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Restaurant Buying & Leasing Glossary
Plain-English definitions for the terms you'll see in restaurant listings, leases, and purchase agreements.
A
- Asset sale
- A sale where the buyer purchases specific assets of the business, such as equipment, inventory, the lease, goodwill, and sometimes licenses, rather than the company itself. Buyers often prefer asset sales because they can leave behind liabilities they didn't agree to take on. How to buy a restaurant →
B
- Base rent
- The fixed monthly rent under a commercial lease, before taxes, insurance, and shared operating costs are added. Compare offers on total occupancy cost, not base rent alone. What leasing a restaurant space costs →
C
- CAM (common area maintenance)
- The shared costs of running a multi-tenant property, such as parking lot upkeep, landscaping, and common hallways, which the landlord passes through to tenants. CAM charges can change from year to year, so ask for the past few years of statements. What leasing a restaurant space costs →
- Certificate of occupancy
- A document issued by the local building authority confirming that a property is approved for a specific use. A space that was approved for a retail or office use may need a new certificate before it can open as a restaurant. Restaurant licenses and permits checklist →
D
- Due diligence period
- The window after you sign a contract, during which you can inspect financials, equipment, permits, the lease, and the building before the deal closes. Contracts usually state what you can walk away over during this period, and for what reasons. Restaurant due diligence checklist →
E
- Earnest money deposit
- A good-faith deposit made by the buyer, usually held in escrow and applied to the purchase price at closing. Whether it can be recovered if the deal falls through depends on the contingencies written into the contract. Restaurant letter of intent guide →
F
- Free rent
- Months during which the tenant pays no base rent, often used to offset build-out time. Free rent is sometimes traded against a tenant improvement allowance, so compare the two as a package. Free rent vs. TI allowance →
G
- Grease trap
- A plumbing device that captures fats, oils, and grease before wastewater reaches the sewer. Local codes often require it to be cleaned on a set schedule, and an older or undersized unit can be an expensive surprise. Restaurant build-out hidden delays →
H
- Hood system
- The commercial kitchen exhaust system, including the hood, ductwork, fans, and fire suppression. Ownership and responsibility for the hood system, and who pays to replace it, should be spelled out in the purchase or lease. Who owns the hood system? →
K
- Key money
- A payment made to a landlord or a prior tenant for the right to take over a lease or occupy a space, separate from rent. Key money is often non-refundable, and how it's treated legally and for tax purposes varies, so get it documented in the agreement. Taking over a restaurant lease →
L
- Lease assignment
- Transferring an existing lease from the current tenant to a new one. The landlord usually has to approve the assignment, and the original tenant may stay liable unless the landlord releases them. Taking over a restaurant lease →
- Letter of intent (LOI)
- A summary of the main terms a buyer or tenant proposes, such as price, deposit, and timeline. Most LOI terms are non-binding, but some clauses, such as confidentiality and exclusivity, are often binding even before a full contract is signed. Restaurant letter of intent guide →
- Liquor license transfer
- Moving an existing liquor license to a new owner or location. Most states require approval before the transfer is final, and the timeline can affect when you can open or take over the business. Does a liquor license transfer? →
O
- Occupancy cost ratio
- Total rent and occupancy costs divided by gross sales. Operators use it to judge whether a location can support the business, and the level that works depends on the concept, menu prices, and margins. Restaurant affordability calculator →
P
- Personal guarantee
- A promise by an owner to pay a lease or loan personally if the business can't. A personal guarantee can reach beyond the business entity to your personal assets, so read the scope and any cap before signing. Personal guarantees on leases and loans →
S
- Second-generation space
- A commercial space that was previously used as a restaurant and still has some of the infrastructure in place, such as a hood, grease trap, and plumbing. It can cost less to open than a raw shell, but the existing equipment still needs to be inspected and approved. Second-generation restaurant spaces →
- SBA 7(a) loan
- A government-guaranteed loan from an SBA-approved lender that can finance a business acquisition, among other uses. SBA loans usually have longer terms than conventional bank loans, which lowers the monthly payment but increases total interest. SBA loans to buy a restaurant →
- Seller financing
- An arrangement where the seller carries part of the purchase price as a loan to the buyer, paid back over time. Terms such as the rate, down payment, and default remedies are fully negotiable. Seller financing for restaurants →
- Seller's discretionary earnings (SDE)
- A common measure of a small business's cash flow: pre-tax profit plus the owner's salary and one-time or personal expenses run through the business. SDE is often used to value owner-operated restaurants, while larger operations are usually valued on EBITDA. How much is my restaurant worth? →
- Sales tax clearance
- A written confirmation from the state that a business has no unpaid sales tax. Some states require a clearance or give the buyer a way to hold back funds when a business is sold, and unpaid taxes can follow the business. Restaurant back taxes →
T
- Tenant improvement (TI) allowance
- Money the landlord contributes toward the tenant's build-out, often paid as a credit or reimbursement. The allowance usually comes with conditions on what it can be spent on and when it must be used. Free rent vs. TI allowance →
- Triple net (NNN) lease
- A lease where the tenant pays base rent plus property taxes, insurance, and maintenance on top of it. NNN leases can look cheaper on base rent alone, so the total monthly occupancy cost is what matters. What leasing a restaurant space costs →
These definitions are general and informational. They are not legal, tax, or financial advice, and terms vary by state, lender, and contract. Confirm each one with your attorney, accountant, or lender before you sign.