The biggest fixed payment and current migraine for nearly every bar and restaurant owner across America is their rent payment. April was already incredibly hard for most operators to cover with sales declines of 50% or more from March. How are owners supposed to pay their May bill with zero on-premise dining from April and takeout/delivery only attributing a fraction of previous sales?
First, it's important to remember that not being able to pay is of no fault of bad management as some of the most successful industry icons are experiencing the same struggle right now. J.P. Morgan reported in 2016 that restaurants have the shortest cash buffer with only 16 days. Compared that to real estate that sits on the opposite end of the spectrum as the top industry with the average business having a 47-day cash buffer. Yet, somehow pleas for rent negotiations is falling on tone-deaf ears all across the nation. Even Cheesecake Factory sent a letter to its landlords that it wasn't paying rent last month.
Looking outside of the restaurant industry, a swarth of publications* have reported that Petco, Dick's Sporting Goods, Victoria's Secret, Staples, Burlington Coat Factory, Gap, Barnes & Nobles, Nordstrom's, H&M, and Foot Locker have been paying late or not at all. As reported by the Datex Tenant Track that tracks commercial leases nationwide, said 44% of tenants had not paid their rent as of April 10th, 2020. Compare that to the previous month on March 10th, where 88% percent had paid their rent.
“Companies with strong balance sheets need to do their part and play a role in this recovery” by paying store rents when possible,” says Related Companies CEO Jeff Blau. “Otherwise, we’ll wind up with a further problem down the road.” pic.twitter.com/NN98ZgPGt3— Squawk Box (@SquawkCNBC) April 14, 2020
Jeff Blau, CEO of Related Companies, says "it's important for large companies that have strong balance sheets and lots of liquidity to continue to pay" because it could break the ecosystem. Their payments trickle down to the employees of landlords, taxes for the government, and helps the balance sheets of banks that are already struggling with liquidity issues. If defaults start to happen at the bank, then the government will be bailing them out.
Restaurants are a far cry from being 'large' or having strong balance or liquidity during this pandemic. The PPP program only allows for 25% to be paid to rent which isn't helpful for operations with smaller payrolls if they can even secure the loan in the first place. Additionally, with states opening up with 25%-50% capacity thresholds, the chances of being able to afford rent prices from before COVID-19 are next to impossible.
Helbraun Levy is a law firm in New York City that represents the hospitality industry and has been entrenched in the battle between landlords and tenants. David Helbraun, founding partner and chairman, hosted a webinar earlier this week dubbed, 'Peace on the Lower East' with perspectives from both a landlord and restaurant operator. On one side of the proverbial ring was James Wacht, a restaurant landlord, broker, and attorney with the other panelists being NYC chef and restauranteur, John Fraser. It was a two-hour session that offered a wealth of insight from both sides as they intimately described their position and how they hoped to move forward.
David has been preaching for weeks that landlords need to adjust to the new reality that is facing bars and restaurants. He has been working hard to try to shift leases to a percentage rent model which is a haircut for both sides but at least the landlord is generating some revenue while business owners have a fighting chance to dig out from lost sales the past seven weeks. Rent abatement and deferment only adds to the pile of debt many are facing and may incentivize owners to walk away completely leaving empty spaces in a market that may struggle to fill it. (Side note- if you haven't signed up for their newsletter, it's highly informative regardless of what market you may be in.
One insightful tidbit that bar and restaurant owners may overlook is that not every landlord has the ability to adjust lease clauses and/or rent payments without the landlord's lender signing off on these changes. As a starting place, it is important to present your landlord with hard numbers and facts about lost sales. Furthermore, use Datassential's Sales Projection Tool and enter your sales from 2019. Based on your type of concept, it will show the potential sales drop off year over year. Overall, restaurants are expected to suffer a 22% dropoff from the latest modeling with quick-service restaurants faring the best by only losing 13% of sales while fine-dining is getting hammered at a 38% revenue decrease. Users can input their state reopening dates to make it more accurate as well. If an operator can show their cash flow projections for the rest of the year, landlords will be able to financially grasp how daunting a situation the industry is in. Speak in landlord language, which is hard numbers and dollars.
While every situation is different and some landlords show little to no concern for the plight of our hospitality world, here are five quick tips to remember when trying to negotiate the lease. An attorney and accountant should be consulted in the process.
- Research the possible costs your landlord is facing. Look up taxes, notes, and liens where possible and commercial real estate brokers or lawyers in your market should be able to help here. If you can find their monthly expense, it may help to make sure you can ensure they are not losing money each month.
- See if they will work with their bank to switch payments to interest only if possible. Do the leg work of seeing what programs banks may be offering if you know who their lender is.
- Ask to move to a percentage rent model with a smaller base and percentage of sales. 10% is on the high side but 6-8% would be ideal. If it's still a smaller number than your fixed cost, take what is possible.
- Apply security deposits to missed rent payments as possible but understand any missed payment may activate clauses that allow them to request operators replenish these security deposits to a higher threshold than before.
- Remember they are human too and in a pandemic. Try to use language that focuses on the bad hand we have all been dealt with even if their response is less than courteous. Learn from the FBI's former lead hostage negotiator, Chris Voss, on negotiating in good faith and appealing to what drives landlords.
In a time when states are just starting to open back up for guests to come back, here is hoping landlords start to work with restaurants and bars more. When and if they don't, hopefully, the government can step in to offer protection personally and professionally from the over-zealous ones.