We wanted to be in Coral Gables. Who wouldn’t? Boutique-like Coral Gables, “The City Beautiful,” as they call it. And for us, it made sense for reasons beyond the obvious and predictable panache. Operationally, it was a perfect fit. We have two locations in Miami and good concentration in the Miami area — Coral Springs, Davie, Miami Lakes and North Miami Beach; we have good synergy there. We have leverageable brand awareness and equity. Coral Gables had what we were looking for in the usual measures, too: population density, solid income levels in the surrounding areas, good retail and daytime employment, etc. The University of Miami is there, too, and we do well with college kids. We were also happy to find that restaurants in the commercial area were doing well and that their price points created competitive opportunities for us; we could be a lower-price alternative to a robust market.

Then the obvious that can’t go without mention: the sex appeal of Coral Gables. If you’re in real estate and you’re here and you can’t help but think about how your client’s brand can benefit. The place has a buzz. It’s hip. The Mediterranean Revival architecture is spectacular. There’s also great history. Coral Gables is the nation’s very first planned commercial district, and the nation’s first gated residential communities with homeowner’s associations surround it. Practically a hundred years later, it’s stunning. Sadly there aren’t more cities that have preserved their original design standards like Coral Gables.

I had heard of the strict zoning regulations here, and now I knew why; the place was planned from the beginning! And now we were about to experience the very restrictions that distinguished this beautiful area! I expected it would be challenging — if not difficult, but I say good for Coral Gables, good for planners who’re dedicated to preserving what makes and keeps places special. I’m a fan. I’m all for municipalities that foster these values. Besides the beauty and integrity that commonly result from this type of discern, I believe this philosophy helps preserve the vitality and economic value so many communities and markets lack, that commonly leads to the inevitable decline in commercial viability. We fight hard for restaurant brand and architectural standards, and we always will because they’re critical components of our clients’ brands and their competitiveness. But when trade areas characterized (and protected) by rigid restrictions provide restaurateurs vibrant spirit and consumer vitality that benefits restaurant brands and drives business, it’s good for everyone.

Now, the work. There were no sites that provided the prototypical dimensions we needed. The real estate was more expensive than we usually preferred. Of course, this wasn’t a surprise. It also appeared we might not be able to have a full bar on the patio, which is a hallmark of the Miller’s Ale House brand and important to operations. As for sewage and grease traps, the situations were across the board: In some cases they were formidable issues, in others not good but workable. Still, this meant development issues we’d need to gear up for. Parking? It’s an urban market — no one parks in front of the store and walks in. As obvious as this seems, this would be a new experience for our customers. This had to be considered.

By now you get the picture. Passing on Coral Gables and considering other Miami area sites more in line with our traditional sites and things would be easier — and faster and cheaper. Suddenly we’d back in our comfort zone, and it would be business as usual. But, then we’d forego a thriving commercial area in very hip trade area. Fact is it’s never easy to penetrate markets like this. It doesn’t matter what market you’re in, L.A., New York, D.C., Chicago… If you want to be in the high-energy places of the hot markets, you have to bear down.

And bear down, we did. The test for the real estate team was knowing what to look for and what questions to ask, what was doable and when to say when. Ultimately it was a great cost/benefit analysis, weighing risk against reward — the risks associated with zoning codes and architectural solutions and renovation and probable customer behavior and COSTS, against the rewards of revenue generation and profit contribution if all goes as planned.

Maybe this is an even more accurate explanation: The test is knowing what all of those variables are and how they affect restaurant operations and performance. It’s not just the real estate, but understanding clearly how the restaurant client operates, their optimal performance metrics, what the management team needs, what yields are acceptable and which aren’t. If you don’t know these things, if you don’t know what to look for, what questions to ask or what to consider and what affects what and how, I don’t know how you can make intelligent business decisions about restaurant real estate.

Bright lights, bright colors. The place is abuzz, and it’s packed. Everywhere you look are tables smothered by scrumptious Tex-Mex and tangy drinks in salty-rimmed glasses. Outside it seems just as many wait happily for their tables. It’s a wonderful way to spend dinnertime for lots of happy people.
 
