Running a successful restaurant is like conducting a complex orchestra – every financial component must work in harmony to create a profitable performance. One of the most critical sections in this financial symphony is your occupancy costs, and getting these numbers wrong can turn your dream restaurant into a cash flow nightmare.

What Are Occupancy Costs?

Occupancy costs encompass all the expenses related to your physical restaurant space. These fall into three main categories:

• Base rent – Your monthly lease payment to the landlord

• Common area maintenance (CAM) and property taxes – Shared building expenses and tax obligations

• Utilities – Electricity, gas, water, waste management, and other essential services

While these might seem like fixed costs you simply have to accept, understanding and managing them properly is crucial for your restaurant's financial health.

The 10% Target

After years of working exclusively with restaurant clients, we've identified a clear pattern: restaurants with occupancy costs over 10% of gross revenue consistently experience cash flow challenges.

That 10% should break down as follows:

• 6% for base rent

• 2% for CAM and property taxes

• 2% for utilities

Why 10% Matters So Much

Restaurants operate on notoriously thin margins – the average net profit is around 4% nationally. When occupancy costs exceed 10% of revenue, every percentage point moves that profitability closer zero – or negative.

Making Smart Location Decisions

Before you fall in love with that perfect corner location, run the numbers:

1. Calculate the true cost: Add up base rent, estimated CAM/property taxes, and projected utilities

2. Project realistic revenue: Be conservative in your sales projections – it's better to be pleasantly surprised than cash-strapped

3. Test the percentages: Divide each occupancy cost component by your projected annual revenue

4. Build in a buffer: If you're right at 10%, consider whether you have room for growth or if costs might increase

When the Numbers Don't Work

If your dream location pushes occupancy costs above 10%, you have several options:

• Negotiate lease terms, including rent escalations and CAM cap limits

• Look for locations with lower base costs but similar traffic potential

• Adjust your concept to generate higher revenue per square foot

• Consider alternative locations that might offer better financial fundamentals

The Bottom Line

Your restaurant's location is crucial, but it shouldn't come at the cost of financial stability. The 10% occupancy cost rule isn't meant to limit your options – it's designed to set you up for long-term success.

Need help analyzing your current occupancy costs or evaluating a potential location? Our team specializes in restaurant financial analysis and can help you make informed decisions that support your long-term success.