Restaurant Leasing Guide: How to Find & Negotiate Restaurant Space

Leasing restaurant space is one of the most consequential financial decisions you will make as a restaurant operator. The lease you sign will define your fixed costs for the next five to ten years, dictate what you can and cannot do with the space, and ultimately determine whether your concept has the financial breathing room to succeed. As a managing broker who has represented both landlords and tenants on hundreds of restaurant transactions across Southern California, I have seen firsthand how the right lease structure can launch a thriving business — and how a poorly negotiated lease can sink one before the doors even open.

Whether you are searching for your first restaurant space for lease, evaluating a second-generation restaurant location, or trying to understand triple net lease terms before signing on the dotted line, this guide will walk you through every stage of the restaurant leasing process from a broker’s perspective.

Should You Lease Restaurant Space or Buy an Existing Restaurant?

Before you start browsing listings for restaurant space for lease near you, it is worth stepping back to ask a more fundamental question: should you lease raw space and build out a new restaurant, or should you buy an existing restaurant that is already operating?

Leasing Raw Space (New Buildout)

Advantages:

• Complete creative control over layout, design, and equipment
• No inherited operational baggage or reputation
• Opportunity to install modern, energy-efficient systems from scratch
• Ability to design the kitchen around your specific menu and workflow

Disadvantages:

• Buildout costs typically range from $150,000 to $500,000+ depending on size, condition, and concept
• Timeline from signed lease to opening day is usually 3 to 6 months (and frequently longer)
• Permitting delays in California can add months to your timeline
• No revenue during the buildout period, while rent obligations may already be accruing
• Higher risk — you are spending heavily before proving the concept in that location

Buying an Existing Restaurant

Advantages:

• Existing equipment, grease trap, hood system, and permits are already in place
• Can often be operational within 60 to 90 days of closing
• Existing customer base and online presence provide immediate revenue
• Lease assignment or new lease negotiation is part of the purchase process
• Lower total capital outlay in many cases, since equipment and tenant improvements are already capitalized
• Understanding the business valuation gives you a clear picture of earnings potential

Disadvantages:

• May inherit equipment that needs repair or replacement
• Layout may not perfectly match your concept
• Possible negative reputation attached to the location
• Existing lease terms may not be ideal

The Bottom Line: For first-time operators or those looking to get into business quickly with lower risk, buying an existing restaurant is almost always the smarter play. Leasing raw space makes the most sense when you have significant capital, a proven concept, and a specific location in mind that is not available as a turnkey operation.

How to Find Restaurant Space for Lease

Finding the right restaurant for lease requires a multi-channel approach. The best opportunities are not always the ones listed publicly.

Work with a Commercial Broker

A commercial real estate broker who specializes in restaurant and food service properties is your most valuable asset. A good broker will have access to off-market opportunities, relationships with landlords and property managers, and the negotiation experience to structure favorable lease terms. At Smith Allen Group, we represent both buyers and tenants in restaurant real estate transactions across California, and we frequently identify opportunities before they hit the open market.

Online Listing Platforms

The major commercial real estate listing platforms include:

• LoopNet — The largest commercial real estate marketplace. Good for retail and restaurant spaces, though listings can be slow to update.
• Crexi — A newer platform with better search filters and more accurate listing data. Increasingly popular with landlord representatives.
• CommercialCafe — Useful for comparing lease rates across neighborhoods.
• LocalFlavor/BizBuySell — Better for existing restaurant businesses for sale, but occasionally list lease opportunities.

Drive the Neighborhoods

Some of the best restaurant spaces are never formally listed. Drive through your target neighborhoods and look for “For Lease” signs, recently closed restaurants, and spaces under construction. Take note of the property management company or landlord contact information and reach out directly. Neighborhoods with strong retail location fundamentals — high foot traffic, complementary businesses, favorable demographics — should be your priority targets.

Off-Market and Pre-Market Opportunities

Landlords often prefer to fill restaurant spaces quietly, especially if the previous tenant failed and they want to avoid the stigma of a publicly vacant space. Building relationships with commercial property managers and landlord representatives in your target areas can give you access to these opportunities before they are advertised. This is one of the primary advantages of working with a broker who has deep local relationships.