Unbeknownst to everyone here at Chuy’s newest restaurant in College Station, Texas, however, this night came close to never happening. Fact is this restaurant almost never happened. Why? In the world of restaurant real estate, nothing about this deal was easy.
 
But that’s how it goes, really. There are infinitely more restaurants than great real estate sites — and even fewer great trade areas! Think about it… What do you do? Restaurant companies have to grow, they have to add units, and site demand dwarfs site supply. So if you’re looking for the perfect site waiting just for you, you’re in trouble. In fact, start every site search with this in mind: In the beginning, as you confirm site criteria and get buy-in from management, as you set out to find the site, assume that many of the great sites for restaurants probably look nothing like great sites for restaurants. Get it? I’ll even go this far – I say that any restaurant real estate team who isn’t moving big rocks, so to speak, or worse, isn’t experienced at identifying the less-than-obvious sites, is at a huge disadvantage.
 
Behind the Chuy’s in College Station is a bunch of anecdotal evidence of this, the truth behind how a restaurant resulted in a place it might well never have been. Here are some top line points about this site selection and deal that clarify my position:
 
- College markets are tricky. Easy as that. Too close to campus, you ensure lower profitability and parking capacity issues and, moreover, jeopardize sales opportunities with families and professional crowds. Too far from campus, students won’t go. Period. But, students drive most college town economies, you need them, and, yet, most college towns have considerable non-student populations that try their best to avoid the campus congestion. To make matters more interesting, our client Chuy’s appeals to an eclectic mix; we need a critical mix of students and non-students, young and old.
 
- We spent two years looking for the site, a site we believed was the best site. Two years! Could we have gotten one in less time? Of course — more than a year earlier, even. In fact, during that two-year search period, we passed on several decent, suitable sites, ones that satisfied a lot of our criteria. We passed on seemingly great sites in a new, sexy retail area. We passed on sites that offered appreciable highway visibility, located at busy intersections. Here’s more: During our search period, more than one nationally known casual dining concept — competitors! — entered the market. (Right, they took sites we passed on.)
 
- We loved one location, there were just no sites available there. What we did find — and liked a lot — was a big, empty parking lot at a 1980’s mall without a significant remodel during its life. At a casual glimpse this had become the former “place to be” as a newer retail and restaurant cluster had developed at another intersection. But the thirty year-old center did have a lot of positive attributes, such as freeway visibility, strong traffic generation and the strategic proximity to both college and community we were seeking. The key would be to convince the mall ownership of an idea Bryant Siragusa, National Director of Restaurant Leasing for CBL and Associates, and representative for the mall ownership, had collaborated on. We believed Chuy’s, because of its popularity in the state (remember lots of Texas A&M students in College Station are from cities in Texas where Chuy’s has great brand awareness and loyal patrons), could be placed in the mall parking lot and, in due time, help invigorate Post Oak Mall, and that it was worth the time and expense involved in creating an opportunity where none existed.
 
- So – two years later, our best prospective site is a parking lot, literally, at a  mall in need of rejuvenation. But, here’s what we really saw. We approached mall ownership with our position that the mall retail area was in decline and that if no action was taken, the decline would continue. We proposed that our restaurant could go on an outparcel on the edge of the parking lot, and the energy Chuy’s would bring, because of its popularity and the visibility of the restaurant from busy roads, would drive consumer traffic and revitalize the area, providing the boost it desperately needed. Besides that, a parking lot would become revenue-generating real estate. Sounds great, right? Nope. There was still the issue of economics.
 
- $750,000. That’s the figure the ownership claimed was necessary to make the pad ready for a restaurant. Plus, they didn’t believe the restaurant could achieve the non-financial benefits we promised. In their opinion, they’d be investing a lot of money and it was only about achieving adequate financial returns.
 
- We thought ‘Tennessee developer, Texas trade area.’ That’s how we saw it; that was the issue, we believed. Of course a developer in Tennessee didn’t understand the power of an Austin-based restaurant, but we could ultimately convince them that it was more than just about the dollars, and we did. Some might say we negotiated well, but it was really that we believed the restaurant addition could impact the retail center. It was a creative deal, sure, but to us, it was clear. We believed it could happen, and we were convinced it was good for everyone — the developer, the mall retailers and the restaurant company.
 
