During the Covid-19 Crisis, restaurant owners are working overtime to find a variety of ways in which they can ease the heavy burden of mandated closures. Paying rent in a space you aren’t fully utilizing is a tough pill to swallow when margins are already paper-thin to begin with, and a hefty rent bill can be the straw that breaks the camel’s back in many cases right now. A solid strategy for restaurant owners to take into account while navigating the pandemic is working with your landlords to reach rental agreements that work for both parties! While each situation will be unique based upon the relationship and lease requirements already at hand; it’s critical to remember that there are a few facets of a landlord/tenant relationship that remain fairly consistent across the board.
It’s very expensive to replace a tenant
Especially during a downturn/recessionary economy, replacing a tenant is an added burden on landlords. Having said this, this fact isn’t your free pass to walk up to your landlord and let them know you’re irreplaceable because it’s going to cost them too much. Remember, knowledge is power, and knowing your operation’s finances is key in determining how you’ll move forward once this is all over, which in turn will help your restaurant strategize how best to move forward in the current moment.
We’ve worked with several clients in developing their break even’s and budgets so they can clearly and knowledgeably demonstrate to their landlords that they do in fact have a plan in place that addresses how any potential rent reduction and / or rent deferral can be paid back.
Keep in mind – the point of this strategy for your restaurant is to come up with a plan that will work for both parties!
Commercial Property Value is tied to Rental History & Rental PSQFT
It makes total sense that the value of income property is determined by the income it produces. Keeping both the income and the PSQFT (price per square ft.) enables landlords to refinance their loans or utilize the property for collateral in order to purchase new properties. We’ve assisted in several scenarios where the restaurant has requested 90 days of reduced or deferred rent. In order to reduce the sting for the landlords, it helps if restaurant owners strategize to create the following:
- Tenant Improvement (TI) Loan: A separate TI Loan in the requested amount is amortized over a period of time that is doable for the restaurant. This allows the landlord to show that they are maintaining the property value by investing in their tenants. This allows them to show an investment story vs a loan deferment story to their lenders.
- Payback Through a PSQFT Offset: As opposed to a loan, the deferred amount is paid back through a temporary increase in the price paid per square foot over a period of time that’s doable. Landlords love this move because they get to demonstrate a favorable story to the banks; “During the downturn, we were able to maintain (x) PSQFT.”
- Note Payback Tied to Sales: The deferred amount is paid back as a % of sales over (x) period of time. This one comes with a warning label: Make sure you exempt your weekend sales from the payback, as you’ll need them to make payroll. If you don’t, then make sure you lower the % paid pack per week.
Remember, landlords need you in order to survive too! The conversation is real and needs to happen; Your landlords will most likely be willing to work with you so long as you have an educated discussion with them about how you can make this work in everyone’s favor so that when this is all said and done, we’re ALL on the road back to thriving rather than simply surviving.