Posted by ray@lcorn on November 11, 2003 at 13:02:09:
Luke,
I know zilch about Canadian law. I would guess that the “caveat” (warning) in the title records is because the lease is a burden on title. Usually (in the states) a memorandum of lease is recorded to put parties on notice that the lessee has vested rights in the property.
ray
Resteraunts - Why not Ray? - Posted by Luke
Posted by Luke on November 04, 2003 at 06:49:28:
Hi Ray!
I had the privelege of listening to your Web-radio interview with J.P and Terry Vaughn over on wsradio.com and couldn’t help but notice your aversion to having resteraunts on your properties. Why is that? My gut feeling would be the fact that they play with fire, is that it?
TIA
Luke
Re: Restaurants - Posted by ray@lcorn
Posted by ray@lcorn on November 04, 2003 at 13:52:43:
Luke,
My aversion to restaurants comes from experience in owning the operation rather than just the building. For those who haven’t heard the interview, my comment was “I don’t like to hear the word ‘restaurant’ and my name in the same sentence.” That’s a lighthearted way to say I’ve found that I am not cut out for that particular business. I know others who do very well in the restaurant business, I’m just not one of them.
The reasons are several, and my own lessons were expensive and hard won.
First, a restaurant is a business, plain and simple. Even a franchised operation run by a manager for an absentee owner cannot be treated as a passive investment. As a business, restaurants must survive on profit margins that leave very little room for error. Labor and food comprise (at least) two-thirds of the operating expense, and both are highly subject to waste. Competition is fierce, with little to no barriers to entry. In short, nothing about a restaurant fits my present criteria for investment. Obviously that has not always been the case, and it may change in the future. But at this point in time we do not want or need another retail business operation in our portfolio.
As a prospective tenant, I have to evaluate the viability of any business from the standpoint of what is known to be true for that business in general, and specific to the site and backers.
My first priority in selecting tenants for commercial properties is the financial strength of the owners and/or guarantors of the lease. Next in evaluating risk of default is the performance of the business type in general, and then specifics to the case. In the case of restaurants, franchises increase the probability of success, but unless the corporate parent is willing to sign the lease the tenant is no stronger than its owners.
The nature of the food service business produces some undesirable by-products. Most localities I deal in require a restaurant to have a grease trap to capture the solid waste produced. If a building is being retro-fitted this can be an expense modification. Dumpsters routinely overflow, and not with innocuous cardboard and paper that typifies retail or office tenants. They are typically smelly, messy and unsightly. Fire suppression systems must be installed and regularly maintained for any kitchen. Ventilation systems are often not sized or designed to handle the inevitable odors from cooking, and even when they are those odors have to go somewhere. If you’ve ever been downwind of a burger joint at lunchtime you know what I’m talking about. Lastly, traffic flow and parking have to be adequately managed in order to prevent tenant conflicts.
In sum, all those issues and others increase the risk and effort required in producing the cash flow that provide my return on investment from a real estate project. That means that I should and would charge a premium for taking on that increased risk and effort, but often the operator cannot stand an increased rent due to the very competitive pressures that make his business difficult in the first place.
For all the reasons above, I definitely do not want to own one as a business, and am very careful when evaluating a restaurant as a tenant. My own aversion aside, many people do very well as restaurant owners and operators. Also, as developers that typically keep and manage what we build, there are distinct advantages to having a quality restaurant operation as a component of a project.
The acquisition of the property I mentioned in that interview was just such a case in point. We own a hotel and have an office building in development, both of which are adjacent to the restaurant we actually re-acquired (we originally developed the site twelve years ago). It was built as a restaurant and required no modifications. It made sense for us to own and control the property since we have a large investment in the total project. The tenant is a good operator with a high-quality business, and spent a considerable amount of money last year upfitting the interior for his concept. We also know the market very well, and have confidence we could replace the tenant if need be. That’s a perfect example of weighing all the pros and cons up front, aside from my personal bias!
On the other hand, I recently had a case where the decision went the other way. We developed a small strip center last year in front of a Wal-Mart Supercenter, and had at least a half-dozen restaurants contact us wanting to lease space.
We considered the following factors when creating the tenant mix: The site was tight on parking; the prevailing rental rate for retail space was above what a restaurant could pay; we had 75% of the space leased to retailers and were very tight on dumpster space. The tenant mix did not lend itself to needing food service, and the surrounding neighborhood already has about 25 restaurants. In our view that made the failure of a few of them fairly likely. We declined to lease to any of the interested restaurants because we did not want to subject the property to those challenges, in addition to the general characteristics mentioned earlier.
ray
Re: Restaurants - Posted by Luke
Posted by Luke on November 06, 2003 at 21:49:53:
Thanks for the insight Ray!
My first thoughts (on why you might be adverse to resteraunts) were, fire, grease and then fire (again :). I hadn’t thought about the competitiveness aspect of it at all, not to mention the extra hassles like gross dumpsters and parking lot squabbles.
The reason I even mentioned it and caught onto your take on resteraunts, is because a property that I’m looking at investing in, currently has a resteraunt as a tenant. In fact their lease agreement is registered with Land Titles (this is in Canada) and shows up on the property title as a “Caveat”. Any idea why would that be?
thanks again!
Luke