- There is one advantage we had that’s worth mentioning. Besides the good fortune of experience and capability to think creatively, which enabled this deal to happen, we, that’s Foremark, are fortunate to be in good stead with the most reputable national developers. Because of our work history across the nation with best-in-class restaurant clients, developers generally respect our opinions and treat us with the dignity that enables less-than-sure-thing ideas and deals to be discussed. I think it’s fair to say that had we lacked restaurant real estate experience or if we didn’t have a respectable record of hundreds of real estate deals for growing restaurant companies, we could never have gotten someone to listen to us, let alone agree. (We have clout, and it’s a great advantage. We’ve earned it. It took a decade, but now we have it, and I’d be lying if I said it didn’t benefit us.)
 
This is a good example of unconventional restaurant real estate work and an even better example of why when we identify a promising, but obvious site for a restaurant, we can’t help but wonder if we need to roll up our sleeves and work a little harder.

Successful restaurant companies regard real estate as the first critical decision that will determine the long-term success of a unit and its profit contribution. In the beginning, the restaurant company has a clean slate and a new opportunity to put its best foot forward, start anew and make sure everything to ensure success is done as well as possible. The well-managed company realizes new units — new chances for optimal performance and meaningful revenue generation — are limited, so it has to make the most of every growth opportunity. Many of the challenges are out of the company’s control: Competition is a given; there will be plenty. Operational challenges? There will be those, too. But at site selection time, when the real estate part is most critical, the only problems — errors in judgment, oversights, mistakes, etc. — are typically self-imposed, right? Of course, they are. At this point, if there’s a breakdown, it’s their fault. In the beginning, it’s the restaurant company and their real estate advisors, that’s all. The company is in complete control and free to proceed how it chooses, at its own risk.

But occasionally formidable risks with your real estate investment can be the easiest to overlook. The operator has an opportunity to manage the risk associated with the real estate investment, especially when the new restaurant is among the development’s earliest prospective tenants. When this opportunity comes along, the restaurant operator/prospective tenant has huge leverage. If the operator fails to take advantage of the leverage, it’s an unforgivable mistake.

Here are three basic rules that any restaurant company should keep in mind when it’s among the developer’s first tenants:

First, learn the developer’s plans for other tenants, be they retailers or restaurants. Understand how the tenant mix affects the quality of your real estate. For example, some tenant mixes could overburden parking facilities at the times most critical to your business success. Negotiate a resolution with the developer over any possible obstacle to your business success.

Second, protect yourself with exclusive use provisions, which prohibit the landlord from bringing direct competitors to the same development. Protective use language in your agreement should be sufficiently broad. Imagine your restaurant is recognized for burgers and sports broadcasts. In some instances, the exclusive use provision would forbid another similar-themed concept from becoming a tenant. Still, in others, and even better, any full-service restaurant might be forbidden.

The third: Know the other tenants and make certain those brands are compatible with your target audience. Could you envision customers of other, nearby tenants becoming your customers? And vice versa? That’s key. To extend the sports bar metaphor, the restaurateur is far better off next to a hardware store and a sporting goods retailer than a dress shop and a weight loss center.

This seems fundamental, and it is, but these points go unconsidered more than you might imagine.

For a long while we’ve predicted restaurant expansion would cause a sharp increase in adaptive conversions. The reason was simple: The downturned economy means less new development, and less new development means less opportunities for new restaurant construction. (Obviously the dynamics causing this situation include lots of reasons — finance, lending, opportunities from foreclosure, unaggressive developers, even restaurant companies whose expansion objectives can’t be halted because of economic slowdown, on and on — but you get it.)
 
We believe a key growth solution for restaurant companies that need to expand is largely in adaptive conversion, that is, capturing existing vacant real estate and re-purposing it for restaurant use.
 
