Restaurant Conversions vs. New Builds: A Franchisee's Guide to Real Estate

Blog Summary:

Converting an existing restaurant space ("second generation") typically offers faster speed-to-market and lower initial construction costs due to existing infrastructure. However, new builds ("greenfield") provide superior layout efficiency and brand customization, avoiding the potential hidden repair costs of older buildings.

Restaurant Conversions vs. New Builds: A Franchisee's Guide to Real Estate

Converting an existing restaurant generally saves some upfront costs and reduces construction time by months compared to a new build. However, new builds offer complete control over brand standards and workflow efficiency that conversions often compromise. The common misconception is that conversions are cheaper but anyone in the business knows that is far from true. Some second generation spaces are so badly deteriorated or need such costly repairs that a raze and rebuild might be a better option.

The Real Estate Dilemma: "Second Gen" vs. Ground Up

For franchise partners, the site selection phase is critical. You are often faced with a choice: lease or buy a space that was previously a restaurant (known as Second Generation or "2nd Gen") or build a new space from scratch (known as a New Build, "Greenfield," or "Vanilla Shell").

Both paths have distinct financial and operational implications. Understanding these nuances is essential for your ROI and long-term success.

Converting an Existing Space (Second Generation)

This option involves taking over a space that was previously occupied by a food service tenant but not always. Many different building types can be converted but you must understand the costs to convert a non-restaurant building as much as building that was a restaurant. Something else you would want to consider is permitting and how that is impacted by each building type.

The Pros of Conversions

• Speed to Market: The timeline is significantly compressed. You often avoid the lengthy permitting delays associated with changing the "use" of a building.
• Existing Infrastructure: Major mechanical items like Type 1 hoods, grease traps, and walk-in coolers may already be in place. This can save tens of thousands of dollars.
• Negotiation Leverage: Landlords sitting on vacant restaurant spaces are often eager to deal. You may secure favorable Tenant Improvement (TI) allowances.

The Cons of Conversions

• Hidden Liabilities: You inherit the previous tenant's problems. Old plumbing, outdated electrical panels, or a faulty HVAC system can lead to expensive change orders.
• Layout Compromises: You must shoehorn your brand’s operational flow into an existing footprint. This can hurt labor efficiency during peak hours.
• Brand Confusion: If the previous restaurant failed, you might battle the "ghost" of that location. Customers may subconsciously associate the address with the previous bad experience.

Building from Scratch (New Build / Greenfield)

This involves leasing an existing space or buying a raw space, often in a new development, where you are the first tenant. 

Pros of New Builds

• Operational Efficiency: You build exactly to our franchise specifications. The kitchen flow, POS stations, and seating are optimized for maximum throughput.
• Longevity of Systems: Everything is brand new. You will have full warranties on your HVAC, roof, and equipment, reducing maintenance costs in the first 5 years.
• Modern Aesthetics: You get high ceilings, better natural light, and modern utility hookups that match current building codes immediately.

The Cons of New Builds

• High Upfront Costs: You are paying for everything from the concrete slab up. This includes expensive trenching for plumbing and installing new electrical services.
• Permitting Nightmares: Zoning reviews and obtaining a Certificate of Occupancy (CO) can take months. This extends the time you are paying rent (or pre-rent fees) without generating revenue.
• Site Availability: finding a pristine, new development in a high-traffic "A" trade area is difficult, expensive and highly competitive.

At a Glance: Conversion vs. New Build

Key Questions to Ask Your General Contractor and the Brand you’re Franchising

Before signing a lease, engage a construction manager or GC to walk the site.

1. Is the Grease Interceptor compliant? Codes change frequently. An old grease trap might not meet current municipality standards, requiring a massive excavation to replace.
2. What is the HVAC tonnage? Ensure the existing units can handle the heat load of our specific kitchen equipment.
3. Are the "As-Built" drawings accurate? Never trust the landlord's old drawings. Always verify the location of plumbing stacks and load-bearing walls.

Final Verdict: Which is Right for You?

If your goal is to open quickly with a tighter initial budget, a second-generation conversion is often the smart play. It allows you to leverage existing capital improvements.
However, if you are well-capitalized and prioritizing long-term operational perfection over immediate speed, a new build ensures your restaurant operates exactly as the franchise model intends