Avoiding Conversion Pitfalls

Second generation restaurant space is where the action continues to be for expanding restaurant companies. Read any restaurant publication from the past couple years, and you will likely find expanding operators mentioning conversion opportunities as their current growth vehicles. The main factors for this trend are the savings in invested capital and construction time. Consider the lack of growth capital and the practically non-existent pipeline of new retail centers, and it becomes clear that expanding restaurant companies must consider conversions in order to achieve growth goals.

Having worked on numerous conversion opportunities for our restaurant clients, we understand the scarcity of available new sites and the enticement of capital savings, saved time and mitigation of development risk promised by converting an existing restaurant space. Our experience, however, is generally that what is frequently perceived as a bargain can ultimately turn into a costly venture.

Take for example a freestanding restaurant in Houston, Texas that in its lifetime had operated as two concepts. The building seemed structurally sound. When contractors began demolition work, though, two conditions were eventually revealed: load-bearing walls set for the original restaurant space not shown in the plans and severe rodent infestation.

A five-year old restaurant building in San Antonio is another good example of unanticipated obstacles. The structure had an oversized ramp due to the large grade change between the building and the parking lot positioned above it. When the architects submitted plans to the city, the ramp was determined to be in violation of ADA compliance because of the excessive grade where the ramp was built. Reconfiguring the ramp to meet ADA guidelines lead to a significant cost overrun.

Unforeseen issues such as these wreak havoc on operators’ rates of return, and in some cases, force budget changes that affect other company projects or, worse, even the company’s expansion plans.

So, how can you evaluate conversion opportunities to avoid problems and help ensure prudent use of capital and resources? Here’s a quick checklist guaranteed to reveal most serious issues:

1) Building Age. Unless you are trying to maintain the historical significance or period architecture of a building, a good rule of thumb is that any building more than 10 years old might not function efficiently without costly retrofits.

2) Time Spent Vacant: Without routine maintenance, a building’s overall condition declines quickly when sitting vacant. Beware of buildings that haven’t been in use for an extended period of time.

3) Conduct Field Verifications. Examine as-built surveys and plans with your architects and contractors sooner rather than later. This usually requires some minor, up-front costs, but the study will mitigate your risks by revealing potentially costly issues early. The benefits far outweigh the costs.

4) Inspect for Code Compliance. Verify conformance to current codes such as fire, ADA, parking requirements and buildable areas. Remember to think “current;” what might have complied then, might not now. Remodeling a structure may rescind items made permissable by a grandfather clause.

5) Inspect Functionality. Determine if the existing floor plan accommodates functionality necessary for your concept. Be mindful, for instance, that moving a kitchen or bar presents significant cost implications.

On conversion projects we find time after time, vigilance pays great dividends. Keeping this in mind and the factors discussed here while evaluating conversion opportunities will assist you in avoiding a conversion pitfall.