LESSON 3

ERGONOMICS OF SITE SELECTION

OBJECTIVES:

After the completion of the chapter, students should be able to:

● Research that must be done to determine whether a concept fits an area or a
particular location.
● Site Selection: the advantages, or possible problems in choosing your location.
● Major considerations when deciding whether to buy or lease your site.
● Common factors and advice for negotiating a lease.

SELECTING A SITE
Be aware that in site selection, there are two important designations: whether your
concept is convenience oriented or destination oriented. A convenience-oriented restaurant, like
a fast food franchise, depends primarily on a nearby base of customers to be drop-ins, gener-
ally for unplanned visits. Because it is likely to have similar competition throughout the area,
customers probably would not drive a long distance to visit this particular site, unless it happens
to be a convenient part of their daily commute or errand route.
Destination-oriented restaurants attract guests often because of their unique concepts.
Customer visits in this case are planned ahead of time, and may involve driving 10 or more
miles, depending on the attractiveness and availability of the concept. A destination restaurant
is more likely to be the choice for a special occasion or fancier meal. Ideally, you’ll attract both
types of customers: some drop-ins and some who planned their visits.

Site Selection Research

Unfortunately, most customer research seems to include only demographic information,
when location-related background can be equally important. Location-related information might
include frequency of use, distance traveled, where the trip originated, reasons for the visit,
whether the visit was in tandem with other activities, proximity to home and/or work, and how
often key competitors are also frequented.
Luckily, there now exists site selection information specific to the foodservice industry—
sales in existing eating and drinking establishments, market share of QSRs, and National
Restaurant Association data known as the Restaurant Activity Index (RAI) and Restaurant
Growth Index (RGI). The RAI is an indication of a population’s willingness to spend money
eating out instead of cooking at home. The RGI is a statistical prediction of cities where a new
restaurant has the “best” chance of succeeding. In both surveys, the number 100 is used as the
benchmark, or “national average”—in other words, a score of above 100 indicates better-than-
average prospects, and lower scores indicate poorer prospects. The RGI is not a gauge of
where restaurants are but where it is best for them to go. That’s why well-established cities
already known for their lively dining scenes may not fare as well in these surveys of as-yet-
undiscovered markets.
Restaurants that make it are those that meet a need, and research like this certainly pin
points these needs by area. Nowadays it rarely is available free of charge, but it can be
purchased online. Finding out an area’s fast-food market share is another valuable key because
it provides insight into the food preferences there, both in terms of price range and level of
sophistication. The sandwich giant Subway uses a special computer program for its site
selection needs.
On-screen, a map shows each existing Subway store, with population rings around it
that indicate the surrounding market potential for that store. Competitor locations have also
been programmed into the system and are shown on the same map. This shows Subway where
there are holes without restaurants. Then the population in those “hole” areas is studied for
demographics and compared to the customers of a successful Subway nearby. By the time the
store development team visits potential sites in person, they have truly done their home-work.
Large MCOs now operate their own food think tanks and idea centers, keeping an eye
on retail and supermarket trends to predict how these might shape the foodservice industry.

GUIDELINES FOR SITE SELECTION

The location of a restaurant is the bridge between your target market and your concept.
And yet, as long as there’s a vacant building and a willing investor, there will be hot debate
about the true importance of site selection. Some experts feel that as long as the restaurant is
located in the “right” area of a city, with a strong economic base, the actual site doesn’t matter
as much—that unique food and beverage offerings and good service will attract customers,
even to a less obvious location. Others are not so optimistic. For the time being, let’s agree that,
at the very least, the restaurant’s concept and location must fit each other. This also means that,
as certain things about the location change, the concept must often change to adapt.

The location selected will have an impact on:

 The type of customer
 Construction or remodeling costs
 Investment requirements by lending institutions
 Local ordinances, state and federal laws
 Availability of workers
 The option to sell alcoholic beverages
 Parking availability and accessibility
 Occupancy costs: rent, taxes, insurance, and so on

Study your own neighborhood, and you’ll probably find a few restaurants that seem to
thrive despite less-than-optimum locations. Most information, however, indicates the reverse: A
good location is crucial to survival and success.
At this point, we will list some important guidelines for selecting a site. If any one of
these conditions exists, proceed with extreme caution. Your business survival may be at risk if
they are not handled properly.

