I often get asked ‘How much should I be paying in rent?’. The rule of thumb for a restaurant is based on your projected sales. Your all in rent ceiling should be no more than 6% to 8% of your gross sales.
An example of this is as follows:
Lets say you have a 3,500-sf space at an all in rent of $20 psf. Your annual rent for this space is $70,000. Lets also say that your restaurant is projected to do $1,000,000 in annual sales. Your rent ceiling would be equal to $1,000,000 (8%) or $80,000 per year. In this example, the proposed rent is lower than the rule of thumb, so judging by industry standards and assuming your operating your restaurant efficiently, this rent rate is manageable.
Recently, I received a call from a franchisee who was upset about his CAM (Common Area Maintenance) increases. For a 4200-sf restaurant endcap on the edge of town, the franchisee was paying around $6 psf in CAM charges. The $6 psf CAM charge reflected a recent 5% increase. His question: “What can I do to get my CAM charge down?”
“Yikes”, I said. Not because of the CAM rate (this is actually a very decent CAM rate), or the CAM increase, but the fact that he wanted a reprieve in CAM costs. CAM is notoriously difficult to negotiate down, especially once you’ve signed the lease. “You’ll have better luck negotiating a lower base rent”, I told him. I needed more information about his situation.
The franchisee told me that the property had just been flipped. “What are your neighbors paying in base rent and in CAM?” I asked. He wasn’t sure, but he made an effort to go find out. In the meantime, I called a broker I knew in the community and asked her what the comparables were for his area. “Even in an endcap, he’s paying about $1.50 psf over market”, the broker told me.
With this information and the intel from the adjacent tenants in the shopping center, the franchisee was able to negotiate a lower base rent rate. How is it possible to lower your rent rate after you’ve signed a lease? You need to communicate with the Landlord. If you’re feeling a pinch for whatever reason, communicate that to their team. You don’t get anything if you don’t ask!