If you want to get started in a new location and keep your up-front expenses at rock bottom, one avenue to explore is a long-term deal with a landlord or a developer. By structuring a 15-or 20-year lease, you can avoid committing capital to a down payment on a mortgage.
Juicy Lucy's, a three-year-old fast-food business in Fort Myers, Fla., did its first long-term deal with a developer last year, to finance its fourth restaurant. Since then it's done five more, says Garrett Spitzer, director of development and franchising.
Here's how a Juicy Lucy's deal works: The company finds a location it wants (about half an acre, valued at about $300,000) and approaches the owner. If the owner is willing to build a 1,000-square-foot restaurant to the company's specifications (at a cost of about $240,000), Juicy Lucy's agrees to lease both the land and the building from the owner for 15 years, with options to renew. Typically, the company pays about 10% per year on the land and 12% per year on the building, with leases structured as "net" leases (meaning that Juicy Lucy's pays for taxes, insurance, and maintenance). "The only cash we have to come up with before we open is the down payment on equipment," says Spitzer.
The big incentive for developers is the income. Over the 15-year lease term, they'll receive nearly twice the value of the land and the building -- and they'll still own them. The risk is that the restaurant won't survive. As collateral, the owners and franchisees of Juicy Lucy's pledge their equipment and also sign personal guarantees. -- Bruce G. Posner