Zoning Restrictions. Zoning ordinances must allow your specific type of operation to do
business at this location and must also permit adequate parking on or near the property. Do not
waste time and money attempting to get a variance, which is a long and costly procedural
struggle with your city or county. Likewise, if there are restrictions on the sale of alcohol, look
elsewhere. Unless your concept warrants absolutely no need to serve beer, wine, or drinks
(during regular hours or for private functions), you most definitely restrict your profits when you
limit yourself with a liquor prohibition.

Small or Oddly Shaped Lot or Building. If the parking area isn’t big enough or easily
accessible, you’re asking for trouble. Can the lot meet the basic city parking requirements?
(They are typically stringent, as discussed in detail in Chapter 4.) Can people drive in and out of
the area as easily as they can park? Do garbage trucks have enough space to empty your
Dumpster? Also avoid narrow frontage to the street. You want people to be able to see the
place!
 There is no perfect shape for a restaurant space, but some configurations do work better
than others for maximizing the total number of seats for the square footage. Even the way the
building is placed on the lot determines whether you’ll constantly be opening and closing
window coverings at certain times of day because of glare or direct sunlight annoying the
customers. Get professional design advice before you commit to an unusual space or site.

Short-term Lease. Do not lease for less than five years, with one five-year option after that.
Generally, short-term rental agreements prohibit most restaurants from realizing their potential.
Also, beware the shopping center pad site, which requires that you pay rent plus a percentage
of profit based on monthly sales to the owner or Management Company of the center. Can you
handle the added expense?

Low Elevation. This is seldom a consideration, but it should always be. Elevation affects
gravity, and gravity affects drainage away from the building. A good site is environmentally
friendly. It will minimize your sewage backup, plumbing, and grease interceptor problems. It
does not require extraordinary modifications to get good water pressure throughout the building.
Also, find out if the property is located in the floodplain of an adjacent river or creek, which may
make insurance difficult or expensive to obtain.

Utility Requirements. Amazingly, some people put down earnest money on a piece of
property, only to find out that gas lines or sewer lines are not available there or are inadequate
for commercial use. Your real estate agent or local utility companies can check this for you. And
as you’ll learn in Chapter 5, electrical power requirements are complex for restaurants and may
mean you need more power than now exists in the space. Be prepared to negotiate with the
landlord for the cost of converting or modernizing the electric service.
Along the same lines, the HVAC (heating, ventilation, and air conditioning) system works
hard in a dining establishment. Usually the landlord provides this service, so have the system
inspected to ensure that it meets current city codes for ventilation. Add an inspection of the
hood exhausts, or if there are none yet, determine where they will be located. Modern building
codes require exhaust systems be located as much as 10 feet from any door, window, or fresh
air intake. In a multistory structure, hood installation involves building a shaft through other
stories to the roof, which is very costly. It is better to know early if it’s even possible—or that the
landlord will agree to do it.
Urban Challenges. There are some immediate concerns when locating in a downtown area as
opposed to a roomier suburb. Specific environmental restrictions may have been enacted for
good reasons, but they may also make it impossible for you to do business in certain locations
without extensive capital outlay and/or building modifications. Precipitators, pricey equipment to
clean exhaust fumes before expelling them into the atmosphere, may be required, and exhaust
vents can’t simply be punched through a wall—as mentioned, they may have to snake up
several floors to the roof of the building. Sewer and grease trap requirements are often more
complicated. Licensing can be more expensive, and regulations stricter overall, in an urban
area.
Logistics also figure prominently in busy or congested locations. Where will trucks park
to make their deliveries? How difficult will trash removal be?

Speed of Traffic. The roadway in front of your proposed site provides an important clue to its
future success. Do cars whip by so quickly that the motorists never see your place? Drivers
traveling at 35 miles an hour or less will be best able to read your signage and to turn
spontaneously into your parking lot without causing a traffic mishap.
Is the nearest intersection so busy that most people would think twice before trying to
cross the street to patronize your business? Does the outside traffic hinder or help you? Stand
outside the location and watch both automotive and foot traffic in the area. Ask yourself if
anyone, coming from any direction, would be frustrated by the sheer hassle of getting to your
site. This also applies to restaurant space in high-rises, shopping malls, and other locations that
aren’t necessarily at intersections.

