Most companies want their restaurants or retail businesses to open on schedule. Opening ahead of schedule is every development manager’s goal.

We find we can accelerate the schedule specifically, the duration of the entitlement period, when we pay special attention to some specific steps. Of course, the potential payoff is significant.

Here are some measures in our development work that help reduce the duration of the entitlement period.

• Ask questions about permits. Remember the adage, “measure twice, cut once?” Ask all the questions necessary to ensure each permit submittal is thorough and complete. Comments from your local jurisdiction usually result in a re-submittal, and re-submittals mean delays. Make the effort to get permit submittals right the first time.
• Build a detailed timeline. It’s straight from the project management handbook, but there’s no substitute for a detailed timeline. Establish benchmarks. For each step of the process, spell out what needs to happen, by whom, and in what sequence. Get buy-in from all parties involved. Once people see the plan and understand their roles, a coordinated effort is possible and accountability is established.
• Appoint a captain. This one is our favorite. It’s the key to opening as soon as possible. Get someone – one person – to take charge and serve as the project manager. When there’s one point of contact coordinating everyone involved (architect, civil engineer, landlord, tenant, developer and jurisdiction), things go smoother. Bet on it.
• Consider expedited reviews. Sometimes the state or local jurisdiction will offer expedited reviews at a surcharge (typically, a percentage of the project’s construction cost). If an expedited plan review is available, weigh the time savings against the surcharge. Clients tell us that it sometimes takes only one or two days’ sales to cover the cost of an expedited review. Expediting might mean you can open the store several weeks early, so the potential benefit is huge. Of course, having an approved building permit in hand is pointless if construction can’t begin due to other issues. So do your homework, and make sure all your ducks are in a row.

These are some of the fundamentals of development, but they don’t always get the attention they deserve. Sound execution during the entitlement period may lead to big gains.

Judging by attendance at ICSC conventions this past year in Las Vegas, San Diego and New York, there are very few new retail developments on the boards for 2010. A scarcity of high-quality retail and restaurant space has been evident in recent years, and it will not be relieved by new construction in 2010.

Many retail centers that were in the early stages of development have been put on hold due to a lack of financing and tenants. Most notable is the absence of national retail brand anchor tenants, which typically drive shopping center development and provide the guarantees developers need to obtain financing.

Retail and restaurant companies in expansion mode often ask about potential locations. In many regions, available inventory consists of second-generation space that has come onto the market as a result of business failures. Most of those failures will be written off as victims of adverse economic conditions. But, it’s safe to say that poor quality sites contributed significantly to the tenants’ demise. Many businesses were in locations that would have under-performed even in a bustling economy. I can’t recommend those locations to my clients.

For a couple of years now, there has been a notable undersupply of quality retail space. Without new retail development, there is no relief of pent-up demand. What does it mean for retailers and restaurateurs as they plan expansion for 2010 and 2011? Is an increase in prices of the available sites likely? It looks that way to me.

Due to the economy, we’ve seen a softening in asking rents and purchase prices over the past year or so. But, I’m concerned the lack of new product will trigger higher prices this year. Tenants returning to expansion mode will begin to compete for the quality locations. I don’t believe this return to expansion mode will be sudden. Most tenants will test the waters cautiously. We’ll closely monitor the situation, so please stay in touch.

You’d be hard pressed to find a successful restaurant company that is unconcerned about the physical locations of its restaurants. Location is a key component of restaurant performance – period.

One obvious reason is accessibility. For one thing, patrons like locations that are easy to reach. Another important factor: many restaurants are selected impulsively as hungry guests search for a place to eat as they drive. For this group, highly visible signage and a recognizable brand identity are paramount. This is particularly true for restaurants in the fast casual, quick service and lower-average-customer-check categories.

But, finding the perfect site in the perfect trade area is never easy. In fact, high quality trade areas typically do not offer many, if any, high quality sites. Expanding restaurant companies often face a difficult question. Should they acquire a lower quality site in a high quality trade area or an A+ site in a lower quality trade area?

