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Franchise basics: Restaurant real estate

Costs through the roof

Typically, a rooftop unit (RTU) connects to an interior duct system.
Typically, a rooftop unit (RTU) connects to an interior duct system.

If a franchisee’s restaurant will be using fryers, then exhaust hoods will also be needed. In this case, one will need to install a makeup air unit (MAU) on the roof. The cost to cut into the roof for a MAU is typically passed on to the respective tenant; however, a respective franchisee should ask the landlord to include this work in the lease’s ‘Schedule C,’ i.e. the list of all work to be done by the landlord, which is typically built into the lease rate and recouped over time.

This is important because a franchisee’s general contractor will probably not be able to bid out this type of work to the lowest-priced roofing contractor. Typically, any work on the roof can only be performed by the landlord’s building contractor, who will set their own cost that must be paid, regardless of whether or not the franchisee finds it excessive.

This kind of business relationship usually exists between the landlord and contractor because the latter has warranted the roof for 10, 15, or even 20 years, and to ensure the warranty remains valid, there is a requirement that no other trades can cut into it or perform any work on the roof.

Further, when the roof is cut open for the MAU, the opening needs to be made structurally secure with welded supports. A MAU can weigh up to 272 kg (600 lbs) and the structural welding can run as high as $5000 with an engineer’s certification. Again, unforeseen costs can hit the franchisee.

This author, who is also a building project manager and leasehold consultant, has only been able to negotiate an alternative roofing contractor once—and that was because the base building contractor’s quote was ridiculously high. In fact, it was nearly 40 per cent more than the average quote!

Heating and cooling negotiations

Landlords will provide a leasable area with only the minimum required heating and cooling. Within a 232-m2 (2500-sf) space, for example, the landlord might allow for three to four tons of cooling/heating capacity, but if one does not know their specific needs they might simply accept what is provided as sufficient.

The ‘drop down’ connects the RTU to a new duct system. So, one of these indicates one RTU above.
The ‘drop down’ connects the RTU to a new duct system. So, one of these indicates one RTU above.

Without input from a mechanical engineer, a franchisee will not know what is actually sufficient for their space requirements. For a fast-food restaurant with deep fryers or baking ovens, a typical space will not include enough cooling capacity for the rear cooking area—and every additional ton of capacity one adds can cost between $1500 and $2000. It is not unusual for a mechanical engineer to run a load calculation and then advise the franchisee to add a second roof top unit (RTU) in tons of heating/cooling capacity to ensure a comfortable environment for customers and staff. Again, by understanding one’s needs in advance and being armed with the right knowledge when negotiating the lease, some of these costs can be pushed into ‘Schedule C,’ to be done or paid for by the landlord. Overall, this can save a franchisee between $5000 and $15,000.

Fixturing period

Another lease condition that, in many cases, is not negotiated to the best advantage of the tenant/franchisee is a free-rent or ‘fixturing’ period for design, engineering, and construction before opening. Landlords will typically stipulate this period as 60 days, but in the design-build industry, this does not take actual timeline requirements into consideration. Ideally, to take advantage of a free-rent period, one should ask for a minimum of 90 days.

Landlords already know and understand how long it takes to produce drawings and get permits. Timing is everything so a franchisee should have their design-build team in place to help streamline the process.

Getting the most out of one’s investment

As these examples show, there is substantial money on the table when negotiating a restaurant lease. If one is not prepared with the right information, they could end up paying to upgrade the building for the landlord’s benefit! In most cases, as franchisees sign a 10-year lease with two five-year renewals, they are already making a serious investment in the property and the landlord should cover the aforementioned building-upgrade costs in return.

Frank Deluca is CEO of DCL Management Ltd., which specializes in franchise and multi-store development. He has more than 10 years’ experience serving national franchisors as a project manager and building envelope consultant. For more information, contact him via e-mail at fdeluca@dclgrp.com.

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