Proximity to Workforce. Almost as important as being accessible to the public is the need to
be located close to a potential labor pool. Are your employees able to live close by? Do the
routes and hours of public transportation systems mesh well with your business? The foot-traffic
patterns also are worth close examination. Do plenty of people pass your prospective location
on foot? Are the sidewalks wide enough, in good shape, and brightly lit? Can customers access
your building from the outside, or must they enter another door first before they can find yours?

Previous Ownership. Was this site previously a restaurant? If so, take great care to determine
why it closed. If it is appropriate, talk with the previous tenants and neighboring businesses
about the pluses and minuses of the location. Putting up an “Under New Management” sign is
not enough to guarantee success where others have failed. A bankruptcy in the building’s past
may make it more difficult to secure financing for another venture there. Today’s investors are
cautious. Now that we’ve discussed the possible drawbacks, how about those characteristics
that are almost always attributes? Since we’re speaking in general terms, no single factor will
make or break a business. A combination of them, however, will certainly enhance the
desirability of your site.

Visibility. If people cannot find you because they cannot see you, you’re almost always in
trouble. Exceptions exist, but they are rare. If possible, your building should be visible from both
sides of the street, as far away as 400 feet. This also means checking local signage laws.
Cities, counties, and even your neighborhood merchants’ group may have restrictions on the
types, sizes, height, and even brightness of outdoor signs. As we write this, Seattle authorities
are cracking down on the painted murals on some downtown buildings as violations of its bill-
board ordinance.
Another visibility issue: If you’re looking at a strip-style shopping center, go for the end
cap, or end location; in other situations, choose a corner lot rather than a middle-of-the-block lot.

Parking. In suburban locations, local ordinances specify the ratio of parking spaces to the size
of the building. For restaurants, the general rule is one space for every three seats. Busy places
may need more. Again, we describe the specifics in Chapter 4. Closely examine parking
availability during peak hours—at lunch and dinner, and on weekends—and query neighboring
businesses. Will the dour drycleaner next door to your customers before the main course has
been served? (We know of one instance in which a law firm next door to an Italian restaurant
has diners’ cars towed from its lot even after dark and on weekends, when there’s nary a lawyer
in the office.) Don’t assume that after hours it’ll be okay to use others’ parking lots without a
specific written agreement. Parking fights among businesses can be nasty, protracted, and
counterproductive.
If parking is that tight, study the option of offering valet parking. Will your guests pay the
added cost for convenience or security? Or will you offer complimentary parking and foot the bill
yourself? Finally, where will your employees park?

Accessibility. Make it easy for guests to enter and leave your parking lot and your building.
Check the locations of traffic lights or stop signs, which may affect foot traffic. One-way streets
or speed limits of more than 40 miles an hour may make your place a little tougher for cars to
get to.
 Your city planning and zoning department will be able to provide any recent surveys of
vehicle or foot traffic as well as details of future plans for the street. A prolonged construction
project that restricts access could be deadly to business.
Accessibility also includes compliance with the federal Americans with Disabilities Act
(ADA), which was passed in 1992. Businesses are required by law to provide reasonable
amenities—such as handicapped parking spaces, wheelchair ramps, and accessible restrooms
—that enable physically challenged persons to be customers too. (We detail a few of the major
requirements of the ADA in Chapter 4.)
The first year the ADA went into effect, almost 1800 complaints were filed against
businesses with the Department of Justice, 60 percent of them for physical barriers. Contact a
charitable organization that assists disabled persons and ask for guidelines to help you make
them loyal customers instead of litigants.

Traffic Generators. Large, natural gathering places will affect your ability to draw people into
your establishment. In some cases, when events are held near mealtimes and yours is one of
the only restaurants in the area, they provide captive audiences. In other situations, a crowded
spot may be a drawback if the area gets a reputation for being inaccessible (“You can never find
a parking space,” etc.). Only you can decide if being near a sports arena, museum, department
store, school, hospital, or mall will help your business. On the positive side, you can use
proximity as part of your theme or concept and cater specifically to those patrons.
However, there are some drawbacks. Let’s say you’re considering a site near a high-rise
office with 2500 employees. It sounds promising at first, and you’re imagining a bustling lunch
business. If the office building already has its own cafeteria, executive dining room, and ground-
floor sandwich shop, however, the location may be less than ideal. Also ask if the area has an
active merchants’ association, which may sponsor business builders like parades, street fairs, or
holiday events.

