To pay key or not to pay key, that is the big money question.
There is one thing that every bar, restaurant and club must have to open its doors: the key. In Manhattan, obtaining the key isn’t always as simple as signing on the dotted line; the previous leaseholder or landlord may request a one-time payment before handing them over. This is often referred to as key money or, more charmingly, a “key fee.”
At first glance, a key fee seems like yet another expense tacked onto the already exhaustive list of expenses associated with opening a bar or restaurant and, therefore, something to avoid at all costs (pun intended). However, in many cases, paying a key fee can save a bar or restaurant owner a significant amount of money and time, which, when you’re trying to open a business, is ultimately money.
Skyrocketing Manhattan rents and rising labor costs combined with the many challenges of running a bar, nightclub or restaurant make this a difficult industry with very high turnover. On a positive note, this means there are many leaseholders eager to have valuable spaces taken off their hands. Over the past two decades, Tower Brokerage has closed over 150 restaurant, bar and club leases in New York, with about half of those deals involving a key fee. This fee has ranged from $100,000 to a whopping $1.4 Million.
So how does a future New York bar or restaurant owner decide if it’s worth paying a proposed key fee or if they’re better off looking elsewhere? These are the four questions you must answer before deciding whether to key fee or not to key fee.
What are the terms of the lease?
As you surely know, the rent in Manhattan is “too damn high.” Market rent prices make it virtually impossible to run a successful bar or restaurant in New York City. Luckily, older leases are often priced far below market rates for comparable properties. A one-time investment by way of a key fee may be well worth it if it means saving a significant amount in rent over time.
Be advised that although the scheduled rent appears attractive, you’re going to want to take a long, hard look at the specific wording in the lease before agreeing to a key fee. First, focus on the assignment clause. Does the lease allow the landlord to raise the rent or charge additional fees when a space is assigned? Does the landlord have the authority to deny an assignment for no good reason? What other charges, most importantly real estate tax contributions, are included as “additional rent”. If the answer to either of those questions is yes, think twice. However, if the lease allows for easy assignment and you will not get hammered with a huge annual real estate tax bill, a key fee may be a nominal amount to pay below market rent well into the future. This tradeoff may be just the thing that ensures your bar or restaurant succeeds in the long run.
Is it the right space?
Sure, you’re starting a business and ultimately the goal of any business is to make a profit, but it’s important to put the economics aside for a moment and consider whether a certain space is a good fit for you and your vision. There are countless factors to consider: size, layout, storefront, location, but at the end of the day, does it feel right? Can you see your business thriving there? It doesn’t matter how attractive a lease is if the space simply isn’t right for your business. On the flipside, it might be worth paying a key fee for your dream space.
Now let’s turn back towards economics. Dream space or not, if the property you’re considering doesn’t already have the infrastructure to operate as a bar, restaurant or nightclub, building out that infrastructure yourself will be incredibly costly and time consuming. Some key things to consider are whether the HVAC (heating, ventilation, air-conditioning) is up to code, what equipment the space has and what shape it’s in as well as the plumbing lines (both for the bathroom and bar as well as beer and soda). Additionally, if you’re opening a restaurant, you’ll need an Ansel fire prevention system and a ventilation stack, two things that can be prohibitively expensive to put in yourself.
Not only is building in Manhattan expensive, it’s also difficult and time-consuming. You’ll face delays getting approvals from building departments (that is, if you get the approvals at all). You’ll face expediter fees, architecture fees and engineering fees. Simply put, the soft costs will net you higher than your wildest expectations and the time it takes to get everything approved will be longer than you could possibly estimate.
The good news is that in many cases someone else has already dealt with the nightmare of getting a space bar or restaurant ready. Renting a space with existing infrastructure can save you an unimaginable amount of time and money. It also allows you to open up shop and start making money sooner. For all those reasons, getting a space with existing infrastructure can make paying a key fee a great deal compared to the alternative.
Does it have a liquor license?
It’s impossible to run a successful bar or nightclub without the ability to sell alcohol and if you thought obtaining certain building permits in Manhattan is difficult, try obtaining a liquor license. Given the amount of time it can take to get a license with favorable terms, it may be worth it to pay a key fee if it means leasing a space that already has one.
But it doesn’t come down to whether or not a space is licensed, but rather what type of license it has given its location. Certain liquor licenses are more difficult to obtain than others and therefore more valuable. While on-premise beer and wine licenses are relatively easy to get regardless of location and getting a full-liquor license for a space on a quiet stretch of the Financial District is a breeze (relatively), obtaining a license for a space in a trendy neighborhood like the East Village, Soho or Tribeca is an uphill battle. And even if you do succeed, the license will likely be restrictive in terms of hours of operation.
Those elusive 4AM liquor licenses in prime neighborhoods are extremely valuable and extremely hard to come by – many have been around for decades. If you’re trying to open a bar or restaurant and you come across a prime location space with a full liquor license (the Holy Grail, if you will), it may be worth paying the key fee for that alone, even if the space needs significant renovations and the rent isn’t a bargain.
Is goodwill a factor?
On rare occasions, a bar, restaurant or club will sell not only its lease but also its name and some aspects of its operations. Perhaps it wasn’t profitable, but it had developed a positive reputation, giving its name value and, with some operational improvements, it stands to be a thriving business. In these rare cases, a key fee may be worth it simply for the goodwill associated with the business’ name.
At the end of the day, when leasing a space to open a bar, club or restaurant, deciding whether or not a proposed key fee is worth paying will never be an exact science. However, carefully examining these four questions will help you determine if the key is worth the fee.