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.

What Should I Ask a Tenant Before I Quote a Rent?

Sep 26

Written By Retail Made

Five questions, and most brokers ask none of them: average ticket, best day and slow day sales, daily break-even, what they pay today, and who signs the guaranty.

The fastest way to tell a rookie from a broker is which question comes first. One asks what rent you are looking for. The other asks what you do in sales.

1. What is your average ticket?

It lets you sanity-check every projection you are handed.

Transactions times ticket times operating days is a sales number. A small coffee shop doing 180 to 200 drinks on a weekday at roughly $5.50 to $6.00 lands near half a million a year. If an operator's projection does not survive that arithmetic, the projection is the problem.

2. What is a good day, and what is a slow day?

The spread tells you more than the average does.

One restaurant reports roughly $3,800 on a busy day and $1,900 on a slow one — a 2x swing inside the same week. When an operator says "we do about $2,000 a day," find out which day they mean.

3. What is your break-even, per day?

Then ask what is inside it.

Stated break-even is usually food and labor and nothing else. One operator puts his at $1,500 a day; his own reported numbers imply closer to $1,800 once rent, insurance and his own pay are counted. The gap is not dishonesty — it is how operators think about the number day to day. You need the full version.

4. What do you pay today, all in?

Base or gross, and what is included.

A tenant comparing your gross number to their current base number will conclude you are 25% more expensive than you are. Get their full monthly obligation, not their rent line.

5. Who signs the guaranty?

A national logo on the door is not national credit on the lease.

Find out what entity actually signs and what stands behind it. A franchisee filing Chapter 11 does not care what the sign says, and neither will your owner when the space goes dark.

Why operators answer

Most of them will tell you, because almost nobody asks. A broker who asks about average ticket is signaling they understand the business rather than the square footage, and that changes the entire tone of the negotiation.

Understanding Retailers covers reading a retailer's numbers, what each category needs, and how to back into a rent they can carry.

Retail Made