Let’s start with the obvious, but often overlooked: Controlling your real estate in some form of ownership, especially in today’s restaurant market, is preferable to leasing. Control gives you the option of converting your investment into cash using a variety of tools, such as a sale-leaseback. More importantly, real estate can be a lucrative investment. A well-known restaurateur explained his thinking on it this way: Controlling all of your real estate allows for buildout concepts that make the investment more valuable. Since we don’t yet know what the long-term effects of the pandemic will be, the more control you have over the real estate in question, then the more options (and flexibility) you’ll have when that picture becomes clearer.
We also know ownership is not always possible. In some areas there is no opportunity to own the land, but you may be able to do a ground lease and own the building. If the ground lease is favorable, this may be a good option.
The second key point is that if you own, you need to determine your sales level in terms of what’s an acceptable rent factor is, even if it is a related-party lease. You need to secure your debt service with a reasonable amortization. Instead of a 30-year, look for a shorter amortization on the real estate and see if reasonable rent can service a reasonable debt service.
Another consideration is whether the real estate has multi-purpose value. We are seeing many people offering development services, and even some who will do joint ventures, so the concept owner has some ownership interest. Look for creative approaches.