Second-Generation Restaurant Spaces

A “second-generation” or “second-gen” restaurant space is one that was previously operated as a restaurant and still has the infrastructure in place — hood system, grease trap, gas lines, floor drains, and often some equipment. These spaces can save you $100,000 or more in buildout costs compared to converting a raw retail space into a restaurant. When searching for restaurant space for lease, always ask whether the space is first-generation (raw) or second-generation (previously a restaurant).

Understanding Restaurant Lease Types

Not all restaurant leases are structured the same way. Understanding the different lease types will help you accurately compare opportunities and calculate your true occupancy cost.

NNN (Triple Net) Lease

The NNN lease is the most common lease structure for restaurant tenants in California. Under a triple net lease, you pay:

1. Base rent — A fixed monthly amount, typically quoted as a price per square foot per month or per year.
2. Property taxes — Your proportionate share of the property’s annual tax bill.
3. Insurance — Your share of the landlord’s building insurance policy.
4. Common area maintenance (CAM) — Your share of costs to maintain shared areas: parking lot, landscaping, exterior lighting, trash, security, management fees, and more.

Example: A 2,000 sq ft restaurant space at $3.00/sq ft/month NNN with NNN charges of $1.25/sq ft:

• Base rent: $6,000/month
• NNN charges: $2,500/month
• Total monthly obligation: $8,500/month

The key risk with NNN leases is that the “N” charges can escalate. Property taxes get reassessed, insurance premiums rise, and CAM charges can balloon if the property management company is not keeping costs in check. Always negotiate a cap on annual NNN increases — typically 3% to 5% per year.

Modified Gross Lease

In a modified gross lease, the landlord and tenant split some of the operating expenses. The landlord might cover property taxes and insurance while the tenant pays CAM, or the landlord covers everything up to a “base year” amount and the tenant pays any increases above that threshold. Modified gross leases are less common for restaurant spaces but can offer more predictable monthly costs.

Gross Lease

Under a gross lease, you pay one flat monthly amount and the landlord covers all operating expenses. These are rare for restaurant spaces but occasionally appear in multi-use buildings where the landlord prefers a simplified structure. Be aware that gross lease rates are higher to compensate the landlord for absorbing those variable costs.

Percentage Rent

Some restaurant leases include a percentage rent clause in addition to base rent. This means you pay a percentage of your gross sales above a specified breakpoint. A typical structure might be 6% of gross sales above $1 million annually. Percentage rent clauses are most common in high-traffic retail centers and malls.

Negotiation tip: Always negotiate the breakpoint upward. The higher the breakpoint, the more revenue you can generate before percentage rent kicks in.

What Is a Good Rent-to-Sales Ratio for a Restaurant?

The rent-to-sales ratio is one of the most important financial metrics for evaluating whether a restaurant lease makes economic sense. This ratio measures your total occupancy cost as a percentage of gross sales.

Industry Benchmarks

How to Calculate Total Occupancy Cost

Total occupancy cost includes more than just base rent. You need to account for:

• Base rent
• NNN charges (property tax, insurance, CAM)
• Percentage rent (if applicable)
• Any parking or storage costs

Example calculation:

• Annual base rent: $72,000
• Annual NNN charges: $30,000
• Total occupancy cost: $102,000
• Projected annual gross sales: $1,200,000
• Rent-to-sales ratio: 8.5%

At 8.5%, this lease is on the high end of acceptable. If your concept targets a 10% net profit margin, an occupancy cost above 10% will make it extremely difficult to hit that target after accounting for food costs (25-35%), labor (25-35%), and other operating expenses. Understanding your seller’s discretionary earnings in the context of occupancy costs is essential for restaurant valuations, whether you are entering or exiting a business.

Revenue Projection is Critical

Before signing any restaurant lease, you need a realistic revenue projection for the location. Do not rely on the landlord’s or listing broker’s optimistic estimates. Research comparable restaurant concepts in the area, analyze traffic counts, and build a conservative financial model. If the lease does not work at 75% of your projected revenue, it probably does not work at all.

Our SDE calculator can help you model the earnings impact of different lease scenarios on your restaurant’s overall valuation.

Key Lease Terms Every Restaurant Tenant Should Know

Restaurant leases are dense legal documents, often 30 to 60 pages or more. Here are the critical terms you need to understand and negotiate before signing.