Successful adaptive conversion is more challenging than new construction. It’s a trickier process, no doubt. The problem is mainly in our comfort zones with the work with which we are most acquainted, though: Most restaurant companies are more accustomed to and experienced at expansion by building prototype restaurants via new construction, not identifying existing buildings in established retail centers, negotiating conversion agreements of existing buildings, navigating the ensuing conversion logistics, then changing long-held consumer awareness and perception about — a building that’s ‘been there and was that.’ Still, no matter how you slice it, starting with a clean slate, as they say, and doing something the 25th time is generally more conventional and trouble free than an adaptive conversion. It’s like doing anything else you don’t do regularly: It feels awkward, it takes more time, and you make more mistakes. For restaurant company leaders, this, the reality of doing something new, less than effectively, isn’t easy to shake off. The slower process and the mistakes are costly, and, as is in all expansion, less than best sites rob companies of sales and profit revenue for years to come.

As we all know, many restaurant companies have stopped or slowed down new store development due to the economic downturn and uncertainty in the business due to pending government regulations. What has not changed, though, is the fact that these restaurant companies, especially those that have been in existence for 15 to 20 years and more, have existing stores with leases due to terminate or options needing to be exercised (or not). Based on a development timeframe of 15-20 months for ground-up projects and 13-16 months for in-lines or conversions, these companies need to have strategic plans for these units no fewer than 3-5 years out.

The strategic plans need to carefully demonstrate consideration to all facets of the real estate aspect of the business: Is the restaurant profitable? Does the option need to be exercised or the lease renewed? Is the restaurant unprofitable (or not satisfying profit goals) but located in a strong trade area and simply lacking individual site prominence? Should the unit be relocated within the trade area? Is the site unprofitable (or profitable) and located within a deteriorating trade area? Should stores be closed? How do relocations and closings affect the overall development of the market – opening up new trade areas previously too close to existing restaurants or just the opposite?

These are just some of the matters that must be studied. The process requires considerable time, and, moreover, expertise. (I must say the benefit of experience — having been through the real exercise a time or two, with large scale operations, in which the stakes are high and decisions must be made, also pays great dividends.)

What’s undeniable is how critical these matters are to a company’s immediate and sustainable prosperity. But, all too many times, the decision is made when the option renewal notice period comes up (typically 180 days prior to the end of the lease term or current option), and the decision is made “on the fly,” with no consideration given to the company’s overall business, not the least of which includes the amount of time it takes to find a replacement site and restore sales revenue.

Sorry to sound a little preachy. If it sounds like this matters to me, it’s because it does. I just can never get used to restaurant companies managing the real estate component of their business in a haphazard, “uh-oh” sort of way. Would they manage their operations this way? Of course not. How about their accounting? You don’t see many non-financial managers making key decisions about corporate tax liability. But the real estate part of their business? Too many times, it’s neglected — and the contribution it could make to the company’s overall performance, goes overlooked and under-utilized.

Restaurateurs know well the challenges of expansion. But what about expanding to new and faraway markets, outside of operational comfort zones, where their concepts have little or no brand awareness? While this sort of expansion is common for national brands, it’s a bold undertaking for even the strongest regional restaurant concepts.

In just one month, two Foremark casual dining restaurant clients accomplished this. In the same week in July, a Florida-based concept opened in Nevada and a Texas-based concept opened in Alabama.

Miller’s Ale House, one of Florida’s most successful sports-themed restaurant chains, considered a “Regional Powerhouse” by Nations Restaurant News, opened in Las Vegas, and Chuy’s, a successful, Austin, Texas-based Tex-Mex concept, popular throughout the state of Texas, opened its newest location in Birmingham, Alabama.

For any restaurant company, expansion is the surest way to achieve growth objectives. But, without argument, each of these concepts could have selected new, less challenging locations closer to markets each knows best.

“It’s gutsy, none of us will deny that. We’re accustomed to opening in places closer to home where lots of people know us,” explains Michael Hatcher, vice president of real estate and development. “We felt like it was time to go outside of our comfort zone, both operationally and from a customer standpoint. Sooner or later it’s a step we had to take. We believe we were up to it, though. We know we have the real estate support to identify good markets and sites and we’re confident we can manage the store successfully.”

For Miller’s Ale House, the expansion was even more challenging. “Las Vegas is a lot different than Orlando, or any Florida market, for that matter. And, besides that, it’s 2,300 miles and two time zones away,” jokes Ray Holden, President and COO, Miller’s Ale House. “We know we can compete once we’re there. We can run our restaurants. We provide good value. We needed to make sure we made good decisions about where we put the restaurant, that’s something we can’t change,” Holden adds. “It’s a growth step for us. But that’s the way it goes, right? If you’re working hard and doing what you need to grow, it never gets easy. If you’re comfortable, something’s wrong. In this business, everyone knows that.”