Design Flexibility. Your own ability to adapt to an attractive space when you find it is important.
For instance, Starbucks has four different prototype store designs, knowing it will encounter
promising locations that may be of different sizes and shapes. Adaptable designs for both an
urban and suburban setting might be the way to go if you’re open to either type of location—or if
you’re simply planning ahead for expansion.
Restaurant Cluster. There are streets in most cities that seem to be lined with eating places.
Such areas are commonly known as restaurant clusters. People tend to congregate in these
areas, which helps your place become a regular destination for some. For all their advantages,
however, clusters have life cycles. Make sure you choose one that is not headed for a downturn
in economics or popularity. Do not try to duplicate any of the concepts already at work in your
cluster, and remember that the national, casual dining chains seem to work better in a cluster
than fancy, white-tablecloth establishments.

Guests, Both Regular and Infrequent. You want 50 percent of your guests to fall into the
category of “regulars,” who visit your restaurant three to five times per month. The market
segments that typically can provide these diners are:
 Singles
 Young families
 Retirees
 Affluent empty nesters
 Office or professional crowd

These folks must live or work nearby. When you visit your competition to do market
research, notice who eats out and when. Observe what they order and how long they stay.
What is it about this particular site that seems to attract them? However, do not overlook the
infrequent guest as an attribute. Having a strong base of infrequent guests—tourists,
conventioneers, regional salespeople who come to town occasionally—helps insulate a
restaurant against the impact a new competitor may have on the whims of the regulars. A
regular clientele may suddenly evaporate, at least temporarily, as they all rush to try a new
eatery, while the infrequent guest is not prey to these whims.

OWNING OR LEASING SPACE

Once you have identified a location where your concept will fit, where you can find employees,
and where members of your target market will visit on a regular basis, your work has just begun.
Will you lease the site or purchase it? Remodel or build from the ground up? You may
consider hiring a commercial real estate broker to assist in your property search, but it is smart
to do concept and target customer research before you do so. Some property owners don’t want
to pay the broker’s commission fee to make a sale, but the broker brings real estate negotiation
experience to the table as well as knowledge of multiple locations and market demographics.
Brokers are not in the restaurant business—but then again, you’re not in the real estate
business—so they may add some valuable insight to the selection process.

BUYING LAND AND BUILDING ON IT

Even if it is raw land, the same attributes (and problems) of site selection in general hold
true here, too. Your first step should be to find a real estate broker who will help with the myriad
details of land purchase. You’ll want to know if the selling price is fair, based on other recent
sales in the area.
Although many other factors were mentioned in the previous section, “Guidelines for Site
Selection,” the reality is that the purchase price of the land will have the single greatest impact
on the character and the ultimate success of the business. Why? Because it determines the size
and type of restaurant you can put there as well as the amount of funds that remain to cover all
the other expenses.
Sales prices in urban areas are calculated in dollars per square foot; in undeveloped
areas, dollars per acre. If you can afford to pay cash for the land, you’ll bring the cost down
considerably. Most people, however, buy land for businesses just like they buy houses—with a
down payment and a mortgage of monthly payments with interest charges.
Will the person selling the land be willing to finance the mortgage (carry the note), or will
you get a bank loan? In either case, the land itself will be used as collateral to guarantee the
loan. If you don’t make payments, you lose the land and, most likely, anything you’ve built on it.
When making a land purchase for a restaurant site, pay close attention to two long-term factors:
1. The floating interest rate is the rate of interest you will pay. It is one or two percentage
points higher than the bank’s prime rate or the Consumer Price Index (CPI).
2. The payout period is the number of years it will take to pay back the amount
borrowed. In most situations, this will be 10 to 15 years.