Common Area Maintenance (CAM)

CAM charges cover the cost of maintaining shared spaces in a commercial property or shopping center. For restaurant tenants, CAM can include parking lot maintenance, landscaping, exterior lighting, property management fees, security, and even marketing for the shopping center.

Watch out for: Landlords who include capital expenditures (roof replacement, parking lot resurfacing) in CAM charges. These should be the landlord’s responsibility. Also insist on a CAM cap — a maximum annual increase of 3% to 5% — to protect against runaway costs.

Tenant Improvement (TI) Allowance

A tenant improvement allowance is a contribution from the landlord toward your buildout costs. TI allowances for restaurant spaces typically range from $20 to $50 per square foot, depending on the market, the landlord’s motivation, and the strength of the tenant.

How it works: The landlord reimburses you for qualified improvements (usually after completion and inspection) up to the agreed amount. In exchange, you are typically committed to a longer lease term. A $40/sq ft TI allowance on a 2,000 sq ft space means the landlord is contributing $80,000 toward your buildout — a significant benefit that can make or break your opening budget.

Free Rent (Abated Rent)

Free rent is a period — typically one to three months — during which you occupy the space but do not pay rent. This is standard for restaurant leases because the buildout period generates no revenue. Always negotiate free rent for the entire buildout period, and ideally a month beyond to allow for soft opening and ramp-up.

Personal Guarantee

Most commercial landlords require a personal guarantee from the business owner, meaning you are personally liable for the remaining lease payments if the business fails. This is one of the most significant financial risks in restaurant leasing.

Negotiation strategies:

• Limit the guarantee period — guarantee only the first 2 to 3 years, then convert to a corporate-only guarantee after proving your track record.
• Cap the guarantee amount — limit your personal exposure to 12 to 24 months of rent rather than the full lease term.
• Negotiate a “burn-off” clause — the personal guarantee reduces by a set amount each year.

Assignment and Subletting Clause

The assignment clause determines whether you can transfer your lease to a new tenant — which is critical if you ever want to sell your restaurant business. Without assignment rights (or with unreasonable landlord consent requirements), selling your business becomes dramatically harder because the buyer cannot assume your lease.

What to negotiate: The lease should state that the landlord’s consent to assignment “shall not be unreasonably withheld, conditioned, or delayed.” Avoid leases that give the landlord absolute discretion to deny an assignment or that trigger a lease recapture clause (where the landlord can terminate the lease instead of allowing an assignment).

Exclusive Use Clause

An exclusive use clause prevents the landlord from leasing other spaces in the same property or shopping center to a directly competing concept. If you are opening a pizza restaurant, your exclusive use clause should prevent the landlord from leasing to another pizza concept in the same center.

Why it matters: Without an exclusive use clause, the landlord could lease the space next door to a direct competitor, splitting your customer base and potentially making your location unviable.

Renewal Options

Renewal options give you the right (but not the obligation) to extend your lease for additional terms, typically in five-year increments. These options protect your investment in buildout and prevent the landlord from refusing to renew or dramatically increasing rent at the end of your initial term.

Best practice: Negotiate rent increases during renewal periods at a predetermined rate (3% per year or CPI-based) rather than “fair market value,” which gives the landlord too much leverage.

How to Negotiate a Restaurant Lease

Lease negotiation is where a skilled broker earns their fee many times over. Here are the ten most impactful negotiation tactics for restaurant tenants.

1. Never Accept the First Offer

The initial lease terms are the landlord’s wish list, not a final document. Every term is negotiable, and landlords expect a counteroffer. Starting from the landlord’s first draft without countering leaves significant money on the table.

2. Lead with a Strong Letter of Intent (LOI)

Before getting into the weeds of lease negotiation, submit a Letter of Intent that outlines your key terms: proposed rent, lease term, TI allowance, free rent period, and any other deal points. The LOI sets the framework for negotiation and gives you leverage to refer back to agreed-upon terms.

3. Know Your BATNA (Best Alternative to Negotiated Agreement)

The strongest negotiating position is having other viable options. If you are considering multiple restaurant spaces for lease, let the landlord know (tactfully) that you have alternatives. Competition for your tenancy drives better terms.

