Daily Business Review

Finding a good location for a restau­rant in South Florida is like an archaeological crusade for the Holy Grail. Many in search of space can spend months and even years scouting for a suitable place.

Once that is over, operating expenses includ­ing property taxes, insurance and maintenance run from $8 per square foot in a

typical strip center to as much as $25 per square foot in enter­tainment and downtown centers such as CocoWalk in Miami, Beach Place in Fort Lauderdale and City Place in West Palm Beach.

Brokers and restaurant owners predict pass-through costs will rise a whopping 30 percent in the next 18 months as new assessments hit tax rolls and commercial insurance premiums climb.

"We could literally write a deal every two days here in South Florida if we could find the sites to purchase or lease," said Boca Raton restaurant broker Tom Prakas of the Prakas Group. "It is getting real ugly."

Some hard-pressed restaurants inevitably will be forced to close, and lease buyouts could trim costs. But high­er-priced menus can result in fewer cus­tomers.

"The expense and heartache of mak­ing it work and how long it takes to make a profit" are growing concerns, said Oscar Rivera, commercial real estate attorney at the Coral Gables firm of Siegfried Rivera Lerner De La Torre & Sobel.

He is a lead organizer for the International Council of Shopping Center's law conference this year, and finding suitable retail space is a frequent ICSC topic of conversation.

"When you back that into lengthy and costly permitting and retrofitting, the obstacles become almost insur­mountable," Rivera said.

CB Richard Ellis market reports indi­cate South Florida overall retail vacancy rates have dipped from an average 8 per­cent in 2002 to 3.9 percent at the end of last year, while lease rates have surged as much as 50 percent, particularly in prime locations such as Boca Raton, Palm Beach Gardens and downtown Miami.

Twenty years ago a restaurant on Miami Beach's sleepy Lincoln Road leased for as little as $20 per square foot. Today, lease rates are running from $70 to as much as $100 per square foot, said John Carter, an associate with the bro­kerage firm Cushman & Wakefield in Fort Lauderdale.

Actor Danny DeVito, restaurant developer Dave Manero and investment banker Michael Brauser recently ended a two-year hunt by paying $1.2 million, or $133 per square foot, for the former 9,000-square-foot Joia nightclub on Ocean Drive in South Beach. DeVito's is scheduled to open early next year, with $5 million already spent.

"The location is wonderful, but the building is defunct, totally torn down," Manero said.

The pre-opening crunch isn't a problem just for celebrity millionaires look­ing for signature sites. Municipal fees can be an unexpected financial burden.

In 2004 restaurateur Luis Diaz and his family signed a seven-year lease for 1,500 square feet at a Lake Worth strip mall for $2,000 a month. The Diazes were confident a Mexican restaurant ″would be lucrative at that rate. ,,

They took over some space from a Cheeburger Cheeburger. But controver­sy erupted when the city passed an impact fee ordinance later that year and slapped the Diazes with a $45,000 charge for future parking.

Property owner Jimmy Asher initial­ly agreed to cover the charge but pulled back when the family fell behind on the rent and construction schedule, Luis Diaz said.

"We only had like $50,000 for the retrofit. It was all we had," he said. "We ended up paying rent for a long time without having a certificate of occupan 

cy due to the unpaid assessment. It was horrible."

Asher said he tried to intervene with the city to no avail.

"What I presented was that the previ­ous occupant had been a restaurant, and therefore they should grandfather the property in and exempt us from the charge," Asher said. The previous fast-food outlet used the Diazes' space for refrigeration and an employee lounge.

"The city said the rear space was not a restaurant and that the assessment was final," Asher said. He paid $35,000.

Diaz said, "Our rent went up to $2,330 a month, and we had to extend the lease to pay the money back." At long last, Juanita's Mexican Restaurant is due to open in several -weeks.

"It's a game of chess. Different municipalities have different rules. Orange, Palm Beach, Broward and Miami-Dade counties all are having more stringent impact fees, particularly when it comes to parking and water hookups," said restaurant broker Alan Koch of Score Realty in Palm Beach Gardens.

Skyrocketing asking prices for avail­able properties, although nothing new, add to an iffy situation.

Boca Raton restaurant broker and landlord Jeff Sussman is -working with Texas-based Landry's Restaurants to sell a io,ooo-square-foot Charley's Crab out­let on the Intracoastal Waterway in Deerfield Beach. The one-acre property is listed at $7 million, but Sussman does­n't see much future for -waterfront din­ing in South Florida.

"A lot of the waterfront restaurants will continue to disappear," he said. "It is too expensive. The land value and rents have gone way, way up."

