I own a small mixed use property and am planning to continue buying similar properties. A friend of mine owns a highly successful restaurant in the area and we are mutually interested in having him open a 2nd location in my building. I am wondering what the pros/cons are of simply treating this as an arms-length lease vs. finding a a way to go into business together than benefits us both (i.e. charge him little or no rent in exchange for some ownership of his business). I know I could just capture some upside with % rent, but I’d rather have upside through partial ownership since I am optimistic about his business and could see us continuing to buy properties and expand together.
I realize this could get pretty complicated… for example if I give the tenant free rent and make up the income through the business, my property will be producing negative cash flow which could screw up the debt service coverage…
Has anybody done something similar or have any insight on this?
Let me save you some heartburn and a few years of life expectancy. Don't get into the restaurant business.
Yeah I agree with SHB - mixing friendship and business is a bad enough idea, let alone the restaurant business.
Percentage rent is still your best bet here. He gets a lower rate (which also helps you, because he's less likely to close down shop for not being able to pay rent) and if he blows it out of the water, you get to participate in the upside. If you're both in agreement on the structure, you can always make the base rent lower than market and the % you would get after a certain point higher than market.
If you co-own the place, and it doesn't go well (and most restaurants don't), not only are you fucked as the business owner, you're also fucked as the landlord. I don't know why you'd set yourself up to potentially be double fucked - or triple if you lose a friendship over it.
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