For us at Foremark, this was a big week for our clients, Miller’s Ale House and Chuy’s and us. While each of the companies have built a successful business with the capability to expand on this level, we know our broad knowledge of markets and trade areas along with our ability to identity conducive sites has played a key role in each of these ambitious moves.

In commercial real estate, the word “unforeseen” is often used to express regret. Unforeseen costs and unforeseen project delays are explanations of why a project was less successful than expected. The best protection against these disappointments is the process of due diligence.

We typically advise our clients to begin due diligence as soon as they have signed a Letter of Intent (LOI). We begin our Site Investigation Report (SIR) process, which includes a project site and jurisdictional visit, consultation with the landlord or developer, and thorough review of the executed LOI. Ideally, the SIR is reviewed by our client and the client’s architects, engineers and contractors before any large financial commitment is made.

For any new development project, the engineers, contractors and architects provide upfront estimated costs. Development fees levied by governing jurisdictions are sometimes overlooked. Impact fees are assessed on new development by cities and counties to fund growth infrastructure. These fees can amount to several hundred thousand dollars – enough to destroy budget integrity and nullifying a project’s pro forma financials.

When impact fees are identified during the due diligence process, there is ample opportunity to reach workable solutions. Here are some examples of how impact fees can be administered to create favorable outcomes for developers.

Transportation Fees: In some cases, a landlord can make accommodations to reduce transportation impact fees. A landlord might be able to absorb some of the transportation impact fee cost through already satisfied impact fee agreements within a larger development project. Some landlords, sympathetic to their tenants’ financial burdens, might even agree to reexamine lease terms. We have even worked with landlords to present arguments against a concept’s use categorization in the municipal code (quality restaurant, entertainment use, fast food, etc.). Additionally, the assessing jurisdiction may be willing to negotiate the reduction of impact fees when the fate of a project is jeopardized by such costs, especially in today’s economic climate.

Capacity Fees: Other large and often unavoidable site development fees are water and sewer connection fees, sometimes referred to as capacity fees. The fees are charged by most water and sewage providers; they are calculated according to a myriad of different factors and equations (meter sizes, plumbing fixture counts, total seat counts, etc.). If identified early enough, these fees can be reduced through redesign. If nearby utility lines have sufficient water pressure, smaller sized meters can occasionally be installed to reduce costs (larger meters generally increase costs). Because restaurant sewer connection fees are sometimes based on seat counts, a floor plan might have to be reduced or modified (bar stools vs. fixed seating) to decrease costs, or possibly even to meet an exceeded parking code based on a total seat requirement.

Understanding and recognizing transportation and capacity fees that affect time and costs, and ultimately determine the fate of a project, is just one aspect of comprehensive due diligence process. When undertaken early in the process and performed well, due diligence might be the most critical phase of any building construction project.

(Part II of the blog topic – advantages in early due diligence of discussing zoning ordinance regulations and how such regulations can restrict a tenant’s prototypical design and brand identity.)

From the mid-1990s through 2007, there were few real estate options available to restaurateurs. Although many operators would have preferred to own their real estate, purchase prices were prohibitively high.

Strong real estate prices combined with a large number of creditworthy operators made property ownership very attractive to developers and investors. Cap rates were low; property values were trending higher. Restaurateurs who wanted to own their real estate had to pay absolute top dollar. Instead, most contented themselves with negotiating the best leases they could get, and making their operations as profitable as possible.

Much has changed over the past three years. A tightening of credit since early in 2008 has forced some developers and investors to deleverage by liquidating certain properties. A number of tenants have either filed for bankruptcy or called for renegotiation of leases. For some landlords, the risks of ownership have begun to outweigh the rewards.

Market dynamics have changed enough to prompt some operators to reassess their real estate options. Desirable locations are available in good markets and prices are more affordable than they have been in years.

