Three experts chime in on renegotiating leases, communicating with landlords, and managing rent when sales are crashing.
It’s no secret that signing a lease on a restaurant space is a big commitment. With no way of knowing future circumstances, operators take the plunge and vow to pay various costs, regardless of events to come.
This year, the unthinkable happened, and it affected rents for restaurants ranging from nationwide chains to independent one-offs. In late March, The Cheesecake Factory made waves with its decision to withhold April rent payments as its dining rooms shuttered. Across the U.S., other concepts of all sizes also began considering their options as sales plummeted.
Now, as restaurants return to full, albeit social-distanced, operations in some states, the industry is adjusting to a new normal. At the same time, many operators are seeking ways to prepare for potential calamities (like a second wave of the coronavirus), and leases play no small role in this process. FSR asked three industry experts aThreeHere’s what they had to say.
Jon Taffer | Host, “Bar Rescue”
Occupancy costs or rent for a restaurant should never exceed 10 percent of revenues; all budget categories have to fit within certain parameters for a restaurant to make money. The problem post-pandemic is that revenues have been affected. A traditional restaurant pays base rent plus a percentage and, in today’s climate, that base rents kills operators—suddenly occupancy costs run from 10 percent to 12, 15, 18, 20, or even 30 percent of revenues.
The way we need to negotiate leases has started to change. I’m a big proponent of straight percentage leases. If I can tell my landlord that I’ll give 9 or 10 percent of my revenues as rent, that’s the greatest lease of all, because my rent never exceeds that set percentage. A fixed number formula like this provides the restaurant owner with a lot of protection on the bottom end and provides the landlord with a lot of benefit if revenues are on the top end.
If I were a tenant right now, I would be negotiating with my landlord. The door has been opened for negotiations; every landlord has the chance to renegotiate their finances because the banks are expecting it. So this negotiation can go all the way up the chain.
Unfortunately, we are going to lose great restaurants during this pandemic. But operators are also going to have the opportunity to jump on locations that would normally have never become available. So anyone in the restaurant business should be looking for those gem locations that are going to become available over the next months.
Jay Bandy, President, Goliath Consulting Group | Atlanta
When the coronavirus pandemic started, one of the first people we recommended our operators call were their landlords. Depending on the size of the company, leases take the most time out of anything to negotiate, so that’s where operators should start.
Operators need to be upfront about their situation; you need to tell your landlord that you’ve lost sales and you’re going to be losing money over the next few months. Then, tell them what you’re doing to stay in business, but also that you need their help. Give as many details as you feel comfortable with, and let them know that you’re not looking to get out of the lease, you’re looking to work with them to get to the other end of the problem.
I think restaurateurs should remember that landlords are used to dealing with these issues, especially if they’ve been through issues before this, such as the Great Recession. It’s about understanding that landlords have a business to run as well, and they recognize that, when crises happen, it’s in their best interest to maintain a relationship with their restaurateur and figure out a solution. The last thing a landlord wants is an empty space.
Elizabeth Blau, Founder and CEO Blau + Associates | Co-owner, Honey Salt | Las Vegas
It’s a mixed bag with landlords. When the coronavirus struck, they were all over the place. Some were trying to work together with tenants. Then, of course, there were others sending out nasty letters demanding rent, which is pretty absurd when, at the most, restaurants were operating on a takeout-only model.
It’s a good idea to find a place where you can share resources and practices with other operators. We made a Save Our Local Las Vegas Restaurant Community Facebook page to create a comforting spot for people to communicate with one another in this crisis.
The laws about leases vary on a state-by-state basis. There were certain states, like California, where the governor said that no evictions were permitted during the coronavirus. If you’re looking for legal change to allow more time to pay rent, you should definitely appeal to your legislators and your Small Business Association.
The stimulus loans were intended to help businesses pay their rent. So, in the case of Honey Salt, we told our landlord, “When we get our money, you’ll get your money because, right now, we’re barely staying afloat.”