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The Advantage of Being Your Business’s Landlord

One of the biggest challenges restaurant, bar and club operators face is the cost of spiraling occupancy costs. I have seen many good operators over the years lose their successful business because they couldn’t continue to absorb the increased occupancy costs they have experienced. Unless you have a long term lease in place with reasonable fixed rent increases you can afford you are vulnerable to being priced out of the market. Under ideal circumstances your rent shouldn’t exceed five percent (5%) of net sales (gross sales less sales tax). However in many sections of the San Francisco Bay Area and in many expensive sections of Southern California I have seen rents in excess of ten percent (10%) and sometimes as high as fifteen percent (15%+) or more of sales. Needless to say businesses paying these expensive rents are being forced to sell at lower prices and/or chance the risk of going out of business as the increased operating costs they are experiencing with product costs, labor costs and other costs are putting pressures on them to absorb many of these costs as the market will not bear many increased prices. Consumer’s available discretionary cash flow for food and beverage consumption away from home is limited due to the increased costs they are experiencing across the board for many of their daily expenses versus the minimal income increases they are experiencing.

The advantages of owning your own business and building are indicated below.

  1. You can assure yourself that your rent will be at an affordable level.
  2. If you have a mortgage on the building you own you can write off the interest expense to reduce your taxable income.
  3. If the building is located in a good location you will benefit from the increased real estate appreciation you will experience as property values in the area increase which will increase your net worth.
  4. You are motivated to make improvements to the building and maintain the building in a first class manner as the improvements you make will most likely improve the value of your building.
  5. You can control your destiny and assure yourself that your business will be around for many years and maintain a good cash flow for yourself.
  6. The Small Business Administration (SBA) has some very affordable loan programs where you can finance up to eighty percent (80%) of the purchase price of the business and building. Conventional lenders also like to finance these opportunities.
  7. If you should choose to sell in the future you have the option of selling the business only and becoming the landlord and receiving rental income or you can sell the business and building together and perhaps obtain a premium as there are few businesses available with the real estate.