Thinking of Buying a Fast-Casual Franchise? Read this report first.
QSR Feature
Search and Rescue
Persistent operators can find real estate deals in concepts forced to shut their doors because of the tight economy.
Shuttered quick-service locations can provide favorable real estate deals for expansion-minded operators.

Manhattan: It’s arguably the world’s most competitive real estate market, and among the most difficult areas to find good restaurant locations.

That’s why newly minted Moe’s Southwest Grill franchisee Donald Lindover chose the site of a former Burger King store to open his 2,000-square-foot, 44-seat restaurant on First Avenue across the street from the Peter Cooper Village, a residential development on the Lower East Side.

“It’s very difficult to find a small location that would be affordable,” says Lindover, a Manhattan-based immigration attorney who searched for more than a year to find a suitable site. He and his wife recently opened the doors of their Mexican-style fast-casual concept.

From the floor up, much of the interior—including tables and chairs that had been drilled and bolted onto cement floors—was gutted to make way for Moe’s colorful interior and cafeteria-style floor plan. Lindover kept the HVAC system and water heater that met with New York City’s stringent building codes.

The final price tag was $750,000, with an estimated $100,000 savings over a new build-out, Lindover says. Equally important was a relatively quick turnaround, just six months, in part because many of the permits required for new construction were not necessary, eliminating inspections from various city departments.

“Time is truly money,” Lindover says.

Throughout the country, savvy restaurant operators are taking advantage of similar opportunities for real estate conversions. Higher costs for everything from steel to concrete and so-called “tap fees,” which municipalities charge new businesses to hook up water, electricity, and gas, are pushing restaurateurs to think twice about building from scratch.

Meanwhile, there are also some unexpected gems coming on the market, as the downturn in the U.S. economy has prompted store closures for brands ranging from Quiznos and Subway to Lone Star Steakhouse and Pasta Pomodoro. Even Starbucks, the once venerable industry darling, said in January that it was closing coffeehouses and scaling back plans for domestic expansion.

“This creates a perfect opportunity for a fresh concept to go in and leverage a tremendous location and existing location-related infrastructure,” says Dan Rowe, CEO of Fransmart, which develops and franchises a host of restaurant chains, including Firkin Pubs and fast-casual concepts such as City Wok and Sandella’s.

“Two years ago it was so tough because we were competing with Starbucks or Chipotle or somebody like that,” says Rowe, who is based in Alexandria, Virginia. “Nowadays these guys are slowing down, and we’re getting looks at real estate that we just haven’t seen in a while.”

Landlords have also had to alter the fat-cat mindsets prevalent in recent years when demand for premium sites was more competitive. They are now offering perks such as allowances for attendant improvements. In some cases, Rowe says, new occupants can even avoid contingent liabilities if an existing tenant is under pressure to break free of a money-losing operation.

The key to a successful conversion is careful due diligence, says Andrew Ritchie, president and CEO of Cardinal Point Inc., a Lexington, Kentucky–based architecture and engineering firm specializing in the fast-casual restaurant market.

“The greatest myth is that conversions are cheaper. They can be, but they can also be more expensive,” Ritchie says. “When someone wants to get in there and convert a space, the key is to do a feasibility study up front.”

Cardinal Point, which charges anywhere from $2,000 to $5,000 for a feasibility study, brings the customer and real estate broker to the prospective site for a comprehensive meeting. Along with them come architects, engineers, and other specialists who kick the tires on everything from construction to equipment, and also scrutinize permits. Often the firm is able to turn around a report in just one day.

Failing to do the homework can lead to unexpected surprises, says franchisee Mike Smith, who, along with a partner, converted a struggling pizzeria in Arlington, Virginia, into the second of their two franchised Zpizza locations.

Smith says he thought the 1,000-square-foot store had ample parking to support his take-out and delivery business. That was not the case.

“It turns out it doesn’t because of my neighbors,” he says, adding that being close to a 7-Eleven, a cigarette store, a currency exchange, and a pawn shop can be somewhat off-putting to customers in the gentrifying neighborhood.

Even so, saving some $60,000 over the cost of a new build-out in a desirable Washington, D.C., suburb with limited real estate was worthwhile, Smith says. It took months of scouting for sites, contacting landlords, and pounding pavement before he found the location on Craigslist, the public classifieds- listing Web site.

“We started identifying restaurants in good areas that were not doing well,” he recalls. “We’d look up tax records and call the landlord.”

Indeed, with that type of persistence and a little luck, operators can sometimes find a hidden gem. That’s what happened when Jeff Starbeck, founder of the San Jose, California–based fast-casual Sonoma Chicken Coop, sniffed out a troubled brewpub in nearby Campbell, California.

The restaurant had been opened by Silicon Valley engineers who made their money during the dot com boom. Starbeck says they poured some $4.5 million into their slick 13,000-square-foot location, including about $800,000 in brewery equipment, but had little idea of how to run a restaurant and soon faltered. Eventually the landlord took over the operation.

After a string of negotiations and rebuttals, Starbeck finally prevailed, purchasing the whole operation for just $250,000. Today the largest of the Sonoma Chicken Coop restaurants brews its own beer in five varieties, and also distributes it to the other locations.

“Everything was there,” he says. “It was set up for it.”

Deborah Cohen is a former Reuters correspondent and veteran foodservice writer.