4. Request a Rent Abatement During Buildout

Never pay rent on a space you cannot operate. Your rent obligation should begin when you open for business or at the end of a defined buildout period — whichever comes first. Three months of free rent on a $6,000/month lease saves $18,000.

5. Push for Meaningful TI Allowance

Landlords are often more willing to invest in tenant improvements than to reduce base rent because TI is a one-time cost while lower rent reduces income for the entire lease term. If the landlord resists lowering rent, redirect the negotiation toward a higher TI allowance.

6. Cap Your NNN Exposure

Insist on annual caps for NNN charge increases (3% to 5% maximum). Without caps, a property tax reassessment or a major CAM expenditure could spike your monthly costs by hundreds or thousands of dollars with no warning.

7. Limit Your Personal Guarantee

As discussed above, negotiate a limited or “burning” personal guarantee. This is especially important for first-time operators who may not have significant personal assets beyond what they are investing in the business.

8. Secure an Assignment-Friendly Clause

Your ability to sell your restaurant in the future depends heavily on lease assignability. Make this a non-negotiable term. The lease should explicitly state that the landlord cannot unreasonably withhold consent to a lease assignment in connection with a bona fide sale of the business.

9. Negotiate Signage and Patio Rights

Signage visibility can make or break a restaurant’s street presence. Negotiate for maximum signage rights, including monument sign placement, building-mounted signage, and any directional signage within the shopping center. If the space has patio potential, ensure your lease includes the right to operate outdoor seating and specifies the square footage allocated.

10. Get Everything in Writing

Verbal promises from landlords or their brokers are meaningless if they are not in the lease document. If the landlord agrees to repair the HVAC, repave the parking lot, or allow a specific use, it must be written into the lease or a lease amendment. Anything not in writing does not exist.

The True Cost of Building Out Restaurant Space

One of the most common mistakes aspiring restaurant operators make is underestimating the cost and timeline of building out a restaurant space. Here is a realistic breakdown of what to expect in California.

Major Buildout Cost Categories

Timeline Expectations

A realistic buildout timeline in California looks like this:

1. Lease negotiation and signing: 2 to 6 weeks
2. Architecture and engineering plans: 4 to 8 weeks
3. City plan check and permits: 4 to 12 weeks (varies dramatically by jurisdiction)
4. Construction and installation: 8 to 16 weeks
5. Final inspections and corrections: 2 to 4 weeks
6. Health department approval: 1 to 3 weeks
7. ABC license transfer (if applicable): 4 to 12 weeks (can be concurrent)

Total estimated timeline: 4 to 8 months

Many operators plan for 3 months and end up taking 6 to 9 months. Build a financial cushion for carrying costs during the buildout period, including rent (if free rent has expired), insurance, loan payments, and your own living expenses.

Restaurant Zoning and Permits in California

California’s regulatory environment for restaurants is complex and varies significantly by city and county. Here are the key permits and approvals you will need.

Conditional Use Permit (CUP)

Many California cities require a Conditional Use Permit for restaurant operations, especially if you plan to serve alcohol, have late-night hours, or provide entertainment. The CUP process involves a public hearing before the planning commission and can take 2 to 4 months. Some locations have existing CUPs from previous restaurant tenants that may transfer with the lease — always verify this before signing.

Health Department Permits

The county health department must approve your restaurant’s design, inspect the facility before opening, and issue an operating permit. In San Diego County, this is managed by the Department of Environmental Health (DEH). Plan review can take 4 to 6 weeks, and you may need multiple inspections before receiving final approval.

ABC License (Alcohol)

If you plan to serve alcohol, you will need a license from the California Department of Alcoholic Beverage Control (ABC). The most common restaurant licenses are:

• Type 41 — On-sale beer and wine (eating place)
• Type 47 — On-sale general (eating place — full bar)

New ABC licenses can take 3 to 6 months to process. Transferring an existing license from a previous operator is often faster but still requires ABC approval. Your lease should include a contingency allowing you to terminate if you cannot obtain the required ABC license.

Fire Marshal Approval

The fire marshal reviews your occupancy plan, fire suppression systems (including the hood suppression system), emergency exits, and signage. This inspection is typically required before you can receive a certificate of occupancy.

