What Restaurant Operators Need to Know About Tenant Improvement
When you are building your restaurants you'll likely incur costs related to improving the property itself. Electrical, plumbing, HVAC work, and structural changes are all common types of improvements operators make when starting a restaurant. Because of this, landlords will often provide a Tenant Improvement Allowance.
Tenant improvement allowance is generally a set amount of funds (negotiated in the lease) specifically set aside to help operators cover the costs that ultimately make a space more valuable. This amount is usually calculated based on the square footage of the leased space and the current condition of the space.
Who Typically Receives Tenant Improvement Allowances?
Typically, tenant improvement allowances are reserved for new spaces. If you're taking over an existing restaurant you'll likely not receive allowances, as most changes made will be cosmetic.
For first-time spaces being converted to restaurants, you can likely negotiate a larger allowance. Ultimately, restaurants are a great amenity to a building and increase the overall value of the property. If the space an operator is looking at is on the ground floor of an office building or a high-rise building, you might be able to negotiate larger allowances, as you'll be making the space more desirable.
The Downsides to Tenant Improvement
Typically, landlords recoup their tenant improvement allowance by charging higher rents. If a you receive $100,000 in funds from your landlord and have a ten-year lease, the landlord may charge an additional $10,000 per year in rent. This ensures that by the end of the lease, landlords have recouped their initial $100,000 investment. Rent increases can be especially burdensome during the first years in operation as you build your brand and business.
Additionally, allowances are usually determined based on construction status. For example, you might receive 50% of the total funds when your architect signs off on the project being complete, and another 50% once you're open for business. This can often be a financial burden to as you'll likely face additional costs during the construction process. Without access to the full funds from the start, you might need to seek out additional sources of funding just to get started.
Ultimately, if a landlord is seeking to recoup their initial tenant improvement throughout a lease, they will be taking a risk that the restaurant will not go out of business. A landlord will therefore want to scrutinize the financial stability of potential operators to ensure this large upfront capital will be repaid.
Advantages to Tenant Improvement
Can cover a significant portion of the build out
Can negotiate for a higher amount if landlord really wants you
Disadvantages to Tenant Improvement
Often timing mismatch between payment is made and when funds are needed
Landlord will charge higher rent
Alternatives to Tenant Improvement Allowances
Restaurant operators have many different options for finding restaurant financing. They might seek conventional bank loans, partnerships with investors, or riskier alternatives like merchant cash advances. Each of these options has its advantages and disadvantages and typically provides a range of financing amounts.
inKind restaurant financing can be an alternative to tenant improvements or used to pay down existing tenant improvementst. Unlike conventional methods of financing, we provide restaurant operators with a lump sum of nonrestrictive cash that does not accrue interest or result in lost ownership.
First, inKind purchases a large amount of food and beverage credit from your restaurant. Then, we sell that food and beverage credit to thousands of users on the inKind app. This model gives operates immediate access to funding while also supporting a restaurant's continued success by driving new, loyal, and high-spending guest traffic.
Similar to how landlords generally profit off of tenant improvements, inKind succeeds when your restaurant succeeds. Unlike conventional sources of funding, this partnership approach focuses on supporting restaurants and helping them build long-term and sustainable profitability.
How The inKind Financing Model Works
inKind provides funding by purchasing food & beverage credit to your restaurant.
inKind sells the F&B credit to guests on the inKind app. Guests receive a bonus to spend more.
inKind sends guests to your restaurant. Guests who use inKind visit more often and spend more per visit.
When looking at spaces and negotiating a lease, ask about improvement allowances. Many of the changes operators make will have a lasting effect on the building, to the landlord's benefit. How much funding you receive will be based on the condition of the space you take, your creditworthiness, and market conditions.
Ultimately, tenant improvements are solid sources of financing for many operators. Their major disadvantages arise from the timing and distribution of funds and the future impact rent increases might have on a business. For an alternative source of debt and equity-free financing, inKind Capital financing is a great choice for restaurants of all shapes and sizes.
Get in touch
How can inKind take your restaurant(s) to the next level? Let's chat.