In smaller to mid-sized properties most hoteliers view their restaurants as a …
In smaller to mid-sized properties most hoteliers view their restaurants as a necessary evil, a high-labour, low-profit department that causes more problems than others combined. The resto is usually there only to sell rooms and accommodate a guest’s need for food and beverage services. To make money management has to be on top of it 24/7, which few are. A solution for many is to lease the foodservice department to a qualified restaurateur. However, for hotel owner, it’s not a simple as obtaining a triple net lease on a warehouse where there is no involvement in the business of the lessee. Still, leasing a hotel restaurant to a capable operator often turns a losing or borderline operation into a room patronage generator and profit centre.
With a hotel lease a restaurateur can often obtain a prime location, a steady stream of customers, and tap into a previously closed market at a relatively low start-up cost. The premises, tenant’s improvements, and the FF&E are usually part of the package. The only out-of-pocket expenses would be for small wares, linens, menus, and miscellaneous items. However, as it is necessary to adapt to the hotel environment, it too is not as clear-cut as operating a freestanding restaurant. The restaurant is now part of a larger, more integrated operation. Still it can be a win-win for both parties. Hotel management is relieved of a headache, and a qualified restaurateur can make money where a hotelier might not. A good lease that is well structured, and adhered to by all, where both parties are better off financially with than without, makes for a long-term mutually beneficial arrangement. With a freestanding operation, if the hotel can net five per cent after taxes, it will require 1.2 million dollars per annum in food sales to equal a $5,000 per month rental income. Your first concern with a prospective lessee, is to structure an agreement that is beneficial to both parties. Establishing a fair rent is perhaps the most difficult part. The National Restaurant Association, whose statistics are usually quite applicable to Canada, indicates for most restaurants rental rental rates range from five to 10 per cent of gross sales, with a median of seven to eight per cent. However, it is noted that these percentages have been declining in recent years. To establish a sound percentage, which could escalate as sales volume increases, is for most the easiest way to go about it, yet if the restaurant lessee is less than honest it could create a multitude of problems for the hotel.
The alternative, which often works better for both, is to calculate a fixed per-month rental rate. The starting point is an assessment of the required annual return on the capital investment that the hotel has in the improved restaurant portion of the building. Add to this the pro-rata share of fixed operating costs, such as property taxes, utilities if not individually metered, insurance, parking lot maintenance, based on the per cent of the total floor areas of the hotel occupied by the restaurant. If the restaurant occupies, say 20 per cent of the hotel’s area, it should pay 20 per cent of the fixed costs. If provided, add a charge for return on investment and depreciation on the FF&E at say 10 per cent interest plus seven per cent depreciation. (15-year average life). Add the cost of the services provided by the hotel by in the way of maintenance, security, accounting, and janitor service. Once you include profit for the hotel, you have the rental formula. It’s more complicated to calculate perhaps, but workable.
For many hotel restaurants, banquets, catering, weddings, and mini-conventions are a bonus. There is lower labour cost, better pricing, and as they are usually held in the evenings, at a slower time for most, more profit is produced. Thus, the hotel should be entitled to an increased rent, say 15 per cent from this department, which would be in addition to the fixed monthly rate if that method were used. This remains the case even more if the hotel does the booking and controls the scheduling. On the other hand, room service, because of its inconsistency, and usually odd hours should probably be charged less rent than the normal operation. Many overcome this problem by having higher menu prices for room service. The restaurateur will require compensation where a complimentary breakfast is included in the room charge and hors d’oeuvres are served in the lounge in the afternoon.
Louis Madris, a successful restaurateur who leases his restaurant space in a mid-sized hotel says that to ensure there are no unauthorized meals charged to rooms, or after breakfast time checkouts he asks for guest identification by having them show their room key or card. Every evening he receives a list of guests to whom he should not charge meals. He says he averages about one skip per year. Although the hotel does the banquet booking, serving and bussing, he does the collecting. Every Monday morning he and the hotel manager swap accounts.
Principal negotiating points center around the premises and property use, care and control, length of lease, the rental structure, division of fixed and operating costs – who pays for what, hours of operation, definition of gross sales if a percentage lease, banquet food and liquor service, local patrons use of the common hotel-restaurant areas, off-premise catering, complimentary food and beverages by the hotel, billing rooms for food service, replacement of lost and broken FF&E, premises maintenance, and repair, early termination conditions, company imposed standards, marketing and advertising.
The bottom line is that leasing out the restaurant can be a win-win situation for both the hotel and the restaurant operator. Still, if not properly set up and judiciously supervised it has as much potential to become a bigger headache than you currently have. The hotel must maintain control over the situation at all times, yet cater to the whims of the restaurant operator. The restaurant can add to or detract from the image of the hotel. For a profitable relationship the well-structured lease with a capable operator is the starting point.