You don’t have to be a top chef to see that our current economy has turned many restaurants into hell’s kitchens. In an industry where 60-80 percent of sales are attributed to repeat customers, it’s no wonder. Even their best customers are dining out less often and spending less when they do, forcing restaurants to trim operating costs to the bone.
For restaurants, rent is usually the highest fixed expense after food and labor. So what’s an operator to do after they’ve already chopped, diced and sliced all they can? For many it’s getting their landlords back to the bargaining table.
Although most commercial landlords are hard-driving business people, they don’t want to see their tenants fail — or find themselves holding empty space with a lot of inventory on the market. If a restaurant files for bankruptcy, the property owner loses the projected income from the lease. In most cases, this poses a greater risk than accepting a reduction in rent. Still, don’t expect these seasoned professionals to just roll over. In their arsenal they may have an existing tenant who wants to expand, or another tenant in the wings. They may want to sell their building or be indifferent to the impact your lease may have on their portfolio.
So how can a restaurateur take some of the heat out of the kitchen and still remain in good standing with the landlord?
The first stop is to re-examine your lease. If your business is in serious jeopardy and your lease contains a “good guy guarantee,” you have the option of paying your rent in full and handing back the keys. The only penalty is the likely loss of everything you leave behind, including the security deposit. However, if you merely stop paying rent and do not vacate, in effect, becoming a “holdover” tenant, then you force your landlord into eviction proceedings. That course of action is disruptive, time consuming and costly for all concerned.
The better approach is to be open, honest and willing to renegotiate an outcome that considers both parties. Try to see the situation from the landlord’s perspective and keep discussions logical and factual to avoid emotional reactions that impair your ability to negotiate in good faith.
Write your landlord a personal letter explaining your situation. Include the good news with the bad. Appearing on the brink of bankruptcy will only scare the landlord into trying to extract as much money as possible while you are still operating. Show the landlord that you are cognizant of current market trends, vacancies and rents in comparable locations in your area. Your realtor can be helpful in providing this information.
Give examples of the steps you’ve taken to reduce other costs and improve profitability. Provide a look at how you are promoting your restaurant, adding equipment, improving staff training and inventory control. Point out the upgrades and improvements you may have made, or plan to make, that will increase the value of the property. Explain your restaurant’s financial condition and the amount of rent you can afford, so the leaseholder can better assess their trade-offs and risk.
Be reasonable and willing to manage your expectations. Offer a clear strategy of how your business expects to recover within a set time frame. If you have been a long-time tenant, you may be able to renegotiate a reduction in your annual escalation for a period of time, with an offer to return to the original, or a higher percentage, when your business is measurably improved. But be careful what you ask for. If you ask for short term rollback, you may come to regret it if business doesn’t pick up within the allotted time. Request a meeting to review your letter and your financial documents, answer any questions, and discuss the terms and conditions necessary for you to remain in operation at that location.
If you are successful in convincing the landlord to give you a permanent reduction, expect it to be somewhere in the 15 percent 20 percent range.
Once an agreement has been reached, review the new lease. Be sure it accurately reflects what you agreed to and conclude the negotiations on a timely basis. Some landlords stall the negotiations as long as possible using the lost time and your increasing anxiety to their advantage.
Generally speaking, landlords will only choose to restructure a lease when they believe it’s in their best interest, so be creative. Ask for a lower base rent, but add a percentage tied to sales increases, or the option to restore former terms and conditions at a later date so that the landlord doesn’t feel stuck with a below market lease for an extended term.
According to industry reports, commercial real estate values have dropped 22.8% and in a soft market, like the one we are experiencing now, determined restaurant owners are giving rent renegotiation techniques a shot. And the ones that go about it in the right way, take the right approach, know their bargaining chips and play fair are more likely to succeed. With the reported lease renegotiation success for such operators as Starbucks and Quizno’s, you may soon have your landlord eating out of your hand.
Written by Marjorie Borell, VP- Restaurants and Retail, New York Commercial Real Estate Services. Visit RestaurantSpaceNY.com