurant, you can understand why. Of course we want to ensure that the restaurant is profitable after paying the rent. Ideally, you want to see a net profit of 10-20% of gross income. In recent years the economy has suffered a defeat. As a result, restaurants have a decline in the gross income of about 3-4% with experience. This seems to have affected most if not all, restaurants all over the world. In addition, there may be a new restaurant for several yearsreach and revenue potential targets. Do not expect to be advantageous positions, now available in a new way for restaurants chains. Credit history tenant if the tenant is a limited liability company, you may be able to get the tenant's credit history, Dun & Bradstreet (D & B). D & B offers guests Paydex, the equivalent of FICO business, or personal credit history score. This score ranges from 1 to 100, with higher scores indicating better payment practices. A PaydexScore of 75 corresponds to the FICO score of 700 Thus, if the lessee has Paydex score of 80, you are likely to gain control rent promptly. Lease income ratio: This ratio is the rent based on gross annual turnover of the store. This is a quick way to determine if the restaurant is profitable, ie, the lower the ratio, the better the situation. As a general rule, you want to keep this ratio less than 10%, meaning that the position of strong revenues. Ifthe ratio of less than 7%, operators will most likely make a lot of money to pay the rent. The rental guarantee is probably not important in this case. However, do not rent to income ratio to determine precisely whether or not the tenant a profit. It does not take into account the property taxes as part of the rental cost. Property taxes - calculated as a percentage of the appraised value - varies from state to state. For example, in California, is about 1.25% of the nominalValue, 3% in Texas, and up to 10% in Illinois. And so a restaurant with a rent income ratio of 8%, in a country still active and lose money in another. Parking: Restaurants tend to have a greater number of parking spaces needed, because most of the guests, who tend to stay within a small time window. You must be at least 8 cars per 1,000 square feet (SF) of restaurant space. Fast-food places have about 15-18 per 1000SF. Termination clause: some of the long-term lease for the tenant can terminate the lease if a fire has destroyed, and a certain percentage of ownership. Of course, this is not desirable, if that percentage is too low, eg 10%. So make sure to read the lease. They also want to ensure that the insurance also covers loss of rental income for 12-24 months for the property by fire or natural disaster damaged. Price per SF:You should pay about $ 200 to $ 500 per SF. In California, you have a premium, for example, $ 1000 per SF for Starbucks restaurants, usually sold to pay a high price for SF. If you pay more than $ 500 per SF for the restaurant, making the justification for it. Rent per SF: Ideally, you should be in a property where the rent is low for SF, for example, invest $ 2 to $ 3 per SF for a month. This will give space to increase the rent in the future. It also provides low-rentactivities of tenants is profitable, he will be there to continue to pay the rent. Starbucks tend to pay a premium of $ 2-4 per month rent for SF, as they are often at a premium location with high traffic and high visibility. If you're in a restaurant where the tenant pays more than $ 4 per month to invest SF, make sure you can justify your decision, because it is difficult to make a profit in the restaurant, if the tenant pays higher rent. Some restaurants may be aPercentage clause. This means, in addition to the basic minimum rent, the owner also pays a percentage of their income when they reach a certain threshold. Rent: The owner of a restaurant is usually either a 2% annual rent increase or an increase of 10% every 5 years. As an investor, you should prefer the 2% annual increase in rent, because 5 years is a long time to wait for a raise. You also get more for rent with 2% annual increase of more than 10% increase every 5 years.Moreover, as the rent increases every year, so does the value of your investment. The value of the restaurant is often based on the rent it generates. If the rent increases, while the market capitalization remains the same, your investment will appreciate in value. So there is no advantage to invest in a restaurant in a particular area, such as California. It 'important to choose a restaurant with a great location. Rental period: usually for long-term investors, such as 20-year leasedo not bother to find new tenants. During a period of low inflation, for example, 1% to 2%, that's fine. However, if inflation is high, such as 4%, which means they are technically less rent if the rent is increased only 2%. Not a complete picture of the property with several years of lease left, there may be strong upside potential. When the lease expires without options, the tenant may have to pay market rents much higher. Risks than investment returns: asInvestors, like you properties that offer very high yields, for example 8% to 9% maximum rate. And then you can sell a new franchise restaurant, a developer offered to be tightened. In this case, the developer creates the restaurant, complete with furniture, lamps and appliances (FFEs) for the franchisee on the franchise requirements. The franchisee signs a 20 years absolute NNN lease to pay rent for SF very generous, for example, $ 4 to $ 5 per month for SF. The new affiliate is willing to dothus does not need to come up with the money to start a business. Investors are enthusiastic about the high returns, but this can be a very risky investment. What is guaranteed to make money is, is the developer. The affiliate may not be willing to keep in tough times, otherwise no equity in the property. If the job of the franchisee fails, it can not be ready to be able to find a tenant to pay high rents, and you may end up with a freeRestaurant. Keep track of the records of the operator: The restaurant is managed by an operator with one or two newly opened restaurant is probably a riskier investment. On the other hand, an operator with 20 years of business and 30 locations may be more likely to be next year, you pay the rent. Commercial lighting: Some restaurants are sold under the trade in lighting, so be sure to document in writing what is for sale. SpecialConsiderations for 2010, while the fast-food restaurants like McDonalds do well during the crisis tend to sit-family restaurants sensitive to higher prices because of the recession. This can eat double-digit decline in sales during the year. As a result, many restaurants sitting to close during the recession. And so in 2009 there was a series of sit-market restaurants for sale with over 10% cap and long-term lease through regional absolute NNNRestaurants like Smokey Bones BBQ. Some of them were super-prime locations in regional centers, which would have been only rarely available in the standard market, removed. It 'was an opportunity for investors, as the glass of water half full rather than half empty view. Those who are still around in 2010, probably the most suitable. And so in 2010, the capitalization rate of approximately 1% decrease compared to 2009.

