TO LEASE OR NOT TO LEASE
By Chris Wadsworth
“Why did that new restaurant close so quickly?” “Why are restaurant rents so high?” “Why can’t we get a Krispy Kreme?”
These are just some of the questions local diners have when it comes to the ever-changing restaurant scene in and around Ashburn. To try to get some answers, we turned to Craig Cheney, one of the most experienced commercial real estate brokers in the region.
Cheney, a principal with the real estate company KLNB, has been in the industry for 25 years. He’s worked with scores of restaurants over the years – small mom-and-pops to big national chains.
Ashburn Magazine posed our most puzzling questions to Cheney. Here are some of his responses.
Q: What is the main goal of a landlord when they are looking to lease a restaurant space?
“Landlords prioritize goals and objectives differently depending on a variety of factors. Most of the time, landlords want to get the best economic deal possible from the best credit tenant that has the most cachet and drives the most traffic to their center.”
Q: That sounds like they are looking for a unicorn to some degree.
“It is very difficult to achieve all those objectives, so each landlord will prioritize which of those objectives (economics, credit, cachet, traffic) is most important to achieve their goals. For instance, if a landlord is going to be selling their shopping center in the near future, then high rent and good credit will likely be a higher priority. If they are a long-term holder of the real estate, they may prioritize cachet and traffic over getting the highest rent possible. In most cases, the credit quality of the tenant is at the top of the priority list.”
Q: What type of things does a landlord or leasing agent look for in a potential restaurant tenant?
“If it’s an existing restaurant with other locations, we tend to focus on credit, cachet and a menu that doesn’t compete with other restaurants but caters to the shoppers of the center. If it’s a start-up, we’re still concerned about the menu, but looking for someone who has experience in the restaurant industry, has a well-thought-out business plan and access to enough capital for the construction, furniture, fixtures, equipment and [funds] to support the restaurant throughout the first year of the lease.”
Q: What are some signs of potential success?
“Someone who has had multiple years managing a restaurant and has saved a significant amount of their own capital. When an individual is investing more of their own capital and willing to bet ‘the farm’ on their restaurant concept, they typically have a stronger drive and belief in their restaurant versus someone who is getting a loan for most of the needed capital.”
Q: And what are some red flags?
“A lack of sufficient capital and a business plan that is not thought through well enough and is lacking details such as a menu, name, projections and a breakeven point and timeframe. Another red flag is when we can tell the business plan was generated by AI.”
Q: Having seen lots of restaurants come and go – what are some things that you see successful restaurants do in their first year?
“Successful restaurants pay attention to every detail that affects the customer service, the quality of food and the cleanliness of the restaurant. They bring their A-game every day and are consistent about it. The restaurant business can be very unforgiving if a customer has a bad experience.”
Q: What are some mistakes that you see new restaurants make?
“They cut corners. It can be scary when a restaurant opens and costs are greater than the sales. Successful restaurants believe that if they continue to provide great food [and] great service in a clean atmosphere, the sales will grow and they will be profitable. But if they start to cut corners to reduce costs, the customers will notice, and things typically go downhill from there.”
Q: How important is it for a restaurateur to have business knowledge, not just food and food prep knowledge?
“This is extremely important and makes a huge difference. There’s so much more to running a successful restaurant than just knowing how to cook great food. If someone doesn’t have the knowledge or experience with managing a profitable menu, managing employees, overseeing food deliveries and inventory, etc. but they are a really good cook, they should stick to being the chef and hire a good manager.”
Q: Restaurant owners often blame their troubles on high rents? But rents are negotiated before the lease is signed, correct?
“Restaurant owners never have to agree to rents that don’t make sense for their business to be profitable. When we see a restaurant owner blaming their trouble on high rents, it’s typically because they thought sales were going to be better and thought they could afford the rent they agreed to. I have seen many situations where a restaurateur blamed high rents for failure, but the real issue was that their sales were not good for reasons that were within their control.”
Q: What is an “exclusive” in shopping center leasing?
“An exclusive is where a tenant negotiates that the landlord will not lease to another tenant that provides similar services or food. There are a variety of ways that an exclusive can be negotiated and it can actually be complex.”
Q: But it seems we’ve seen some larger centers that have more than one pizza place or ice cream shop.
“All centers do not have them, but most centers will have at least a few depending on the savviness of the parties.”
Q: What do you think the general public doesn’t know or should know about commercial real estate deals, restaurant leasing, etc?
“There are so many factors that go into bringing a restaurant or retailer to a shopping center. Over the years we’ve heard people say, ‘Why can’t we get ______ [a certain type of retailer]?’ They think it’s as simple as ‘There is space available and there are wealthy people in Loudoun – so who wouldn’t want to go there?’ But it’s much more complex than that.”
Q: How so? What types of factors do restaurant brands consider when leasing a space?
“One of the big things is population [both daytime and evening] and proximity to businesses in the area – and the types of businesses. Restaurants want to draw on businesses that do catered lunches and spend corporate dollars on going out for meals. For a long time, Loudoun lacked the daytime population and employment that restaurants needed to have strong sales during the weekday. Restaurants had great sales on weekends, but sales during the week weren’t that strong. However, that seems to have shifted with more people working from home, more options for delivery services that boost their sales and more businesses moving to Loudoun County.
Q: Sometimes we hear about a new restaurant coming and then years pass before it opens.
“It can take years for retailers to make a decision to come to a market, and once that decision is made, it can take as long as a year or more for them to negotiate the lease. Then there is the architectural and permitting process that can also take a long time. So it can be a very long process with a lot of complexities to it. Occasionally a deal can get done and the tenant opens quickly. But that is the exception, not the rule.”
Q: Is Ashburn a good market for new restaurants compared to other places?
“In many ways Ashburn and Loudoun is a good market for new restaurants because the population is wealthy and is often too busy to cook because of the many dual income households with kids. Generally speaking the rents are more affordable than when you get closer to DC.”
Q: So let’s cut to the chase. Why can’t we get a Krispy Kreme?
“I haven’t talked to them in a while, but they had very specific criteria. They had to have a drive-thru lane and they had to be on the ‘morning side of the road’ – meaning traffic headed to work. And to get a special use permit or special exception for a drive-thru – it’s like an act of Congress in some municipalities. The governmental approval process is expensive and time-consuming and there are lots of retailers that just don’t feel like doing it. But Krispy Kreme was only going to go places where there was an existing drive-thru and that was hard to find on the morning side of the road.”