The Value Behind Second Generation Restaurant Space

Second generation restaurant space is a hot commodity and the most desirable locations are often leased before a sign is put in the window. Thanks to the down economy, the past 24 months has led to a high turnover of restaurant space. Many restaurants are now leased to new operators fully equipped with fixtures and furniture. For those who have never built a restaurant from scratch you may not understand the huge cost and time that goes into turning a retail space into a fully functioning, health code approved restaurant.

The number one cost behind turning a retail space into a restaurant is the water and sewer tap fee. The local water utility district will assess any restaurant, bar, cafe, bakery or any other facility that uses excessive amounts of water a fee. The fee is based on the size of the restaurant and expected usage. I generally estimate about $20 per square foot as a good start for what a fee will cost; each utility district will vary and it is important to first check with the appropriate utility district. The average size restaurant is about 2,500± square feet and thus would equate to about $50,000 just for water use (mind you this is due prior to construction and will be assessed with your construction permits). There are times when a property may have “credits” – payments received for high volume users such as a restaurant or salon but the space has now been turned into a general retailer. To further incentivize a deal a landlord may offer to pay half a sewer fee or perhaps the whole thing – but don’t hold your breath, this is not the norm. Second generation space means you will not have to incur this cost, a huge expense off the list.

Building a kitchen is expensive but a hood and proper ventilation is going to be a huge expenditure. A hood with the proper fire suppression system typically runs over $25,000 for a 8′-10′ foot – potentially much more depending other factors such as where you are venting to and the area you live.

Grease trap and interceptor: If you have ever poured bacon grease down your drain you may have noticed it immediately turns to solid once it cools. Restaurants are required to have an area where this type of material is collected, a grease trap. A grease trap reduces the amount of fats, oils, and greases that enter the main sewage lines and effectively reduce blockages in the sewer systems. Depending on the size and volume of the restaurant the type of grease trap will vary.

To meet health code you must now install a 3-tank sink, a handwash station, a mop sink, and multiple floor drains amongst a list of many other items and allowable materials. If the zoning allows a restaurant you are now on the way to the construction of your new business. If not, you have to go through the 3-4 month process of a conditional use permit which means the red-tape of the City and $1,000 to $12,000 depending on the City. Once you have a permit in hand you can finally think about your equipment, bar tops, glycol system to keep that beer cold, and use the left over pennies for decor. I didn’t even mention your liquor license yet…

The value in second generation space is not the decor, the walk-in cooler, or the stoves for that matter. It is the sewer fee, the hood and ventilation, the grease trap, the city approval, and the headache of not having to re-create the wheel to meet health code approval; a second generation space can save you well over $100,000 in just these few items.

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About thestorefront

Commercial Real Estate Broker in the San Francisco Bay Area specializing in retail sales and leasing.

3 thoughts on “The Value Behind Second Generation Restaurant Space

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