Sale Leaseback

Sometimes the restaurant, the operator canSection real estate and then lease back the property for a long period of, say, 20 years. A typical investor would wonder if the operator is in financial trouble, so he paid his debt to the propertyto for sale. It may, but need not be the case, but this is a quick and easy way for owners of the restaurant to get money from the stock for good reason: business expansion. Of course, the operator of the property for refinancing with cash, but that can not be the best option because:

Hecan not maximize profit as lenders often provide only 65% ​​of the value of property in a refinance situation. The loan will be a long-term liabilities balance, the show is not often seen in a positive light. Interest rates are perhaps not as favorable when the restaurant operator is not a strong balance sheet. He may not be able to find all lenders due to the limited size of the market in the credit market.

You will often see two different strategies for cash-out, if you paid the rent for the viewRestaurant Operator:

Rental market conservatives: the operator wants to ensure that pays a rent so low the restaurant industry has a good chance of profit. It also provides speed cap for conservative investors, such as the 7% cap. As a result, pay his money is small or moderate. This can only be a low risk investment for an investor, because the tenant is likely to be able to afford the rent. Significantly higher than the market rent: the operator wantsto maximize their budget price the property is significantly higher than the market value, ie $ 2M $ 1M for a property. Investors are sometimes higher maximum rate, for example, offered 10%. The operator can pay the rent $ 5 per square meter in an area where the rent for comparable properties is $ 3 per square meter. As a result, the restaurant in this location suffer a loss because of higher rents. However, operators get as much money as possible. This property could be very dangerous for you. If the tenantAffairs do not, and declare bankruptcy, you must provide a lower rent to another tenant for your right to the surface.

Leasehold

Every time you see a restaurant for sale in a long lease. The ground lease term can be confusing, since it could mean

You buy the building and lease the land from another long-term investor, for example, had 50 years leasehold. You buy the land in which the tenants own the building. This is the most likely scenario.The tenant is building the restaurant with his money and then usually signed a lease to 20 years NNN lease the lot. If the tenant does not renew the lease then the building has returned to the landowner. The maximum rate is often 1% lower, for example, from 6 to 7.25 percent, compared to restaurants where they buy land and buildings.

Since the tenant has a significant amount of money (either equity or borrowed) to be invested for the construction of the building, we must make doubly sure that thisis the right place for their business. In addition, the tenant fails to pay the rent or not to renew the lease, the building with a huge value to you as a landowner is back. Then the tenant will lose a lot more business and build, if not his obligation. So think twice before not to send checks for rent. In this sense it is an investment unsure of a restaurant that you have both the land and improvements. In addition to the lower eyelidRate are the main disadvantages of leasehold

There are no tax write-offs, such as the IRS does not lose their value of the land. So that tax liabilities are higher. The tenant, on the other side can absorb 100% of the value of property and equipment to offset the profits of the business. If the property by fire or natural disasters such as tornadoes damaged, some leases allow tenants to collect insurance benefits and to terminate the lease without modification of theProperties in the last years of the lease. Unfortunately, this author is not aware that the insurance companies to sell fire insurance to you, why would not own the building. So the risk is considerable, as you may end up holding an empty bag very expensive, with no income and a huge property tax bill. Some of the leases of tenants do not allow all structural repairs such as roofing, in recent years of the lease. This may require investors to spend money for deferredMaintenance and consequently will have negative effects on cash flow property.

2009 Complete Guide For Restaurant Real Estate Investments