Away from the -water, hundreds of local and national restaurants are'look­ing for locations to either expand or enter new markets.

Brenda Halloway, investor relations representative at Chuck E. Cheese par­ent CEC Entertainment, said plans have been scrapped for a io,ooo-square-foot restaurant in Boynton Beach. For the time being, she said the company is focusing on improving existing restau­rants.

Locations suitable for fast-food restaurants have become particularly scarce since most require one-acre out-parcels at shopping malls and strip cen­ters for a 3,000- to 5,ooo-square-foot, Prakas said.

The likes of Panera Bread and the Atlanta Bread Co. are often in heated competition for the same locations favored by burger chains, he said.

"We're talking about land leases that can run anywhere from $20 to $40 per square foot, twice as much as it cost just five years ago," Prakas said.

Dunkin' Donuts, Starbucks and other outlets can be as small as 2,000 square feet, but they also covet drive-through access.

"Costs for coffee-shop types also have doubled and now fluctuate between $25 and $45 per square foot — unless the location is in a power or affluent center, in which case we're looking at s6o a square foot or more," Prakas said.

Sports bars and grills on the prowl are in direct competition with fast-food out­lets.

Tim Petrillo, president of Restaurant People, -which owns three Tarpon Bend seafood restaurants and the River House in downtown Fort Lauderdale, is busy getting ready to open a Southcoast Kitchen grill on Atlantic Avenue in downtown Delray Beach.

Petrillo and his partners paid $2 million for the former Mancini's restaurant. Another $2 million will be injected into the 5.5oo-square-foot building before the planned opening early next year.

"We searched up and down Atlantic for several years, no exaggeration," Petrillo said. At an average $25 per plate, he aims to hit sales of $3.5 million to $4.5 million in the first year based on the city's demographics and the perform­ance of the company's other restaurants.

In Boca Raton, Sussman bought a 1.8-acre tract in 2004 for $5 million and leased it to the Darden Restaurants chain, parent of Red Lobster, Bahama Breeze and other brands. The 3O-year lease was for $15 million.

The Glades Road site, formerly a Monty's Stone Crab, was rebuilt by Darden into an 8,500 square-foot Seasons 52 restaurant, which opened this year. The lease price works out to $59 per square foot.

"It shows just how much some are willing to pay for the prime locations that do become available," Sussman said.

Prices in the millions are becoming standard.

"A freestanding building of 5,000 square feet with adequate parking requires anywhere from one to two acres which, in many areas throughout Palm Beach, Braward and Miami-Dade, can run for $i million to $2 million per acre," Prakas said.

He has a $2.5 million listing on a gut­ted 6,ooo-square-foot former Sonny's BBQrestaurant on 1.89 acres in Boynton Beach.

"We're looking to sell either directly to a restaurant chain or a developer who in turn will lease to a restaurant ch Prakas said.

It may come as a surprise given their abundance, but ethnic restaurants are at a disadvantage compared with their homogenized American cousins. Many shopping centers allow only one Italian or one Chinese eatery.

The likes of Denny's, Applebee's and International House of Pancakes "have an advantage because they're not limited to one per property," said restaurant developer Manero. "Huge properties are being taken hostage by Domino's Pizza or Papa John's, locking other Italian con­cepts out of the property. It is unfath­omable and utterly absurd."

Outparcels in so-called power malls in affluent areas are significantly more expensive.

PF Chang's and Brio Tuscan Grill as well as American icons like Chili's and 

TGI Friday's lease outparcel buildings of 5,000 to 6,000 square feet for about $200,000 a year in Palm Beach Gardens, said Score Realty's Koch.

"This is just for the land," he said. If the landlord doesn't provide the build­ing, construction costs and impact fees can hit $125 to $200 per square foot.

"The intricate interior design and infrastructure setup such as wiring and plumbing is a separate expense that often runs as high as $300 per square foot," Koch said.

The financial challenge for restau­rants is compounded by stricter lease and credit requirements.

Developer Manero attempted for years to find a location for a Vic & Angelo's Italian restaurant at PGA Commons mall in Palm Beach Gardens. Once a slot became available, he found himself embroiled in a sealed-envelope screening process with four competitors. Seven weeks later Manero's Italian con­cept emerged as the -winner.

"It was by far the strictest process we ever had to go through," he said. "We were asked for all types of financial and credit credentials. It was an integrity war."

The 5,5oo-square-foot building is getting a $2 million facelift at about $360 per square foot.

"The days of quick leases and reasonable costs are definitely over," Manero said. ″

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