Our experience tells us that concepts in a “hot brand” trend are prone to ride the happy tide of invulnerability. They often take a high-risk, low-visibility site in a sought after trade area. Their thinking is that “people will find us.” It’s easy to see how this happens. Decisions are made when the popularity of their restaurants is peaking. The lower quality sites might work well for a few years, until the inevitable happens. The hot brand loses momentum. The real pain comes when a new competitor enters the same trade area in a higher quality location. You guessed it. The once hot concept is now neither hot nor visible. And, the operator is trapped five years into a twenty-year lease.

It’s a mistake you must avoid, because the consequences are so difficult to overcome. You can market aggressively, change menus, paint the building and hope a new manager will restore the glory days, but the building cannot be moved. High quality trade areas are sexy, no doubt. In the long run though, high quality sites provide the best chances for success. Long-term profitability is the only way to keep operators happy.

I spent most of last week at the Restaurant Finance & Development Conference in Las Vegas, the annual event for growing restaurant company owners and executives. In one place at one time we meet with restaurant owners and lenders who focus on restaurant industry growth, like representatives of banks, finance companies, investment banks, private equity firms and merger and acquisition specialists. Of course, companies like us, who specialize in restaurant real estate are there, too.

The conference is touted as the must attend event for growth-minded restaurant company owners and executives focused on the business side of the restaurant business. I’ve attended this event for nearly as long as it’s existed, missing it just once in twenty years. It’s always a productive time for me and our business.

For Foremark, the event is more than a special opportunity to meet industry people and learn. (Funny how when you attend an annual event for twenty years, you get a sense of what you look forward to.) For me the conference has come to represent an exciting preview of the next year, that is, an opportunity to learn the attitudes of industry players about growth in the upcoming year. I’ve come to find the tone of this meeting usually depicts what our business will be like, what we can expect, how ambitious we can be, expansion plans we’re likely to encounter from our clients, on and on.

Here are the highlights of what I took away this time. This is a list of what we’ll discuss in our planning meetings:

• Keynote speaker, economist, Paul Kasriel, said “the recession is over and we are in a recovery.” Not back to where we need to be, of course, but, according to Kasriel, the worst is over. Proceed cautiously and optimistically. (Imagine the cheer that received.) * The recovery will be very long and slow. Unemployment will remain high and peak at near 10.5%.
• Over-supply is still a problem. Anticipate more closings, 5,000-6,000 restaurants are likely to close in 2010. A lot of closings means a lot of opportunities.
• Restaurant sales will be flat to down. Operators will maintain profits by managing costs – labor, food, etc.  Commodity prices are in favor.
• For the first time in years, more meals are being eaten at home; grocery prices are down.
• Lenders are generally credit sensitive. Lenders will favor larger companies with respectable balance sheets. Smaller companies will find it difficult to obtain financing.
• Analysts claim the quick-service operating model is the most promising for the future.
• Because taxes and health insurance, companies are paying special attention to Obama’s healthcare plan.
• Restaurant companies must grow to survive; for restaurants choosing not to grow is not an option.

The message: smart growth. The economy is improving. Restaurants must grow, but growth will not come from over-flowing demand, cheap money and a robust economy. Instead, growth must be fueled by savvy and prudent management decisions.

We often hear that a restaurant company’s expansion is “deal driven.” What exactly does that mean? In too many instances, it means site selection was determined when a landlord offered a hefty allowance on one or more properties. The restaurant company jumped on the allowance, instead of relying on high-quality site metrics. I’m amazed each time I see it happen, because it’s a mistake that is very difficult to overcome. It affects operations for the term of the lease.

It’s easy to understand the reasoning. Restaurants are capital intensive; cash is king for a small growth company. If a new restaurant can be opened with a reduced cash outlay, it must be a good deal. The cash-on-cash return will be huge – right?

