Post Covid-19: The Pros and Cons of Location Takeovers

As the novel coronavirus continues to derail restaurants’ plans for 2020, owners and operators may be beginning to contemplate what is in store for their future. Inevitably, some will fail. Others, however, will be ready to expand into new spaces– and with some concepts closing their doors, there will be an increase in vacated real estate open for takeover.


Former burger joint prior to  takeoverFormer burger joint prior to takeover

While it is possible to take over an existing restaurant space quickly, effectively and affordably, you have to be careful. Those unfamiliar with this type of development often think they’re getting a great deal because so many required elements of a typical restaurant build-out are existing. Landlords and brokers will emphasize these aspects, highlighting the opportunity to “save.” However, these existing conditions rarely work out the way they’re promoted and can end up costing more in the long-run.

Restauranteurs have the potential to keep these costs down, but in order to do so, it’s important to understand why the costs might not be as low as expected or promoted. There are two key things that influence the costs of developing or taking over an existing restaurant:

Differentiation – a fine line

The former restaurant you’re taking over most likely failed. There is a very thin line that separates the amount of changes required to convince customers that there is a totally new concept and operation in the existing failed space. Finding that line is difficult - falling short can mean continued failure. Blowing past it can mean overspending, making it nearly impossible to make a reasonable return on investment. It is critical to define the minimum amount of changes and investment required to ‘exorcise the demons’ from the failed restaurant and make it clear that a unique, new concept has settled in.

Assumptions

There are many variables associated with redeveloping an existing restaurant. People will often initially assume that much of the equipment, building utilities and existing build-out can be reused because there was a previously operating restaurant in the space. Unfortunately, regardless of what landlords or brokers may tell you, there are too many unknown factors related to reusing existing items: updated building codes, changes in use, condition and useful lifespan of the existing items, etc.  Many people may tell you that all of the existing conditions are “grandfathered” because there was an existing restaurant in use prior to you taking possession of the property. Unfortunately, the threshold for reusing existing elements that may not meet current requirements is very low. Every jurisdiction sets their own requirements for allowing non-conforming, existing conditions and these requirements are getting more and more strict.

 

HIYA Taco rendering for taking over space pictured above

 

how to control true costs

Keeping in mind why the costs might be potentially higher than you originally expect, there are three simple things any restaurant owner can do to understand the true costs associated with redeveloping an existing restaurant site and how to control these costs:

Do your homework:  As soon as you identify a potential existing restaurant location that you think might work for your concept and execute a Letter of Intent to acquire it, we highly recommend you work with professionals that can help you with thorough due diligence. This may be speaking with your Architect to identify and understand any potential existing areas that are non-compliant with current building, zoning and health codes. It could also be working with your contractors to examine the building systems (especially the HVAC and kitchen exhaust systems) to make sure they’re in good working order with reasonable life left. Do the same with your kitchen equipment vendor on the refrigeration, electrical and mechanical components of the existing foodservice equipment.  Don’t make assumptions. Verify as much as possible so that you can clearly ascertain the true costs.

Locate the Documents:  There are two different sets of documents that contain critical information and will help with the due diligence above. One set is the Base Building Construction Drawings and the other is the latest Tenant Upfit Construction Drawings.  These should include Civil, Landscape, Architectural, Structural, Food Service, Plumbing, Mechanical, Electrical and Fire Protection drawings.  Several details could be evident in these drawings that won’t be readily visible in even the most thorough site investigation, like the size of a grease interceptor, under-slab plumbing, exhaust duct sizes, etc. The accuracy of this information can easily swing a project budget almost $100,000 in one direction or another.

In many cases, the only place to find this information is in a detailed set of Construction Drawings. These documents are often available through the landlord or property seller. If not, you can also usually access them for a small fee from the local building department. The really good real estate brokers will make it their responsibility to find and copy these documents for the project team’s use.

Verify the fit:  We strongly recommend preparing a “test fit,” or a preliminary layout, as early as possible to determine which aspects of your ideal layout, including cookline, prep kitchen, bar, seating, etc., will fit in this specific location. For example, even though a kitchen exhaust hood may be existing, it might not accommodate your standard equipment line-up. This could either lead to an atypical operation or require significant changes. Either option may be the difference between success or failure.

We also often see an assumed number of seats and / or tables able to fit in a given space based on its square footage, or what was existing. Many times, we find that once a “test fit” is performed and the actual kitchen is laid out in a non-standard shaped space, either more extensive modifications are necessary to get the required seating capacity or the seating capacity becomes secondary to saving money. In either case, the ability to meet the desired ROI is compromised.

 

These are three simple and very low-cost things you can do to better ascertain the true costs associated with taking over an existing restaurant. Once the true costs are determined, it’s much easier to either negotiate up-front to address these costs or look at other design alternatives to mitigate these costs.

Featured in QSR magazine.

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