Should a Restaurant Own Its Real Estate? Buy vs. Lease Decision Guide
Most restaurants lease their space, and many successful operators never own a building. Others view ownership of their location as one of the best long-term decisions they made: it ended rent increases, protected a location they spent years building, and created an asset they could sell, refinance or lease to the next operator. Neither answer is right for every restaurant. The restaurant buy vs lease decision depends on the location, the concept, the owner’s capital and plans, and how the property itself fits a restaurant use.
This guide provides a framework for that decision, for existing operators considering buying their building, buyers of a restaurant whose seller owns the property, and owners who already hold their real estate and are thinking about what to do with it.
The Case for Leasing
- Capital stays in the business. Money that would go into a down payment can fund equipment, renovations, working capital or additional locations.
- Flexibility. If the neighborhood changes or the concept does not work, a tenant can relocate at lease end rather than selling a building.
- Access to locations. Many desirable restaurant locations, such as shopping centers, mixed-use buildings and downtown storefronts, are rarely available for purchase.
- Fewer ownership responsibilities. Depending on the lease, the landlord may handle structural repairs, roofing, parking and common areas.
- Second-generation space. Leasing an existing restaurant space can reduce build-out costs. See our guide to restaurant build-outs.
The Case for Owning
- Control of the location. The owner cannot be forced out at lease end or by a landlord’s redevelopment plans.
- Predictable occupancy costs. Loan payments on fixed-rate financing do not rise with market rents, though property taxes, insurance and maintenance still change.
- Freedom to improve. Owners can renovate, expand, add a patio or reconfigure the kitchen without landlord approval.
- Building equity. Loan payments reduce debt on an asset that may appreciate over time.
- Exit options. At retirement, the owner can sell the restaurant and the building together, sell the restaurant and lease the building to the buyer, or sell the building separately.
The Trade-Offs to Weigh
Owning concentrates more of the owner’s wealth in one location and one asset type. It adds responsibilities for roofs, parking lots, building systems and property taxes. It requires a larger upfront investment than leasing. And if the restaurant struggles, the owner may have both a business problem and a real estate problem at the same time.
Leasing avoids those issues but exposes the restaurant to rent increases, renewal uncertainty and landlord decisions outside the owner’s control. For restaurants that have invested heavily in a specific space, a lost lease can mean losing much of the value built there.
Questions to Guide the Decision
- How long do you expect to operate at this location? Ownership generally makes more sense for owners planning to stay for many years.
- Is this location central to your concept’s success? A restaurant whose customer base depends on its specific site has more to lose from a lease ending.
- Can the business support ownership costs? Compare projected loan payments, property taxes, insurance and maintenance with current rent and charges.
- Will buying drain working capital? A down payment that leaves the restaurant short of cash can create more risk than it removes.
- Is the property suitable long term? Consider building condition, parking, zoning, access and whether the property would appeal to another restaurant operator or other user later.
- What are your growth plans? Operators planning additional locations may prefer to preserve capital for expansion.
- What is your exit plan? Consider how you might eventually sell or transfer the business and the real estate.
Running the Numbers
A useful comparison looks at total occupancy cost under each option, not just rent versus loan payment. Under a lease, include base rent, scheduled increases, common area charges, property taxes and insurance passed through, and any repairs the tenant must handle. Under ownership, include principal and interest, property taxes, insurance, maintenance, reserves for major repairs and the opportunity cost of the down payment. Then consider what each option does to the restaurant’s cash flow in a slow year. Our restaurant cash flow guide explains how occupancy costs interact with prime costs and debt service.
Owners can estimate payments on real estate financing with our conventional loan calculator.
Holding the Property in a Separate Entity
Many restaurant owners who buy their building hold it in a separate company that leases the property to the restaurant. This can separate the real estate from the operating risks of the restaurant, make it easier to sell the business and the building independently, and help with estate and succession planning. The lease between the two entities should be in writing with reasonable, documented terms, because buyers and lenders will review it. Legal and tax advisors should help set up the structure.
When You Are Buying a Restaurant and the Seller Owns the Building
If the seller owns the property, a buyer typically has three options:
- Buy the business and the building together, financing both, often with a longer-term structure for the real estate.
- Buy the business and lease the building from the seller, preserving capital but creating a landlord relationship with the former owner.
- Buy the business with a lease and an option to purchase the building later.
Be careful with valuation. If the seller’s financial statements show little or no rent because the seller owns the building, the business’s earnings must be adjusted to reflect market rent before it is valued separately from the property. Otherwise a buyer may overpay. See our guide to restaurant valuation.
Sale-Leasebacks
An owner who holds a restaurant property can sell it to an investor and lease it back. This converts real estate equity into cash that can fund expansion, a partner buyout or debt reduction. The trade-offs are the loss of control and future appreciation, plus a long-term rent obligation that will affect earnings and any future sale of the restaurant. Lease terms in a sale-leaseback, including renewal options and assignment rights, deserve careful review.
How Lenders View Restaurant Real Estate
Restaurant buildings are specialized properties. Lenders and appraisers consider how easily the property could be used by another restaurant or converted to another use, the condition of kitchen-related systems such as grease handling and exhaust, and the location’s traffic and access. For owner-occupied property, lenders also evaluate the restaurant’s cash flow, since the business’s rent or payments support the loan. Environmental review is common for any commercial property purchase.
Financing options for owner-occupied restaurant property may include SBA 504, SBA 7(a) and conventional real estate loans, subject to eligibility.
Timing a Purchase of Your Building
Opportunities to buy a restaurant building often arise at specific moments: a lease renewal, a landlord deciding to sell, a neighboring property coming to market or the purchase of a restaurant from an owner who holds the real estate. Operators who have kept their financial records current, understand what they could afford and know how they would structure ownership are in a better position to act. If a lease includes a purchase option or right of first refusal, note the deadlines and conditions so the opportunity is not lost.
Frequently Asked Questions
Is it better for a restaurant to rent or own?
It depends on the owner’s time horizon, capital, the importance of the location and the property’s suitability. Owning provides control and equity; leasing preserves capital and flexibility.
Can I buy the building my restaurant leases?
If the landlord is willing to sell, yes. Some leases include a purchase option or right of first refusal. Owner-occupied financing may be available.
Should I buy the building when I buy a restaurant?
It can make sense if the price is reasonable, the business can support the combined payments and you plan to stay long term. Otherwise, a long lease with renewal options may be the better choice.
Financing Owner-Occupied Restaurant Property
US Professional Funding helps established restaurant operators and qualified buyers finance owner-occupied restaurant real estate, alone or together with a business acquisition. Visit our restaurant real estate acquisition page to learn more.