Wrong. While high landlord allowances require a smaller initial cash outlay, such deals almost always come with high rents. And, high rents raise the break-even hurdle, resulting in a highly leveraged P&L. That means the restaurant company needs to generate high sales just to stay in business. Here’s the ironic twist: high landlord allowances never generate high sales, but high-quality sites do.

The amount of landlord allowance is a finance decision, not a real estate decision. A solid real estate strategy differentiates between the two. Sites should be evaluated on the basis of potential, merit and capability to generate sales – independent of the deal structure. For our partners, we create a new store pro forma analysis using a return on invested capital approach. If the unfinanced returns meet the company’s hurdle, then the question can be asked, “How much cash outlay will this potential site require?”

I attended the Western Region ICSC Conference in San Diego last week. While most I encountered seemed confident the economy had bottomed out and that business is improving, the typically high-energy ICSC conference was hardly evidence. Registered attendance was down to about 3,000 from 5,000 in 2008. (As I recall, registered attendance in 2007 was near 7,000.) There were considerably fewer tenant booths, and one could only surmise from the notable, large developers who hosted meetings at nearby hotels that the $300+ per person ICSC registration fee made on-site participation cost-prohibitive. The conspicuous absence of new development projects, typically unveiled in celebratory fashion at this conference, was another sobering observation. And, sadly, many of the proposed projects that have been on the boards for the past few years remain noted as “future.”

Count me as an ardent supporter of the ICSC. I know most of us respect the association and the benefits it provides our trade. But I think the ICSC missed an opportunity last week to step-up, assert itself as the leading business platform we know it is and provide an evocative and inspiring conference centering on the matters of the economic situation. Why not a downturn economy-specific show theme? We’re all in this together, right? Aren’t we all looking for an edge, if nothing more than reasons to believe things are getting better?  What if exhibitors and speakers had been asked to address ways we can work around such difficult times? What if attendees could have hoped attending would send them home rejuvenated, with new ideas to stimulate business? Even discounted fees for exhibitors and attendees would have made a difference. Goodness knows we need it. By anyone’s measure, it’s no time for business as usual.

Hispanic purchasing power has influenced the marketplace. Hispanic shoppers generally spend more on food purchases because their families are usually larger. But the longstanding trait that Hispanic families are more likely than others to prepare and serve food at home appears to be changing, especially as younger generations make more family decisions about meals and adopt typically American lifestyle habits.

With close to 8 million Hispanic residents, the presence and influence of the Hispanic culture within Texas where we live has been prevalent for decades and continues to increase. According to 2007 U.S. Census data, people of Hispanic or Latino origin constitute 36% of Texas’ state population making the Hispanic/Latino demographic a significant segment of the state’s consumer market. Retail marketers and consumer brand managers have long been aware of this sector’s purchasing power, and it appears restaurant concepts are following suit.

One popular example is Pizza Patron, a Dallas based pizza concept since 1986 that has “centered their entire brand to the multifaceted traditions and heritage of Latin life.” Since franchising began in 2003, the brand has grown from four local stores to 90 in six states, with more than 40 additional stores under development and plans to have 750 stores within the next decade. The majority of Pizza Patron’s stores is community-based in Spanish speaking or Hispanic neighborhoods and offers Spanish-titled pizza such as La Patrona and Le de Carnes.

Another Dallas based, Hispanic influenced restaurant concept, Burguesa Burger, opened just recently in May 2009. Jeff Sinelli, the accomplished and well-known founder of multi-unit brands Which Which and Genghis Grill, created Burguesa. Sinelli explains his new concept was inspired by his travels to Mexico and Argentina where ham is predominantly used to make burgers instead of customary American beef. (Seems to me the burgeoning Hispanic market I mentioned in the beginning of this report might have also inspired the successful entrepreneur.) Burguesa’s Latin/Hispanic influence is evident in every aspect of its business. Sinelli has incorporated Latino suppliers, Spanish (and English) menus, and Burguesa’s accepts both U.S. and Mexican currency. In addition, customers who purchase a burger are allowed one free phone call to Mexico from the store’s phone booth.

