When opening a restaurant, restaurateurs typically fall into one of two categories. First-timers and independent restaurateurs are more likely to purchase a restaurant with a kitchen and infrastructure.

According to their design, franchisees and multi-unit chain tenants will often secure raw space to build out the store. However, if they don't know how to lease the space or buy it, both types of restaurateurs could be in for significant costs.

Some hidden costs may affect both the lessees and buyers of commercial properties, but others are more specific to each.

Impact Fees

Developers are required to pay impact fees for any new developments. Developers typically bear the burden of impact fees, but smart developers know how to pass these costs onto their tenants.

The tenant will typically pay specific impact fees depending on the location they are leasing. For example, the city may charge impact fees if the developer plans for specific commercial spaces to be used for restaurant purposes before tenants move in.

After a tenant has applied for their specific permits, the city will review the fees that were already charged and make any changes necessary to accommodate any equipment that may have a greater impact on the space. For example, the city charges these fees because they know that restaurant use has a greater impact on the water system than non-food retail/service shops.

There is no set formula for how tenants are charged. Every city is unique. 

The impact fees can reach the thousands. Therefore, it is important to understand what impact fees were paid by the developer. To prevent the developer from passing these fees on to the tenant, it is advisable to include specific language in your lease. In addition, to avoid over-budgeting, make sure the tenant knows the exact cost before agreeing to pay.

Hidden Costs When Buying A Restaurant

Many restaurateurs who purchase an existing restaurant want to cut down on the time and money required to remodel it. Many people assume that it meets all current building codes because the restaurant has been in operation for a while.

ADA & Code Upgrades

A restaurant approved five years ago might not be in compliance with today's code cycles.

Numerous buyers will need to make space changes, which could lead to costly code upgrades. We have also seen restaurateurs lose their liquor licenses due to the fact that the previous owner had reduced the space and not have the required number of restrooms.

We recommend that you hire an architect to do due diligence on a restaurant space if you're looking to buy one. Additionally, with the increase of American with Disabilities Act (ADA) lawsuits filed over the past couple of years, we recommend that an accessibility expert, such as an accessibility-certified inspector, be brought on during the due diligence phase to review and point out any potential ADA deficiencies that can make the new owner susceptible. Different states also have their own accessibility laws.

Hidden Costs Affecting Both Buyers And Tenants

Extension Options:

 Having the option to extend your lease term is a key factor for business owners. While tenants may fight for their right to extend their leases and to receive the rent due during the option terms of their lease, many tenants don't know the details of how to negotiate extensions. Commercial leases generally state that "options are personal to the tenant." If you assign the lease, this will cancel your right to exercise your options. The right to extend your lease is crucial if you intend to sell your business.

Many lessors have tried to extort money from tenants trying to sell their businesses, but they didn't realize their option was null.

The effect of defaults on your ability to extend is another important issue. Many leases state that certain defaults can result in the option being void. Therefore, it is important to negotiate precise language that preserves your rights, provided you correct such defaults.

Lease Assignment, Subleases, And Profit Share:

Assignment refers to the transfer to another party all of the tenant's interest in the lease during the remaining lease term. These are the most important terms you need to know and negotiate.

Assignments allow you to end a lease early and/or to sell your business. Many assignment clauses include many conditions, which must be approved by landlords. Some give landlords sole discretion to approve or deny the assignment.

Some assignments may not be exempt from your lease obligation. If you intend to sell your business, a well-drafted assignment provision can help you create an exit strategy and increase your company's value.

Some leases have vague language that allows the lessor to keep anywhere from 50 percent up to 100 percent of all profits. This clause is usually used to protect the lessor if the tenant subleases the property or collects a higher rent than the current contract. However, the seller can enforce the clause to retain all of its profits after selling the assets or assignment of lease.

This article will cover a few issues that often go unnoticed when leasing or purchasing a restaurant property. The difference between a smooth opening or a costly overrun is how experienced lawyers, architects, and restaurant realty brokers work.