Second-generation restaurant spaces are attracting more attention as construction costs climb, offering an alternative to building from scratch. These sites come with existing kitchens, exhaust hoods, and grease traps, promising lower upfront costs and faster openings. But the financial savings are not always as clear as they appear on paper.
The Cost of Building From Scratch
Building a new restaurant from the ground up typically costs between 1.5 and two times more than converting an existing one, according to Alexis Readinger, founder of the Los Angeles-based hospitality design firm Preen. A significant portion of that expense comes from the back of house and the complex systems supporting it.
For franchise systems, these upfront costs directly impact unit economics. Every dollar saved on construction is a dollar that does not need to be recovered through restaurant operations, explained Sam Ballas, founder and CEO of East Coast Wings + Grill. This makes the idea of converting an older space appealing for smaller brands and emerging chains, which often have more flexibility to adapt to an existing layout.
Highly standardized chains, however, are less likely to compromise their precise specifications for a real estate deal. Brands like In-N-Out and Chick-fil-A operate with rigid standards, meaning a second-generation space might not meet their needs.
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Why the Deal Can Backfire
Assuming that a lower initial construction estimate equals a lower total investment is a common error. The problem usually stems from a mismatch between the inherited space and the new concept. Operators often see existing equipment and assume savings, only to find they must rework the layout because the space does not fit what the new restaurant actually requires.
This approach can be “penny-wise, pound-foolish,” Readinger said. In some cases, the savings from not building new are entirely erased by the cost of renovating the space to fit a different concept.
That is why operators must know when to walk away. You either have a fit or you don’t, according to Danny Bendas, managing partner at Cooperation Restaurant Consultants. He advises against getting emotional about a deal.
The strongest case for a second-generation conversion occurs when the new concept closely matches the prior one, particularly in kitchen layout and equipment. Readinger noted that converting a sushi place into a sushi location is “If I want to do sushi and I can take over a sushi place, from an infrastructure standpoint, it’s brilliant.” However, a significant concept shift, such as turning a fast casual burger restaurant into a full-service kitchen, tends to shrink the potential savings quickly.
Operators also need to verify that a space contains all the brand requires before signing a lease. Bendas described a scenario where an operator might say they can get a great deal on a location but cannot do something integral to the brand. If that requirement is non-negotiable, the space is not right for the business.
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It is also vital to understand why the previous restaurant closed. Ballas pointed out that there is usually a reason a space became available. The reason could be specific to the concept, specific to the operator, or related to a fundamental problem with the real estate. Operators should research the history of the location and, if possible, reach out to the previous owner.
Hidden Liabilities and Systems
The history of the site can reveal issues like a bad location, a poor street view, or a lack of parking. Bendas emphasized the importance of looking beyond the surface. Second-generation spaces can also carry unwanted baggage, causing brands to start on the wrong foot if they need to erase a bad reputation associated with the location.
The building itself demands scrutiny, particularly regarding equipment. Stainless steel work tables are generally “pretty bulletproof,” but refrigeration and deep fryers may not be worth keeping without a close review of their condition, Bendas said. Operators should negotiate the removal of unwanted equipment as part of the lease, having the owner get rid of it so the business does not incur the cost of disposal.
Existing systems, such as HVAC, can also be deceptive. They may appear to be an asset until it needs to be replaced six months after opening, Ballas warned. This hidden liability must be managed carefully during lease negotiations.