Is 12% occupancy cost too high for a restaurant?

Twelve percent occupancy cost is above the healthy range for most restaurants. Public chains report rent and occupancy between roughly 5% and 11% of sales. At 12%, a restaurant is carrying rent that will show up as thin margins by year three.

What does occupancy cost include?

Occupancy cost is total annual occupancy divided by annual gross sales. It includes base rent, CAM, property taxes, building insurance, and percentage rent where it applies. Utilities usually sit outside it.

How do I test whether a rent is too high?

Divide the proposed annual occupancy cost by the tenant's realistic annual sales. If the result exceeds 10%, the tenant needs higher volume than projected or a lower rent.

Should I take second generation space, or a shell?

May 28

Written By Retail Made

Second generation restaurant space is worth less than its reputation. The only components that reliably carry over are infrastructure: electrical service size, gas capacity, water and sewer, a grease interceptor sized for the new use, and rooftop units if their tonnage and age hold up.

Everything a tenant can see is usually going in a dumpster.

What USUALLY survives

Electrical service size and panel location
Gas line and meter capacity
Water and sewer capacity at the building
Grease interceptor, if it is sized for the incoming use
Rooftop units, if tonnage and age hold up
Hood and make-up air, if the cook line stays where it was

What USUALLY does not

Layout. Kitchen size, kitchen location, seat count
Restroom location and count
Finishes, millwork, fixtures, seating, lighting
Anything that fails current code once the walls are open
Anything branded to the last operator

The under-slab problem

A tenant who wants a different footprint will demo the kitchen no matter how good the last one was.

That is where the assumed savings disappear. Moving a kitchen or a restroom means new plumbing under slab, which means cutting concrete, which means the second generation space now costs more than the shell would have. The line items that looked like a head start become demolition costs.

Ask what the tenant actually intends to keep. If the honest answer is the infrastructure, then infrastructure is the requirement — not second generation space.

What a first generation space can be delivered with

The second generation request exists because of cost and time. Both come from infrastructure, and infrastructure is something an owner can deliver:

HVAC sized for the use, set in place and connected
Grease interceptor installed, or stubbed to the space
Electrical panel set, with capacity to serve the use
Gas stubbed to the space at adequate capacity
Water and sewer stubbed at the right location
Restrooms built to code, or a stated allowance
Storefront, demising walls, sealed slab, finished roof

Quoted that way, the comparison changes. It stops being first generation versus second and becomes total cost to open and time to open — the two numbers the tenant is actually solving for.

Why this matters on the landlord side

An inbound request for second generation space only is not a disqualifier for a shell you represent. It is a signal about cost and schedule, and both can be met.

Never answer that request with "we do not have that." Answer with what you can deliver, item by item.

Put it in writing before the LOI

Vague delivery language is where deals come apart at permit, six weeks after everyone shook hands.

"Landlord to deliver in warm shell condition" means different things to a landlord, a tenant, a general contractor and a plan reviewer. Specify the tonnage, the panel size, the gas capacity, the location of stubs. It is a short list and it prevents the most expensive kind of argument.

Creative Deal-Making covers delivery condition as a negotiating lever, along with rent structures, concessions and timing.

Retail Made