The state of Texas’ population is projected to increase by 71.5% between 2000 and 2040 to 35.8 million. Of this 35.8 million, it is estimated that Hispanic population will increase to almost 19 million. What is now often phrased as a niche market, the Hispanic/Latino population will comprise more than 50% of the state’s total population. One can only speculate that countless developers, retailers, brokers, and restaurants will follow in capturing this demographic.

*Sources U.S Census, Pizza Patron, NRN Magazine

As another sign of the times and the tight lending standards that exist today, Landlords needing to backfill existing space have little capital resources available to contribute the extensive tenant finish out dollars we’ve all become accustomed to “receiving the last several years.”  With the capital intensive nature of new store development for restaurants, there are creative ways to achieve Landlord contributions to help offset the Tenant’s capital investment on a new location. “If the restaurant company has adequate cash reserves, one avenue to receive TI Allowance is in the form of rent abatement.”  Depending on the parameters of each deal, I’ve seen this range from as little as two months to as much as 18. “The benefits apply to each party: During the abatement period, the Landlord receives tenant payment of typical operating expenses such as taxes, insurance and maintenance that would otherwise add to the sunk costs of a landlord’s vacant space. This also helps accomplish the investment goals of the Tenant.”  By withholding rent payments during “these” positive cash flow months, cash reserves are increased, allowing for the allocation of capital to new or existing projects. Keep in mind, a tenant must take into account the time value of money when agreeing to a deal of this structure. “$200,000 paid back to a Tenant in monthly installments is not worth the same as having that cash in hand today.”  The Tenant’s negotiations and proforma should reflect this.

A tenant agrees to accept the premises “as-is” a phrase commonly used in the leasing of restaurant real estate, even more so now because of the availability of closed restaurants. It represents an understanding between a landlord and tenant that the Tenant will perform whatever work is required to open a new restaurant on the property.

However commonly used, restaurateurs can improve their deals by reviewing their Letter of Intent templates and omitting this language. Restaurant operators agreeing to accept a premises “as-is” disclaim landlords from some implied warranties, including workmanlike quality, that automatically come with the property in a lease transaction.  In agreeing to “as-is,” the tenant accepts the premises “with all faults” including some that may not be apparent.

Much more equitable when parties have this understanding is the language, “Tenant agrees to accept the premises with no additional work required of landlord.” This simple revision acknowledges that, even though the landlord is not doing any additional work, the agreement continues to convey certain assurances, as previously mentioned.

Finding a bright spot in today’s bleak economic and development environment isn’t easy. If there is one silver lining in this otherwise ominous cloud, it may be the cooperativeness shown from both municipalities and developers alike in ensuring that certain zoning restrictions and architectural standards don’t create deal-breaking issues for willing tenants. 

There exists an inevitable struggle between a restaurant’s desire to maximize brand identity through architectural design and a developer or jurisdiction’s insistence that potential restaurants meet certain zoning classification requirements and/or development project guidelines without variation.  In the past several years, developers and municipalities were afforded the luxury of strong demand to enforce their material requirements and architectural guidelines rather strictly. Historically, in our client’s experiences, site fallout has much too frequently been attributable to a conflict of design ideals.  “However, I’ve seen two or three different situations in the last 6 months where a developer has personally taken the initiative to persuade planning commissions/architectural review boards to approve a concept’s prototypical design (including colors, materials and signage) with surprising success.”  It has also been prevalent on the municipal end. A recent conversation with a Planning Commissioner at the County of Henrico regarding a signage issue resulted in his admission that the County would assist our client in whatever capacity they could to ensure the store’s opening.

In the face of trying economic times for all individuals and organizations (public or private), it seems that entities who were once unwilling to deviate from their standards are now adopting more flexibility to accomplish store openings. Concept operators can benefit from this paradigm shift by maintaining prototypical designs in new locations and continuing to build brand identity with an expanding customer base.