Restaurant Real Estate Glossary
Restaurant real estate has its own language. Whether you are buying your first restaurant, negotiating a lease for a new concept, or evaluating your first acquisition, knowing these terms will help you move faster, negotiate smarter, and avoid costly mistakes.
Lease Terms
NNN Lease (Triple Net Lease) The most common lease structure for restaurant spaces in California. Under a triple net (NNN) lease, the tenant pays base rent plus three additional expense categories: property taxes, building insurance, and common area maintenance (CAM) fees. NNN charges are typically estimated at lease signing and reconciled annually they can escalate significantly over time, particularly after property tax reassessments or major capital expenditures by the landlord. Always negotiate annual caps on NNN increases (typically 3–5%) before signing.
Base Rent The fixed monthly or annual rent amount, typically quoted in dollars per square foot per year (annual) or per month. Base rent does not include NNN charges or any other operating expense pass-throughs. In California, restaurant base rents are typically quoted on an annual per-square-foot basis.
CAM Fees (Common Area Maintenance) The tenant's proportionate share of costs to maintain shared areas of the property: parking lots, landscaping, exterior lighting, trash removal, security, and property management fees. CAM is the "third N" in a triple net lease and one of the most variable and negotiable components of restaurant occupancy cost.
Tenant Improvement Allowance (TIA or TI) A contribution from the landlord toward the tenant's build-out costs, typically expressed as a dollar amount per square foot. TI allowances for restaurant spaces in California typically range from $20 to $60 per square foot, depending on the market, the landlord's motivation, and the creditworthiness of the tenant. The landlord typically reimburses qualified improvement costs after completion and inspection.
Free Rent A period typically one to three months or longer during which the tenant occupies the space without paying rent. Standard for restaurant leases because the build-out period generates no revenue. Always negotiate free rent for the entire build-out period, and ideally an additional soft-opening period.
Personal Guarantee A legal commitment by the restaurant owner (as an individual, not just the business entity) to fulfill the lease obligations if the business defaults. Full personal guarantees covering the entire lease term are standard asks from landlords. Experienced operators negotiate "burning" personal guarantees that reduce over time as a performance track record is established.
Use Clause The lease provision that defines what type of business the tenant is permitted to operate in the space. Restrictive use clauses (e.g., "Thai restaurant only") limit flexibility to pivot the concept and reduce the pool of potential buyers if you sell the business. Negotiate for the broadest possible use language: "restaurant, food service, bar, and any related or ancillary uses."
Percentage Rent A rent structure where the tenant pays base rent plus a percentage of gross sales above a specified threshold (the "breakpoint"). Common in shopping centers and high-traffic retail locations. Allows landlords to participate in the upside of a successful restaurant tenant.
Co-Tenancy Clause A lease provision that allows a tenant to reduce rent or terminate the lease if a key anchor tenant (such as a major grocery store or department store in a shopping center) vacates. Important for restaurants in shopping center locations where foot traffic depends heavily on an anchor.
Lease Assignment The transfer of a tenant's rights and obligations under an existing commercial lease to a new tenant. The new tenant steps into the existing lease on its current terms. California landlords cannot unreasonably withhold consent to an assignment. A lease assignment right is one of the most important provisions to negotiate it determines whether you can sell your restaurant in the future.
Lease Novation A three-party agreement that releases the original tenant from all obligations under the lease while transferring those obligations to a new tenant. Unlike an assignment (where the original tenant may retain contingent liability), a novation fully releases the outgoing party.
Option to Renew A lease provision giving the tenant the right but not the obligation to extend the lease for an additional term at a specified rent or a rent determined by a specified formula (often fair market value or CPI-based). Renewal options are critical for long-term restaurant stability and for maintaining business value if you sell. Transaction Terms
Asset Sale The purchase of a restaurant's physical assets equipment, furniture, inventory, and the right to assume the existing lease without acquiring the business entity itself. The seller retains all prior liabilities. The most common restaurant acquisition structure for buyers seeking a protected, lower-risk entry.
Business Sale The acquisition of a restaurant as a going concern, including the legal entity, brand, operating permits, staff, and all liabilities. Appropriate when the brand, existing customer base, or ABC license carries significant transferable value.
Letter of Intent (LOI) A non-binding document that outlines the proposed terms of a restaurant purchase or lease transaction — including price, deal structure, key conditions, and exclusivity period. The LOI is the starting point for formal negotiations and due diligence. TableLot provides restaurant-specific LOI templates for both purchase and lease transactions.
