Sunday, November 25, 2012

The inside track to commercial property for food startups

Interview with Alfredo Fresnedo
Realtor, Century 21

By Kathryn Gordon

Kathryn:  Hi Alfredo!  You’ve been selling and renting commercial and residential properties for almost 30 years.  I was wondering how the economic downturn affected commercial business turnover, at least in your (New Jersey shore) area?

Alfredo:  What we’ve seen generally is that it’s become harder to sell businesses.  If they’re not viable to run, they’re hard to sell.  That means that some businesses have closed and the owners have walked away from their leases.

Kathryn:  If that happens, and a business closes, does the business generally sell their equipment to an auction house, or on eBay/Craig’s list?

Alfredo:  Some businesses strip out the equipment.  Some actually leave it all behind.  It depends on why someone is leaving. If they owe a lot of people a lot of money, they sometimes just want to disappear quickly, and abandon everything.

Kathryn:  From your experience, what do you think is the primary reason someone goes into business, invests so much money, and then can’t make a go of it?

Alfredo:  I really think everyone jumped on the "TV cupcake bandwagon” and cannot put out a really good product.  The fundamentals aren’t sound.  They may or may not have financial resources, but they don’t necessarily know how to bake or how to run a profitable business.

Kathryn:  If someone has to close, does it happen pretty easily that someone else comes along and wants to open up?   I know that there’s a bakery around here that seems to have been on the market for awhile.

Alfredo:  It depends.  People still want to open businesses, so a business will move if the business is priced right for sale.  Some people would be just lucky to get their initial investment money back, but they can have unrealistic expectations that they will double their money back.  That is very difficult in today’s economy, and if the business was doing so well that they could double their initial investment it probably wouldn’t be up for sale.

Kathryn:  What are the worst mistakes you've seen made in the food business over the years?

Alfredo:  There was a lovely restaurant in our town, Raspberry Café.  It had good food, friendly and reliable service, a fun atmosphere and a line of customers around the block on a summer morning! (Note:  this is a beach resort town and that’s prime time).  Then when the owners expanded with another restaurant and sold the café because they didn’t have time to correctly manage both, the new people who took over didn’t handle the cafe well.

Unfortunately, the new owners took out some of the original fixtures that had provided a lot of the café’s charm.  They placed an ice cream / soda fountain counter and a service window format that limited the number of table space inside.  In combination with the physical space change, the new owners had bad staff and mediocre food.  The remodeled format never took off.   If a place doesn’t have a good reputation, it will remain empty.  It sold twice fairly quickly and it’s now transitioned into a clothing store.

Kathryn:  In our town, most businesses for sale are for on a lease basis, right - not to purchase the actual building?  Do you think more businesses would sell if people could buy the building as well as the business enterprise?

Alfredo:  No, I don’t.  The majority of new start up business owners don’t have the financing to also be able to purchase the underlying real estate.  They may be able to come up with the money for the start up for business, but that’s all. 

Over time, however, I have turned several business renters into building owners.  When a building comes up on the market, I approach them first and they often do decide to purchase it if their business is doing well financially after the start up point.

Kathryn:  What’s the most typical way you see people financing new food businesses?

Alfredo:  Lately it’s been home equity loans.  It’s very unusual nowadays to qualify for a business loan.

Kathryn:  What’s the typical term of a commercial lease with renewal options? Do you, as a realtor, have any "words of advice" for someone trying to negotiate better lease deals with the landlord?  

Alfredo:  I see the most leases with 5-year with 3-year renewal, or 3 and 5, or 5 and 5.  It’s a big investment to start up a food business. You need a long lease to be able to justify the financial investment.

Some landlords will work with tenants when the market is down, and even if the lease terms are for the rent to increase, they will hold it constant if times are bad.  Others won’t, and I think that’s a big mistake. Rent increases can weaken a weak business and force it to close down.  Empty businesses don’t help generate foot traffic.

Kathryn:  When you're showing a commercial property, do you try to scope out the background of the applicant "differently" than you would for a residential transaction?  Are you trying to help assess viability of their future business?

Alfredo: I do ask if they are an experienced baker, to help gauge how serious they are.  I will say to people that “this may be a mistake,” if they want to buy something they’re not (apparently) qualified to run because it’s not good for the town tourism industry if businesses fail. 

Kathryn:  What words of advice would you as a realtor give to a new business start up owner?

Alfredo:  The best business formula is to know all aspects of your business.  If you have to, like if staff calls in sick, you should be able to handle all positions.  If it’s a restaurant or cafe, you should be able to be a host or wait tables.  If it’s a bakery or restaurant, you should know how to bake all of your products or produce every dish.  No employee should know more than you do.  When someone has that kind of experience, it helps businesses survive.

Kathryn:  Thank you Alfredo for your great insight!

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