Investment Forum - Real Estate

A beginner’s guide to leasing a catering establishment


A checklist on what to look out for or what to ask when viewing potential properties to rent

Starting a food business is a dream many people have; however, it’s not always rainbows and butterflies. There’s a mountain of regulations one must conform to as well as financial and commercial considerations that must be made. With increasing rents and a new level of uncertainty that has hit the catering business recently, it’s important to try to think things through and not rush into anything on a whim. I have friends and clients that were sold the restaurant dream, only to find out that they paid way too much for their expected revenue.

As I was discussing the title of this blog post with Justin, we realised how interesting and useful it would be to create a sort of checklist on what to look out for or what to ask when viewing potential properties to rent.

This is going to be a very basic list of what to look out for and what questions to ask as part of your due diligence process once you have found properties which tick your boxes in terms of location (footfall, views, accessibility etc…) and physical factor (design, layout, size etc…) criteria. 

The single most important exercise one has to do is to understand what you are looking for. If you’re looking to open a particular concept it is important to understand if it relies on passing trade (like a pastizzeria) or maybe it can be in the middle of nowhere (like a central prep kitchen), do you need seating capacity or is it a grab and go concept, size of kitchen for the desired menu and even if you’re looking for any particular features such as a sea view for a fish restaurant.

I would always recommend going in with a concept ready and a business plan in hand. This will ensure that you can give as much information as possible to letting agents. 

Permits and licenses

One of the first things to find out is what sort of permit the property in question has? Catering establishments fall under two classes: 

  1. Class 4C: Use for establishments catering for the preparation and sale of hot or cold food or drink for consumption on the premises where no cooking is allowed; and  
  2. Class 4D: Use for establishments catering for the preparation and sale of hot or cold food or drink for consumption on the premises where cooking is allowed.

This does not necessarily mean that properties without these use classes cannot be approved as catering properties; however, you must consider the cost (professional fees, planning fees and even fines for car parking provision) and time implications to this. This is one of the multiple reasons where it pays to get an architect (Perit) on board who can contribute to the due diligence process through planning assessments, condition reports, cost estimates of the renovation (if any) and calculating the insurance value of the property.

With regards to licenses, every type of establishment that serves food and/or drink must also have an MTA license. You can check out the license online from the MTA website. There is nothing particularly difficult in acquiring these licenses and one can find a checklist on-line of what is required. If the previous site was in use as a bar or restaurant but doesn’t have an MTA license than this is a warning sign that something might be wrong with the property.

The MTA requires things such as health department clearance. If the previous occupier did not manage to obtain this permit than you should find out why as this could potentially be a red flag.

Other important things to consider here include opening hours, noise restrictions, and official seating capacity. These are all points that should primarily come out from your business plan. By discussing these points before you start looking for a site, you are ensuring that letting agents know what your criteria are. This way they will be able to present sites that fit your business concept. 

Rent

This is a make or break for most establishments. The general rule-of-thumb is that the rent should not be more than 10% of your expected revenue (excluding VAT, which is not part of revenue). One thing to remember is that in Malta, which so much speculation going on, rents can be very high so this number is often higher than the recommended 10%.

Whilst exceeding this is sometimes feasible, it is crucial to make sure that your business plan is realistic, that the numbers can easily be defended in front of your partners or the bank, and that the margins make sense. Always have someone who is not directly involved to look at your plan, ask them to be honest and fair. 

Whilst there are many important criteria in a rental agreement (such as, payment terms, growth rates, deposits, management terms, option to sublet, exit clauses etc…), four important things to consider here include:

  1. The contract term: As part of a rental contract, one is usually asked to accept a di-fermo and di rispetto period. The di fermo period is essentially a guarantee that once you sign the agreement you have x-number of years that you are bound to keep paying the lease. Although this is not usually a deal breaker, it’s always good to ask and be informed about the term of the contract along with the contract renewal options and rental increases throughout the term. 
  2. Lease incentives: Are there any lease incentives being offered such as rent-free-periods? Catering properties generally take time to renovate, open and kick-off (called a stabilization period from when the business has opened to once the trade has stabilized).
  3. Key money (Rigal): This is very often requested by landlords who are already running the business as a going concern and request a payment in lieu of the goodwill already built by them. Another scenario is when the property in question is closed for business and the landlord would like some key money as payment for any equipment and furniture available within the property. In the case where one is buying the business, my recommendation would be to ensure that you can recoup the cost within the di-fermo part of the lease. If you are not buying the brand just buying equipment and finishes, have someone evaluate the furniture and equipment and make sure depreciation is factored in. For example, the value of a 12-year-old walk in fridge is obviously lower than the value of a 2-year-old one. Other factors to consider when paying for old equipment is electricity consumption as normally older equipment would tend to waste more energy than the newer equipment.
  4. Turnover rents: Another way of leasing is having either the full amount (very rare) or a percentage of lease taken from a percentage of your revenue. This is especially true for businesses just starting out or for establishments that are very susceptible to seasonality. This type of agreement can give respite during quiet periods or until one understands the market they are in. One recommendation I would always try to place in this case is to have a maximum amount. Essentially this capping is there so that the tenant would not be punished for their success. 

The landlord

Seems like an obvious question, however, it is always important to know who you’re dealing with. A reasonable and understanding landlord makes all the difference, if the site is great but the lessor is very difficult to work with, then I would think twice about renting from that landlord.

This is potentially a multi-year deal and having a good relationship with the people you work with is extremely important. On the other hand, please do go in knowing what you’re looking for, as stated above having a concept and a business plan ready before you start looking helps landlords and letting agents help you maximise your business concept potential. Respect is reciprocal, do not waste people’s time and expect that they do not waste yours. 

These are just a few pointers and things to look out for when searching for the perfect spot. The most important piece of advice I can ever give is do not rush. Leasing a property for a few years is a big commitment and it is important to have your basics well thought out. Have a plan, know what you want, understand what you are looking for, ask as many questions as you can and take someone with experience in the field, you’d be surprised how much a trained pair of eyes can help.

--------------------------------------------------------------

kurt mifsud

A gastronome by profession, Kurt started his career in the food industry at the age of 18, working in both fine dining as well as casual restaurants. He went on to study at the University of Gastronomic Sciences in Italy where he contributed to the organisation of the university’s first study trip to Malta. In 2015 he led the Maltese delegation to the First edition of the “Slow Food Youth Network International Conference”, at the Milan Expo. Since founding The Mediterranean Culinary Academy in 2017, Kurt has overseen the development of the monovarietal endemic olive oil Bidni, seen over 2,500 students pass through its doors, helped in the organisation of over 100 different culinary events from single- session workshops, olive picking events and ceremonies to inaugurate the planting of over 100 new endemic olive trees in the Bidni olive grove. Kurt has been consulting and enabling food businesses start off and grow since 2019, some of his clients include the Valletta Design Cluster and the new to open Palazzo Bifora in Mdina.


DISCLAIMER: The content of this article does not necessarily reflect or represent the views and opinions of The Malta Chamber of Commerce, Enterprise and Industry. 


A beginner’s guide to leasing a catering establishment