Use The 5% Rent Rule As A Predictor

It comes and goes.

 

 

@RestaurantWin:

Saw a listing for a 2500sf #Restaurant for sale in LA. Rent is $15,000/mo. You need 3.6MM/yr in sales to make this work. Is that doable?

 

I posed this question on Twitter after browsing  restaurant listings from different cities.  This particular one is in Los Angeles and the population and spending  power is there so I imagine it’s doable. Based on the rent it’s a prime location because there’s certainly much cheaper restaurant space available in LA but again, location. I can tell you we personally wouldn’t touch this and don’t care what neighborhood it’s in but somebody has before and somebody will again. Let’s break down the real deal.

The 3.6MM in sales is based on the rule of thumb that rent should be no more than 5% of sales. 15k/mo rent is 180k a year, which is 5% of 3.6MM.

180k in annual rent divided by 2500 square feet gives us $72 a square foot but it’s all relative.  I also saw  a restaurant for lease in Manhattan asking $138.46 a square foot for a space that’s advertised at 1300 square feet so if we do the math:

$138.46 x 1300sf = $179,998 /yr or $14999/mo. So 15k in LA  gets you half the space in New York City. And this space was in the bowels of lower Manhattan so the rents there can actually go much higher.

It sounds like a lot of money because it is a lot of money.  Maybe that’s why these spaces are for lease. Restaurants and bars can be very seductive businesses but slow your roll!  Everything is still a math problem in foodservice and not taking the time to analyze all costs will sink your plans wherever the hell you are. Based on the math both spaces need to average 10k/day sales if our target is 3.6MM a year.

Regardless of concept consider the following:

  • Your days and hours of operation. Are you open 10, 16 or 24 hrs? Open daily or closed one day a week? Calculate hourly sales needed to average 10k/day. Can you do $417,$ 625 or $1000 per hour.
  • Both spaces are small – 1300sf and 2500sf. What’s the kitchen to dining room ratio? In other words how many asses will fit at the tables or bar? Is there outdoor seating? A basement?
  • Is your kitchen big enough to produce the volume needed to make the numbers?
  • Can your menu provide the check average you need to make any of the above work?
  •  Are you a full service or quick-service?   A full-service table may take from 30 -60 minutes to turn as your guests gaze into each others eyes over craft beer or designer cocktails. The big business deal being hammered out can’t be rushed either.  We love our guests but they need to get their asses up and out of those chairs and barstools at some point too!
  • Do you see the sheer volume of business necessary to make the math work in these two examples? Even with the moneyed and dense population of those cities I’d be wary of paying that much for those spaces.

You may also have to deal with proximity of competition which is within yards as  well as the fluidity and fickleness of big city dining. What’s hot this year might be out the next.

New York  and LA are in their own categories but this scenario applies to any town.  Before you dream of raking in  all the cash, which you very well may, do the math on where it’ll be going. The balance must exist between your kitchen’s capacity to produce, your price points and ticket average, your service and speed and finally if any of it’s physically possible within the space available and hours in the day.  The numbers must fit and you don’t have to learn that the hard way if you take the time to plan.

Not everyone may agree with the target of rent being 5% of sales but I’m sticking with it. With food and labor costs anywhere from 60%-70%  and we haven’t talked about  utilities, insurance and a host of other expenses planned or unplanned, unless you’re buying the space I wouldn’t plan for much more than that. That is, if you want to keep something for yourself.

Below is a real ad for another space in Manhattan. I don’t even want to do the math on this one!

wp-1456592152596.png

We didn’t even talk about build-out or improvement costs before you even open did we?

Cheers

 Tempura Vegetables

1/2C flour

1/2C cornstarch

1/2t baking powder

1/4t five-spice powder

1T oil

1T vinegar

1 egg

1/2C + 1/8C water

Vegetables*

Flour  for dusting

Oil for frying

Combine flour, cornstarch, baking powder and five-spice. Whisk in oil, vinegar, egg and water until smooth. Chill.

Heat oil to 360. Dust vegetables with flour and dip into cold batter.  Fry in deep fryer 2-5 minutes.

*Vegetables should be cut into thick slices or chunks

 

 

 

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