Owning a restaurant is expensive. It doesn’t matter if you’re a fine dining establishment or a fast-food franchise. With labor and food costs, point of sale systems and marketing efforts, you won’t have a lot of wiggle room in your budget.
Rent is one of your largest fixed expenses as a restaurant owner. Rent plays a factor in where you are located, the condition of your space and your ability to try new menu items or host special events.
How much of your budget should you devote to rent? Keep reading to learn how to estimate rent for restaurants. You’ll have a better idea of what you can afford as you search for restaurants for lease.
1. Research the Market & Your Competitors
You may think a specific city or neighborhood is ideal for your new location, only to discover that you can’t afford the high rent rates. Before you look at properties, you need to determine the area’s average rent costs.
A national survey from RestaurantOwner.com found that the average monthly base rent for restaurants was around $6,000. Responses varied depending on location and concept, ranging from $3,000 to $8,750 per month.
How do you determine the average rent cost in an area? Researching your competitors is an excellent place to start. Public restaurants and franchises often list their Form 10-Ks on their websites. You can use this form to see a business’s occupancy costs from previous years.
Aside from asking neighboring businesses, working with a local commercial real estate broker is your best bet to get a clear picture of the market. Commercial real estate brokers perform extensive research. An experienced broker will provide you with average rents for casual, fast-food and fine dining restaurants in the area.
2. Build Your Restaurant’s Budget
There’s a lot to consider when opening a restaurant, whether you’re operating one for the first time, adding another location or moving across town.
According to a study from Ohio State University, about 60% of restaurants fail within the first three years of business. That statistic doesn’t take into account the effect COVID-19 has had on restaurants since 2020. Starting out with a detailed business plan and budget will help you run your restaurant successfully.
Initial operation costs can be anywhere from $10,000 to $100,000, depending on the size of your restaurant and the equipment you need. Your restaurant’s food and labor costs will absorb 60% to 70% of your revenue. The remaining revenue must be enough to cover your rent, taxes and other expenses.
Restaurant Costs Breakdown
What percentage of sales should rent be for a restaurant? How much rent should a restaurant pay? We’ve broken down the three largest restaurant expenses: food, labor and rent. After excluding these expenses, the remainder of your gross sales should cover other costs and general overhead, with at least 3% to 6% of sales left as profit.
- Food: 25% – 40% of sales
- Labor: 28% – 35% of sales
- Rent: 6% – 10% of sales
Other Occupancy Costs
As a general rule, your total occupancy cost should be 6% to 10% of your gross sales. Occupancy costs include rent, common area maintenance (CAM) fees, property taxes and insurance. CAM fees, like parking lot maintenance or janitorial services, should add no more than 2% to 3% to your base rent.
3. Estimate Your Restaurant Rent Cost
It’s crucial to estimate how much rent you can afford. Generally, larger restaurants in popular destinations may pay up to $150,000 in rent annually. Smaller restaurants in less trendy areas may pay around $40,000 a year in rent and building fees.
Finding out how much you can afford is simple arithmetic. Multiply your annual sales by 6% and 10%. These are the percentages from the recommended budget listed in the section above. The results give you a range of rent you will be able to afford annually.
Let’s say you’re projecting sales to equal one million dollars this year. Multiply one million by 6%. You get $60,000. Multiply one million by 10%. You get $100,000. Based on your estimated sales, you can afford rent from $60,000 to $100,000 annually, which is $5,000 to about $8,300 a month.
4. Use Rent per Square Foot Estimations
Commercial real estate rent is calculated per square foot. The price per square foot varies by city, building condition and neighborhood. You can use your annual gross sales and the square footage of the space to compare rental costs.
First, divide your gross sales by the building’s square footage. The result will be your sales per square foot. If you estimate making $600,000 in annual gross sales, your sales per square foot for a 2,000-foot space will be about $300.
Calculating the sales per square foot helps you see how a rental rate fits—or doesn’t fit—into your budget. Once you know the rental rate, you can use it and your sales per square foot estimation to determine a rent percentage. You want your percentage to fall between 6% and 10% as mentioned in section two.
Sticking with the example from above, divide the rental rate by your $300 sales per square foot. We’ll say the rental rate is $20 per square foot. When you divide the two, you get a percentage of about 6.67, meaning your rent cost would be around 6% to 7% of your sales.
5. Know What Types of Rent Are Available
Another factor to consider is the type of rent you’ll be paying. As a renter or lessee, you may agree to flat rent, fixed rent or additional fees based on a percentage of yearly sales. No matter what type of rent you negotiate, it’s important to expect and plan for annual increases.
- Flat rent. In leases with flat rents, the rent stays at one amount for a given time. Under a ten-year lease, for example, rent for the first five years could remain at a set amount and increase over the last five years.
- Fixed rent. As its name suggests, fixed rent is a set dollar amount. Each month you pay the same amount of rent. The fixed rent amount will likely increase each year of your lease.
- Percentage rent. With percentage rent, restaurant tenants pay a lower base rent plus a percentage of sales. Often, percentages are capped at 5% to 7% of a restaurant’s yearly sales. Percentage rents include a natural breakpoint, which is a dollar amount of sales the tenant meets before paying the percentage.
Estimating rents may seem tedious, but knowing what you can afford will save you from making a decision you’ll regret. After building a budget and determining your rent range, you are ready to find a restaurant space for lease.
Why not bring your restaurant to Branson, MO?
Contact Commercial One Brokers for information on Branson market rents and available restaurant properties. Our experienced brokers will help you find a restaurant for rent that fits your budget, size and ideal customer.
