Declining food and beverage sales and dwindling cash flows have many restaurant operators seeking rent relief from landlords—and actually getting it.
Whether landlords are concerned renters need help during the recession or afraid replacement tenants will not be available should they evict laggards, operators say leaseholders are showing unprecedented grace of late.
While it took a few months for operators and landlords to see eye-to-eye, now operators are seeing double-digit rent reductions. In addition, more deals are being cut for rents based on a percentage of sales, reduced or eliminated common-area maintenance fees, and additional time to make payments.
Sources say operators seeking relief must be willing to share financial results, plans for how their operations would benefit from the added cash and perhaps sign extended lease terms.
“This is the first time I can remember when the landlords are actually listening to us and not just saying no,” said Amir Sabetian, vice president of operations and a six-unit franchisee at 80-unit zpizza. “They’re concerned about their business, too, and the last thing they want is someone to call and say they locked the door last night and left without notice.”
Sabetian said many franchisees of the Newport, Calif.-based zpizza chain have reported getting a wide variety of discounts, including rent forgiveness, abatement, deferred payments and deductions based on a dollars-per-square-foot formula. He added that landlords are asking to see operators’ profit-and-loss statements to determine whether tenants are truly struggling or just angling for a deal.
Last month, Minneapolis-based Granite City Food & Brewery said it had negotiated rent reductions totaling $4 million for its 26 restaurants. Chief executive Steve Wagenheim said the savings would provide enough wiggle room to help build store-level cash flow and scrub some debt off the company’s balance sheet.
Wagenheim said he told landlords, “‘We could reach a significant milestone and be cash-flow-positive with your help.’… All have been receptive to it.”
Overall, Granite City locations received a 33-percent reduction for 2009 and 17-percent discount for 2010.
“We might not have the cleanest balance sheet,” Wagenheim said, “but we’ve got good activity at our stores, which proves ours is a good business.”
If operators want to negotiate with landlords, sharing as much financial information as possible is smart, said Louisville, Ky.-based restaurant and real estate developer Houston Jones.
“[Operators] have to come clean with their finances to prove why they need a reduction,” Jones said.
Restaurateurs he advises have negotiated an average 15 percent off their rent.
“Most landlords are amicable about doing that if they don’t feel like they’re getting the runaround,” he said.
Brian Bern, vice president and director for Sevell Realty Partners in Tampa, Fla., said most landlords he’s spoken with are willing to help businesses that have strong track records and evidence of long-term viability.
“If they’re not good tenants to begin with, or they’re not running good operations, landlords are saying, ‘Sorry, we can’t help you,’” Bern said. “You can’t really blame them if they don’t help someone like that. I mean, what’s the point of giving a crutch to someone who’s going to fall anyway?”
But even if an operation is in dire straits, negotiating a rent reduction from a position of confidence, rather than dread, is best, said Kamron Karington, a former pizzeria owner turned consultant.
“Most guys go in whining, and the landlord smells fear,” Karington said. “If you sound afraid, you sound doubtful. So some landlords are thinking, ‘Why should I make concessions when he doesn’t sound intent on making this thing succeed?’”
While there’s more than one way to negotiate a reduction, Karington said the best deals struck are those where each party gives a little to get a little. If an operator wants a rent break, he might show his commitment to the landlord by signing a lease extension.
Karington said that regardless of why you seek rent relief, tell landlords what the business will do with the additional cash to convince them their sacrificed cash will be spent wisely.
“I bought my first pizzeria in 1994, when there was no recession,” he said. “But I convinced [my landlord] my business was struggling and I needed money to market it. So I asked for $400 off my rent, which he gave me when I signed a five-year lease with him. I saved $24,000 over that term, and he got a good, long-term customer.”