Yana Zhuravel featured in VIP Moderne Magazine - Get a Head Start: The Basics of Commercial Space Leasing for Nightclub, Bar and Restaurant Owners: A Conversation with Yana Zhuravel, Esq.

posted Oct 14, 2009, 11:16 PM by Yana Zhuravel   [ updated Mar 14, 2010, 5:19 PM ]

One of the first things you do when opening up a bar, nightclub or restaurant is to lease a space that suits your needs.  Finding a space and negotiating a lease is a time consuming and complex process that is crucial to your success and bottom line.  In fact, rent is the single largest expense for any establishment. I am fortunate to have Yana Zhuravel, an attorney in New York State who specializes in the nightclub and bar industry.  Yana has helped dozens of nightclub and bar owners negotiate and structure their leases in order to limit the owners’ financial and legal liability.

MLF: What is the first step that a nightclub/bar/restaurant owner should take when leasing a space? 

ZHURAVEL: The first thing an owner should do is to become familiar with some of the basics and terminology of real estate leases and then enlist the help of a professional tenant representative to help find you the right space at the right price.  Also, the nightclub/bar/restaurant businesses are unique because they involve food and alcohol services.  Therefore, enlisting the help of an experienced attorney to properly negotiate and structure the lease in accordance with the establishment’s operational needs will not only maximize the overall economics, but will also limit the owner’s liability exposure and will allow for smooth ongoing business operation.  An attorney can also help with satisfying building code, fire code and licensing requirements.  Any landlord will have a listing agent and an attorney on their team when working on a lease transaction and you should to the same to protect your rights and interests.

MLF: Can the owner just let his attorney and tenant rep run with the leasing process?

ZHURAVEL: Absolutely not!!! No one understands your business needs better than you.  Think of the tenant rep and the attorney as advisors who will work on your behalf and provide you with information and counsel to achieve an optimal outcome. 

MLF: What are some key elements of commercial real estate leases that a nightclub owner needs to understand?

ZHURAVEL: This is an excellent question.  The most critical element of a lease is the manner in which rent and operating expenses are denoted.  There are four basic types of leases, absolute net, triple net, gross and modified gross.  Ultimately you end up paying rent for the space plus a reimbursement for a certain part of the property operating expenses, but knowing the difference between these lease structures can help you compare rents at different properties and make sure that you’re getting the best deal. 

Absolute Net. A net rent simply means that the rental rate per square foot (as noted in the lease) is net of reimbursement for operating expenses.  Under an absolute net lease the tenant reimburses the landlord for all operating expenses associated with the property.  This is a common lease structure for a single-tenant building or a pad site.

Triple Net Lease (NNN).  This is similar to an absolute net lease, but here the tenant reimburses the landlord the pro-rata share of property operating expenses.

Gross Lease. All operating expenses are included in the rent and the tenant is not required to pay additional reimbursements to the landlord.  If you come across a gross lease make sure you get a breakdown of expenses per square foot from the landlord so that you understand the amount of operating expenses at the property.  Being able quantify these two components of the rent may help you to negotiate a better deal and can help you compare a gross lease rate to a NNN lease rate.

Modified Gross Lease.  This is the most complicated lease structure as it requires the tenant to reimburse the landlord the pro-rata share of property operating expenses above a certain base year.  Sounds complicated right! Here is an example. Let’s say that you leased 10,000 square feet in a 100,000 square foot property in 2009 for $10 per square foot.  Now, 2009 will serve as your base year.  In 2009 operating expenses were $100,000, but in 2010 these expenses increased to $200,000.  You are now responsible to reimburse the landlord 10% of the $100,000 increase in expenses of $10,000.

MLF: What are some other lease elements that a bar owner needs to know?

ZHURAVEL: This is a very comprehensive question, so allow me to provide a quick checklist of some key things that come to mind:

1) Lease Term:  The duration of a lease can range from month-to-month (MTM) to 25 years.  A short term lease carries a risk of rental increases, while a long term lease exposes the owner to a significant long term liability.

2) Extension Options: A great feature because it provides short term security and eliminates long term liability.  If you’re opening up a new lounge concept and are uncertain of its success, you can sign a 3 or 5-year lease with several extension options to be exercised at the option of the tenant. 

3) Tenant Improvement Allowance (TI): Landlords frequently offer reimbursement of improvement expenses that you make to your space.  You should look at TIs as a loan to build-out your space.  A lot of times a landlord will offer you an extra TI allowance in return for a higher rent.  When you compare the upfront allowance to the rent increase you’ll find that you’re being charged an interest rate between 10% and 20%, so be careful when accepting such an offer.  You can always request a TI allowance from the landlord as part of your negotiating strategy, just be careful if he increases the rent as a result.     

4)  Exclusive Use Clause: This allows you to make sure that the landlord can’t lease space to a similar establishment at the property without your permission to avoid competition. 

5) Liability: Make sure that your liability is limited only to activities within your leased space and not the common areas.  For example, someone is walking in front of your restaurant and falls on the sidewalk, which is considered a common area. You don’t want to be named party to a law suit as a result.  A liability waiver is especially critical if the landlord is responsible for cleaning the snow or any other debris in front of your establishment.  You should not be responsible for the accident if it’s the landlord’s responsibility to take preventative measures.

8) Hours of Operation:  Make sure that your lease expressly states your permissible hours of operation.  I’ve seen many clients who ran into significant problems because they overlooked this critical clause in the lease.  Also be mindful here because sometimes landlords will require your establishment to stay open during certain off-peak hours (or holidays), which may not be beneficial for you and your business.

9) Grace Period: This is a rent-free period (2-6 months) given to the bar owner to perform build-out.  It’s really important to negotiate a grace period because you don’t want to pay rent during the time that your business is not operational.  Grace periods are standard, so don’t let anyone tell you otherwise, but it’s up to you and your attorney negotiate the best deal possible.

There are countless other nuances to consider when analyzing and structuring lease agreements such as insurance requirements, exclusive parking space allowances, zoning and fire code compliance and ingress/egress easements,  just to name a few.

MLF: Do you have any parting words for our readers?

ZHURAVEL: Leasing sounds like a fairly straight forward process: find a space, lease a space, open for business.  However, this process has certain complexities that need to be recognized and addressed, so if you decide not to seek the assistance of a legal or real estate professional, you should do some research on real estate leases so that you may understand your financial and legal liability exposure.

Yana Zhuravel is a practicing attorney in New York State.  She specializes in Real Estate, Construction, Business and Licensing issues and serves the Nightclub, Bar and Restaurant industries in the New York City Area.

The information contained in this article is provided for information purposes only, and should not be construed as legal advice on any subject matter.  No recipients of content from this article should act or refrain from acting on the basis of any content contained in this article without seeking proper legal consultation based on their specific facts from an attorney licensed in the reader’s state.  The content in this article is general information and may not reflect current legal developments.  Yana Zhuravel, Esq., expressly disclaims all liability in respect to actions taken or not taken based on any content of this article. 

Yana Zhuravel,
Mar 14, 2010, 5:06 PM