Posted by Eric C on July 16, 2003 at 17:04:27:
Hi Sean -
As a former restaurant owner, investor and ultimately guarantor – I think you would be best served by owning the land and pad and forget about the restaurant entirely. Rent that pad to someone else !
Seriously, this is a very broad question. Are you well capitalized? How much experience do you have? How was the location chosen? What type of format are you planning? Is this a franchise or a one-off? How will title be held? How are you organized – partnership, corporation, other?
If you are lucky enough have a wonderful location with great demographics, ample parking, high visibility, and excellent access – then owning that land makes perfect sense. If for no other reason, than to sell it down the road for a profit.
On the other hand, assuming the more normal scenario of a secondary (at best) location, with average demographics, poor visibility, moderate (hopefully) access, and no organized marketing plan – then spend your money on the restaurant, 'cause you’re going to need it.
Location is always important in every real estate deal, but it also assumes even more importance (if that’s possible) when you expect that location to provide your daily bread and butter.
Poorly run restaurants in great locations usually do far better than wonderful restaurants in poor locations.
Work up your business plan carefully with an eye to the future, but don’t lose sight of reality either.
PS - forget about any possible tax benefits to owning the pad and land, you won’t need 'em. The only true benefits to owning your location (other than long-term appreciation)would be stabilized costs (otherwise known as rents) and maintaining the location against competitors. And for my money, both of those are “no shows” if you’re just a small startup. Of course, to gain anything from future appreciation, you have to hold on to the property (make the payments) – and that seems to be a long-shot for most restaurants. Take my word for it.