It was once rare to see smaller parcels available in good markets. Not only are the parcels available today, they are selling at substantial discounts to prices from three years ago. In several markets, asking prices for choice properties have fallen 30 to 50 percent.

Ownership of their real estate has always been important to some restaurateurs. Control over real estate facilitates long-term business planning and makes operations easier for a multitude of reasons. For the first time in a long time, it makes sense to run the numbers to determine whether ownership is a viable option.

Today, RestaurantChains.net released its quarterly list of Top 10 Growing Concepts Under 50 Units. The list is generated based on a concept’s percentage of growth over a 3-month period. Six of the chains were categorized as Fast Casual, three as Quick Service (also known as QSR), and one as Take-Out.

The exclusion of any casual dining or full-service restaurants, arguably the most successful segment over the past several decades, is noteworthy. It raises the question: can casual dining buck the trend? If so, how? Let’s take a look at today’s casual dining exceptions to determine any trends and similarities that may contribute to their successes.

For example, on August 9th, Nation’s Restaurant News reported Cooper’s Hawk Winery and Restaurant and Twin Peaks as two new “Hot Concepts” for 2010. Cooper’s Hawk of the Chicago area, founded by Tim McEnery, describes itself as an upscale casual eatery. Expanding primarily within the Chicagoland area, the concept plans to open its fifth location in Indianapolis within months. The new concept recently increased its financial stability by partnering with Karp Reilly LLC. Plans calls for 1 to 3 openings in 2011. NRN’s other “Hot Concept” is Twin Peaks. Randy DeWitt, the Twin Peaks founder whose 9 locations are quickly gaining in popularity throughout Texas, said he wanted to create a “concept that was just for guys.” He did just that, providing a full-service restaurant constructed as a log cabin, where customers are served quality food and cold beer by impressively dressed lumberjack-themed waitresses.

There are two common denominators to focus on, first, both Tim and Randy built concepts in a specialized segment that wasn’t over-saturated with similar concepts. Sure there was Hooters. But this is America, the country where people crave variety and choice. We put value on uniqueness and creativity. As consumers, we also enjoy the thrill of experiencing “the next cool thing”. That’s the feeling you get at these two concepts. When was the last time you ate in a log cabin with attractive waitresses down the road from your home or office? How often do you eat an affordable upscale meal accompanied by wine produced in-house? Probably, not often.

Secondly, look at geographic stability. Not that they escaped unscathed, but the South and Midwest fared exceptionally well during our “Great Recession” compared to the East and West Coasts. Lower costs of living and a reasonably healthy economy are two reasons restaurateurs have begun to focus on the South, particularly Texas. Concepts are weighing the economic stability of a market before diving deeper into the site selection process.

Casual dining has slowed, but it’s being improved, refined. The most innovative restaurateurs will succeed; established chains will have to adapt. All of this benefits the consumer.

Could it be that restaurant companies are becoming more accepting of new locations that lack the integrity and design standards of their prototypical building designs?

I think so.

Much of the space available now is second or third generation space. And no matter the effects of the recession, remodels and retrofits of existing buildings typically result in compromised designs anyway. If restaurant companies must build properties according to specification with budgets less than what they are accustomed and TI money from landlords is also less than usual, then compromising building design is probable.

Reduced construction budgets and increased building costs are other reasons restaurant companies might be willing to compromise proto building design. With many material plants and manufacturers closing due to the economic downturn, we are seeing an increase in building costs due to increased material costs. This could get worse as new construction rebounds and construction demand outpaces supply. This might not be a bad thing in the long run, however. If companies can value-engineer their buildings by cutting costs in areas that do not affect customer experience or the operation of the restaurant, i.e. less expensive finish materials and finishes customers don’t see, etc., the result could be greater revenue falling to the bottom line.

Diluting brand standards companies work so hard to establish — especially ones in building design, so integral to differentiating restaurant brands — is a decision restaurant companies will struggle to make. Still, though, we should keep at least two things in mind: For one, competing profitably is a top priority; an economic recession of historic proportion seems like an acceptable reason to temporarily compromise brand aesthetics. Secondly, let us not forget the customer experience, the undeniable and main reason for restaurant success. Surely operations managers agree that a customer’s choice to return is more a function of food and service than the aesthetics set by crown molding and window casings.