Key Money An upfront payment made by a new tenant to an existing tenant in exchange for the right to take over a desirable lease. Key money represents the tenant's willingness to pay a premium for a lease with below-market rent, a favorable location, or valuable existing infrastructure. Common in high-demand California restaurant markets.
Due Diligence The investigation and verification process conducted by a buyer or tenant before closing a restaurant transaction. Restaurant due diligence includes reviewing financial statements, lease terms, permit status, equipment condition, health inspection history, and any pending litigation or compliance orders.
Cap Rate (Capitalization Rate) For restaurant property sales (as opposed to business or lease transactions), the cap rate is the ratio of net operating income to the purchase price. A higher cap rate indicates a higher yield relative to price. Restaurant properties typically trade at cap rates of 5–8% in California, depending on location, tenant quality, and lease term.
Restaurant Infrastructure Terms
Hood System (Type 1 Hood) A commercial ventilation system installed above cooking equipment to capture grease-laden vapors, smoke, and heat. A Type 1 hood is required for cooking equipment that produces grease or smoke (fryers, ranges, grills, griddles). Hood systems are one of the most expensive and critical pieces of restaurant infrastructure verify capacity, compliance with current fire and health code, and condition in any space you are evaluating.
Grease Trap (Grease Interceptor) A plumbing device that captures fats, oils, and grease (FOG) from kitchen wastewater before it enters the municipal sewer system. Required for most restaurant operations in California. Grease traps must be sized to your concept's cooking volume and require regular professional cleaning and maintenance. An undersized or poorly maintained grease trap is a significant liability and a common cause of health code violations.
Second-Generation (Second-Gen) Space A commercial space that was previously operated as a restaurant or food service business and retains its food service infrastructure hood systems, grease traps, commercial plumbing, gas lines, walk-in coolers, and often existing permits. Second-gen spaces dramatically reduce build-out costs and time to opening compared to raw commercial spaces.
Walk-in Cooler / Walk-in Freezer Large refrigeration units that operators can physically enter for food storage. Essential for most full-service restaurant operations. In second-generation spaces, verify the age, condition, and compressor capacity of existing walk-ins replacement costs range from $10,000 to $40,000 or more.
Three-Compartment Sink A commercial sink with three separate compartments for washing, rinsing, and sanitizing food service equipment and utensils. Required by California health code for all food service operations with dishwashing needs. Verify presence and condition in any restaurant space you are evaluating.
Fire Suppression System An automatic fire suppression system installed in the kitchen hood that discharges extinguishing agent if a fire is detected. Required in commercial kitchens in California. Must be inspected and certified semi-annually and is connected to the local fire department. Verify certification status when evaluating any restaurant space.
Permit and License Terms
Public Health Permit (LA County) The operating permit issued by the Los Angeles County Department of Public Health Environmental Health Division authorizing a food facility to operate. Non-transferable a new permit must be obtained in each new owner's name. Required before opening and renewed annually. Annual fees range from approximately $772 (under 25 seats) to $1,472 (51+ seats).
ABC License (Alcoholic Beverage Control License) A license issued by the California Department of Alcoholic Beverage Control authorizing a business to sell alcoholic beverages. Restaurant operators most commonly use Type 41 (beer and wine with food) or Type 47 (full service with food) licenses. ABC licenses are not transferable — each new owner must apply for a new license. In high-demand markets, Type 47 licenses can carry significant market value when transferred as part of a business sale.
Conditional Use Permit (CUP) A discretionary permit issued by a local planning authority that allows a specific use — such as late-night restaurant operations, alcohol service, or live entertainment — in a zone where that use is not permitted by right. CUPs require a public hearing and can take 3–6 months to obtain. Some CUPs transfer with the lease or business; others require reapplication for each new operator.
Seller's Permit (CDTFA) A permit issued by the California Department of Tax and Fee Administration authorizing a business to collect and remit California sales tax. Required for any restaurant selling taxable food and beverage items. Free to obtain and required as part of the health permit application process.
Food Handler Card A certification required for all food handlers in California, obtained by completing an accredited food safety training course. Must be obtained within 30 days of hire. Distinct from the Food Safety Manager Certification, which is a more comprehensive qualification required for at least one responsible person at each food facility.
Encroachment Permit A permit from the city or county authorizing the use of public right-of-way typically the sidewalk or adjacent public space for outdoor dining. Required for most sidewalk patios and parklets in California. A valuable but often overlooked asset in a restaurant acquisition or lease.