April 22, 2020 by Haden Smith

As the restaurant industry continues to evolve its operating practices, restaurants will likely begin to devote more square footage to supporting take-out and delivery capabilities and less to dine-in. Ghost kitchens will proliferate and add a new stream of revenue for tenants and landlords.

What is a Ghost Kitchen?

In recent news NRD Capital, the private equity firm behind Fuzzy’s Taco Shop, The Captain’s Boil, and Frisch’s Big Boy, announced it will be using their restaurants as Ghost Kitchens. A ghost kitchen, or commissary facility, is a brick and mortar space that caterers, makers, bakers, food trucks, and emerging concepts are required to operate out of by the health department. Think of it as a co-working space for food or a restaurant without storefront.

There are specific facilities available for this in many areas already that are essentially large warehouses with several kitchens, refrigeration, and storage. These types of facilities become limited very quickly, though, and what many restaurant owners do not know is that they can allow their kitchen to be used as another business’s commissary facility.

Allowing your restaurant to be used as another business’s commissary during off hours is an excellent idea for a supplemental revenue stream for brick and mortar restaurant operators – and as an adaptation for future business planning.

HADEN SMITH, ASSOCIATE BROKER, RETAIL SPECIALISTS

The Logistics

An operator’s lease likely states that the space cannot be sublet without the property manager or owner’s written consent. To get started, simply ask for permission from your landlord to sublease your kitchen to another business by the hour. Most of these businesses only need kitchen space for two hours a day or one day per week.

If given permission, you should create an application process. This application should collect information from potential clients such as:

• Business type (e.g. baker, caterer, food truck, etc)
• Personal information and employee count details
• LLC information, if applicable
• Business insurance
• Planned equipment use
• Business plan

Anytime you are entering an agreement like this, you must do your due diligence and have things properly and officially documented for many reasons.

Leasing

To protect everyone involved, a service agreement or short-term lease should be created. The leasing agreement should detail:

• Rent
• Designation of storage and prep space
• Access to specific equipment needed
• Shared costs for utilities, chemicals, linens, etc.

This agreement will reassure your landlord, and the health department will likely require proof of some form of this document existing to approve a permit. Business insurance should also be required to proceed with an application, including both businesses involved listing the other as additionally insured on their certificates of insurance.

If you are concerned about potential theft and other risks incurred doing this, you must lean on your due diligence processes and afford these emerging concepts and entrepreneurs the same level of faith your landlord has put in you. Finding the right business to partner with in this scenario is essential to ensure there are no conflicts and that the deal is beneficial for all parties.

Ultimately these deals can help three parties prosper. Landlords will have more security about obtaining rent knowing that there is supplemental income, tenants will be offsetting costs, and sub tenants will be able to access the facilities they need for an affordable rate.

Once you have an agreement in place and an address to provide the health department for your new permit, the health department will need to inspect and discuss this situation. They will want to ensure that the general cleanliness and maintenance of the facility are in order from a base perspective, then ask more specifically about the businesses capacity to host another business and maintain compliance. It will be important to explain to them that extra storage and refrigeration will be brought in to accommodate the addition and that the other business will mostly be operating outside of your normal hours of operation.

Pricing

The average price of kitchen space per hour is $25. In most cases, as a business purchases more hours of kitchen time, the price per hour should slightly decrease as you bundle these hours into a package.

The price typically includes access to dry and refrigerated storage, as well as the designated number of hours of kitchen time by the hour. You can use extra storage or shelf space you may have to designate to the new business. Alternatively, if you don’t have extra of either available you can allow them to bring their own refrigeration and dry storage rack and place it in an assigned area.

Ideal Scenarios

A bagel shop is open every day from 7am-3pm. The staff is done closing around 4pm. Sarah, a local wedding cake maker, sold $40,000 worth of cakes last year and needs a commissary facility to get her permit from the health department so that she can get a business license and pay her taxes properly. Sarah has another day job, so she mostly works on her cake business in the evenings and on weekends.

When sales exceed $10k-$25k, depending on where you operate your business, you are required to work from a commercial facility and obtain proper business licensing. Cottage Food Laws allow several baked products to be produced from home and then sold to the public up to a certain amount.

Sarah makes 4-6 cakes per week so she works Thursday and Friday from 6-8pm and makes deliveries on Saturday when she is off from her day job. Because of when she works, Sarah would make a great subtenant for commissary space at the bagel shop. Given that Sarah works two hours a day for two days per week, she uses sixteen hours per month in total which could be up to $400 in extra income for utilizing your space when it would have otherwise been sitting empty.

Another great example is a food truck. In this example, a night club owner wants to serve food from a food truck at his club but does not have the proper facilities or space available to get a food truck permit approved at his club. Because the bagel shop closes by 4pm, the club owner’s food truck crew could arrive at 4pm and begin prep so that they can leave by 6pm for dinner service at the club Tuesday-Saturday. Given that the food truck crew is there for two hours per day five days per week, they use 40 hours per month which could amount to up to $1,000 per month in revenue you generated to offset other expenses from time your kitchen would not be in use anyways.

If you’re interested in learning more about structuring a lease to sublet space, please contact us.