When it’s time to build on your land, you’ll use your projected income statement to tell
you the upper limits you should spend on construction. This may sound cynical, but only you
can decide if you’ll have enough guests coming in the door to support massive construction
debts in addition to land costs. So, before you decide on the buy-land-and-build strategy, you
would do well to meet with a restaurant or foodservice consultant and an architect. Together,
after listening to your needs, they should be able to present a preliminary budget that covers all
aspects of construction. In addition to design fees, the budget must include:
 Electrical
 Mechanical
 Plumbing
 Painting
 Heating/air conditioning
 Interior finish-out (for specific areas: kitchen, dining room, bar)
 Special features (glass, doors, etc.)

It is impossible to generalize about these costs, but professionals can break them down into an
approximate cost per square foot figure that you can plug into your budget. Just like home
prices, square-footage costs for retail and restaurant sites in large metropolitan markets have
skyrocketed in recent years. Be prepared for some sticker shock.
One way to save money in constructing your own restaurant is to rehabilitate an existing
structure. Some call this adaptive reuse. The Internal Revenue Code details the potential
savings for renovation work, since Congress has decided it is generally better to save old
buildings than demolish them. Usually, if the building was constructed before 1936, you can
receive a tax credit of 10 percent of all qualified expenditures; in refurbishing some historical
buildings, the tax credit can be as high as 20 percent. The credit is deducted directly from actual
taxes owed. For instance, if qualified rehabilitation expenses total $100,000, a $10,000 tax
credit is allowed. The actual cost of purchasing the structure, however, is not included. An
accountant and/or tax attorney should be consulted if you’re undertaking historical renovation.

Leasing an Existing Space

Most first-time restaurant owners lease space because it is the least expensive option. In some
instances, the site is simply not available for purchase. Again, a good real estate broker will
save time in site selection and lease negotiations. In every city, there are real estate
professionals who specialize in restaurant locations or in specific trade areas, and their
expertise is worth their fee. In fact, the fee (which usually amounts to 4 percent of the total lease
amount) is often paid by the property owner. Make sure to check on this before you begin the
negotiating process to avoid misunderstandings.
 Did we just say “least expensive option”? As with purchasing property, leasing costs are
relative. Higher-end Manhattan restaurants now pay $200-plus per square foot, in a market
where anything over $100 used to be unthinkable. Part of the reason for the price inflation is
that large, successful MCOs are entering these urban markets, and property owners know they
are able to charge these types of tenants more. However, a Lower East Side location may be
had at the relatively reasonable cost of $75 per square foot.
The time to get an architect or foodservice consultant involved is before the lease is
signed. Yes, their services can be expensive, but it is worth it to have a realistic idea of whether
the space can become what you intend it to be. Stay on good terms with your designers and
contractors by being completely honest as your estimates are being compiled. It is time
consuming and expensive to ask those to draw up preliminary plans, then continually downsize
them because your budget does not fit the project.
As with a purchase, a lease price is referred to in cost per square foot. Since you’re
planning on a successful long-term operation, ask for a lease of at least five years. That way
you know the exact monthly amount to budget for, and you know it won’t increase before then.
In negotiating for space, you should ask about:
 The exact size of space available, including parking
 The exact price, in dollars per square foot
 The amounts of finish-out allowances, and exactly what is included in them
A finish-out or build-out allowance is money for a new tenant to complete the interior of
the space with paint and fixtures, usually chosen by the tenant. This may also be known as
tenant improvement dollars. If the landlord provides this money, the actual monthly rent figure
will be higher than if the tenant opts to pay for finish-out. Who should pay? Your cash flow
situation should determine that. Frankly, most new restaurants need their cash to sustain them
in the first lean months before they see a profit. If that is the case, try to let the landlord assume
finish-out costs. If you’re a good negotiator, test your skills by offering to do the finish-out in
exchange for a much lower rent for the first six months to one year. We also know of situations
in which restaurateurs have done their own finish-out in exchange for free rent for the first three
to six months. It all depends on how badly the landlord needs a tenant in the space.
One important precaution is to consider the tax implications for spending money on
and/or doing work to someone else’s property. If the landlord pays for the improvements, the
contract should clearly state that the landlord owns them. At income tax time, you can- not
depreciate the value of these improvements because they don’t belong to you. You also will be
paying more income tax if you have fewer up-front expenses to write off in the first year. The
basic depreciation rates are:
 5 years for personal property (furniture, fixtures and equipment)
 15 years for land-related improvements (e.g., adding a parking lot)
 39 years for real property

