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Due Diligence Is Key for Second Generation Restaurant Spaces

This North Loop space was an auto repair shop until Diversified Construction turned it into Red Rabbit, Luke Shimp’s newest Minneapolis restaurant.

The restaurant industry has a real estate capacity problem. Rents are going up, landlords don’t need to offer much to entice tenants, and spaces are the subject of all-out bidding wars. 

To keep up, savvy brands are getting more creative to find choice locations while still keeping costs in line. Second-generation spaces are nothing new to the industry to keep costs right sized, but finding them has gotten a lot harder. 

Bar Louie CEO John Nietzel said as growth continues, their flexible footprint ranging from 4,500 square feet to 11,000 square feet helps them fit in whatever space is available, and it also helps each location have a unique design. 

“Historically two thirds of our locations have been second generation. They help two-fold: They’re a little less investment, and one of our guiding principles is that no two Bar Louis are the same,” said Nietzel. “So this forces us to stick to our principle.”

And while they don’t communicate the benefit to customers, going into a second-generation space helps operations stay environmentally friendly. “I would say we reuse 80 percent of what’s in the back of the house,” said Nietzel. “So HVAC, the hoods, the walk-in coolers, oftentimes the kitchen equipment is still in good shape.”

Operators should be cautious, however of making the assumption that just because a space was a restaurant that it’s ideal to be one again.

“To most owners, they see it as an advantage to go into an existing restaurant because they can utilize some of the existing equipment and systems,” said Jeremy Pumper, project manager at Diversified Construction in St. Louis Park. “But when they’re looking at relocating the bar or making major shifts in the layout, those advantages kind of disappear. And certainly with some of these older buildings, they can reveal some surprises. When you open up walls and ceilings, you’ll find 100-year-old structural things that aren’t up to today’s standards.”

At Lumberjacks, a brand expanding in the West, founder Jeff Garret said jumping at a good location without taking a close look at the property is a recipe for disaster. 

“There’s nothing worse than opening on the first day and nobody can use the bathroom, or the AC is out, or power is going down,” said Garret. “Some people will sign the lease and the grease trap is bad, and they have to tear up the whole floor and they don’t have any money to open. So do your research before you sign on the dotted line.”

Pumper said part of that research should include early input from the general contractor. He often visits sites with restaurants clients during the lease negotiation phase to alert them to any concerns. “A lot of this is foreign language to owners and so the preference is to get [a contractor] on board and walk the space before you ink the lease,” said Pumper. 

Don’t discount other former business spaces as opportunities, too, said Pumper, such as the auto shop conversion Diversified completed for Twin Cities restaurateur Luke Shimp’s new Red Rabbit concept in Minneapolis.

“With a non-restaurant space, they’re able to start from scratch and put their own stamp on it,” Pumper said. “They’re not confined to a layout or design.” 

— Additional reporting by Laura Michaels

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