ADA Compliance

The Americans with Disabilities Act requires that your restaurant be accessible to people with disabilities. This includes doorways, restrooms, seating areas, and service counters. In California, the state’s accessibility standards (CBC Chapter 11B) are even more stringent than federal ADA requirements. Non-compliance can result in costly lawsuits — California is one of the most litigated states for ADA violations.

Business License and Seller’s Permit

You will need a local business license from the city and a seller’s permit from the California Department of Tax and Fee Administration (CDTFA) for collecting sales tax.

Red Flags in Restaurant Leases

After reviewing hundreds of restaurant leases over my career, these are the provisions that should raise immediate concerns.

Demolition or Redevelopment Clause

Some leases include a clause allowing the landlord to terminate the lease with 6 to 12 months’ notice if they decide to demolish or redevelop the property. This means you could invest $200,000 in buildout only to be forced out before your lease term expires. If the lease includes a demolition clause, either negotiate it out or insist on substantial compensation for your unamortized improvements and relocation costs.

Unlimited NNN Escalation

A lease with no cap on NNN charge increases exposes you to unpredictable cost spikes. Property tax reassessments, insurance market fluctuations, and capital expenditure pass-throughs can increase your NNN charges by 20% or more in a single year. Always insist on annual caps.

No Assignment Rights

If the lease prohibits assignment or gives the landlord absolute discretion to deny an assignment, you will have difficulty selling your business when the time comes. The lease essentially traps you — the business has limited resale value without a transferable lease.

Restrictive Use Clause

Some leases restrict your use to a very specific concept (e.g., “Thai restaurant” rather than “restaurant”). This limits your flexibility to pivot your concept if the market demands it and reduces the pool of potential buyers if you sell. Negotiate for broad use rights: “restaurant, food service, and related uses.”

Landlord Recapture on Assignment

A recapture clause allows the landlord to take back the lease instead of approving an assignment to your buyer. This effectively kills the deal and the sale of your business. Recapture clauses are one of the most damaging provisions in restaurant leases and should be aggressively negotiated out or limited.

Co-Tenancy Issues

In a shopping center, if an anchor tenant leaves, it can devastate foot traffic to your restaurant. A co-tenancy clause allows you to reduce rent or terminate the lease if certain anchor tenants vacate. Without this protection, you could be paying full rent in a half-empty shopping center with minimal foot traffic.

Deferred Maintenance

If the landlord has deferred maintenance on critical building systems — roof, HVAC, plumbing, electrical — these issues become your problem if the lease makes you responsible for repairs. Always conduct a thorough inspection of the space and building systems before signing, and insist that the landlord address any deferred maintenance items as a condition of the lease.

Key Takeaways

Restaurant leasing is a complex process that requires careful planning, thorough due diligence, and skilled negotiation. Here are the essential takeaways from this guide:

• Know your numbers before you start. Calculate your maximum affordable rent based on projected revenue and the 6-10% occupancy cost benchmark. If the math does not work, walk away.
• Second-generation spaces save significant money. A space with an existing hood system, grease trap, and restaurant infrastructure can save $100,000 or more in buildout costs.
• Understand your lease type. NNN leases are the norm for restaurant spaces in California. Always calculate your total occupancy cost (base rent + NNN) when comparing opportunities.
• Negotiate aggressively on the terms that matter. Free rent, TI allowance, personal guarantee limitations, assignment rights, and NNN caps are the high-impact negotiation points that directly affect your financial exposure and future flexibility.
• Plan for a longer timeline and higher costs than expected. California’s permitting environment is unpredictable. Build a financial cushion for 6+ months of carrying costs during buildout.
• Get professional help. A commercial broker experienced in restaurant transactions and a real estate attorney who reviews commercial leases are not optional expenses — they are essential investments that protect you from costly mistakes.
• Think about your exit from day one. The lease you sign today will determine whether you can sell your business tomorrow. Assignment rights, lease term, and renewal options all affect your business’s resale value and the factors that drive your business valuation.

If you are looking for restaurant space for lease in San Diego or anywhere in California, or if you are considering whether to lease space or buy an existing restaurant, contact Smith Allen Group for a confidential consultation. We represent restaurant buyers, sellers, and tenants across Southern California and can help you find the right space, negotiate favorable terms, and avoid the pitfalls that cost operators thousands of dollars every year.