Specifics of the Typical Restaurant Lease

The annual cost for leased space is calculated per square foot and is known as the base
rate. Chez Ralph is considering a space of 5000 square feet, at a bargain rate of $20 per square
foot.
The annual rent would be:
5000 (size in square feet) $20 (cost per square foot) $100,000

The monthly rent would be:

$100,000 (annual rent) 12 (months) $8333.33

On average, total rent costs should be about 7 percent of yearly gross sales. In many
lease agreements, a percentage factor also is added to the base rate, usually 6 to 8 percent.
This means that the more profit the restaurant makes, the more money it must pay to remain in
the space. Let’s say the percentage factor in this particular lease is 8 percent. How much money
can Chez Ralph make without an automatic rent hike? It’s easy to calculate:
$100,000 (monthly rent) 1.08 (rent plus 8%) $108,000.00

This lease states that Chez Ralph’s rent will remain at $8333.33 per month, as long as its net
sales do not exceed $108,000.00. Be sure that this figure is based on net sales, not gross sales.
Also, specify what the net sales figure will not include: items like liquor taxes or license fees and
other expenses (credit card discounts, sales tax on food, etc.). All parties must agree on how
sales for each month will be verified. Who will drop by to look at your books, and when?
Whenever a percentage factor is part of a lease, your attorney should go over the lease
carefully with you before you sign anything.
Percentage factors are controversial simply because they ask you to pay an additional
price for success. Let’s say, after seven months in business, Chez Ralph has a terrific month:
$112,000 in net sales. Well, this also means more rent to pay. How much more? $112,000 (net
sales) $108,000.00 (rent base plus the 8% factor) $4,000.00 $4,000.00 (additional sales) 0.08
(8% factor) $320.00
Some restaurateurs shrug this off as the cost of doing business; others see it as a subtle
disincentive to strive for bigger bucks.

Term of Lease. Most foodservice business leases are for a period of five years, with two more
five-year options—a total of 15 years. In addition to rent and percentage factors, it is not
unusual to have an escalation clause in the lease, detailing a “reasonable” rent hike after the
first five-year term. The increase may be based on the Consumer Price Index or the prevailing
market rate (what similar spaces are being rented for at the time the lease is negotiated). Make
sure the basis for any rent hike is clearly spelled out in the lease agreement.

Maintenance Agreement. Another important part of a lease is the complete rundown of who is
responsible for repairs to the building. Some leases specify the tenant takes full responsibility
for upkeep. Others give the landlord responsibility for structural and exterior repairs, such as
roofing and foundation work, while tenants handle interior maintenance, such as pest control
service or plumbing and electrical repairs. These items are easy to gloss over if you have your
heart set on a particular site. Remember, however, that all buildings need maintenance, and the
costs can really add up. How much are you willing to do—and pay for?

Insurance. Generally, the tenant is responsible for obtaining insurance against fire, flooding,
and other natural disasters as well as general liability insurance for accidents or injuries on the
premises. The lease must specify how the policy should be paid—monthly or yearly are the
most common stipulations—and also the amount of coverage required. Both tenant and land-
lord are listed as the insured parties, so the landlord should be given copies of all insurance
policies for his or her records.

Real Estate Taxes. Each city and county decides on the value of land and buildings, and taxes
an address based on its assessed value. These taxes are typically due once a year, in a lump
sum, but most landlords will ask that the taxes be prorated and paid monthly, along with rent
and insurance. A triple net lease is the term for a lease that includes rent, taxes, and insurance
in one monthly payment.
Municipal Approval. Just because you sign a lease doesn’t mean you’ll ever serve a meal at
this site. Cover your bases by insisting in writing that this lease is void if city or county
authorities do not approve the location to operate as a restaurant (or bar, or cafeteria, or
whatever you’re planning). Potential roadblocks: Do you intend to serve alcohol? Is your
concept somewhat controversial—scantily clad waiting staff, for instance? You’ll save yourself a
lot of time and money if your lease allows these items in writing and if you also obtain
permission from the county or city first. Politely inquire about all necessary licenses and permits
before you begin finish-out work on the site.