Landlords Lose Money When Restaurant Properties Sit Vacant, So Why Not Give Rent Relief?

Every day, David Helbraun feels like banging his head against the wall. A founding partner and chairman at Helbraun Levey, a New York City-based hospitality law firm with more than 1,000 clients in the city alone, the former entrepreneur and coffee bar owner is struggling to help restaurant owners desperate after months of COVID-19-related closures, restrictions, and income loss. The biggest obstacle, he says, is landlords who would rather see a restaurant space remain vacant, bringing in no money, than negotiate partial payments and rent relief for tenants. Currently, the firm is handling lease negotiations for more than 200 clients.

“Why is this happening?” he says. “My gut tells me that the real estate market in New York is shark-infested waters, and the landlords who grew up and do business in these shark-infested waters have to be sharks themselves. You can’t reason with a shark. ‘Maybe you shouldn’t eat that seal, there aren’t many of them.’ No, they’re going to eat the seal.”

Helbraun’s frustration goes to the heart of a crisis facing the restaurant industry and so many others clobbered by the economic fallout of the coronavirus: the cost of real estate. In late July, Philadelphia’s all-day cafe High Street on Market announced it would close its longtime location in the Old City neighborhood because it simply couldn’t keep up with rent, which went up by $5,000 a month last October, says co-owner Ellen Yin. The restaurant struggled to make ends meet during mandated closures and months of lost business, and the landlord — whom Yin declined to name — wouldn’t budge or offer any concessions. (The property’s real estate agent refused to identify the landlord and would not give comment to Eater.) “I told him we were in a really difficult position,” Yin says. “‘It’s difficult to be a restaurateur in this situation, and while I understand you have expenses, I need help.’” Even though High Street had paid its rent in full through August 1, the only assistance she was offered was a promise not to raise rent when the lease came up for renewal in October. A day after Yin informed the landlord that they were vacating, they were sent a termination letter via certified mail. The space is already listed for rent online, starting in October.

High Street on Market isn’t the only popular restaurant to announce closure recently. Other high-profile restaurants and bars — including Uncle Boons and Banty Rooster in New York City and the Summer Place and Flights in the Bay Area — cite the challenges of paying rent and inflexible landlords as key reasons for closing. Space for kitchens, dining rooms, and bars is incredibly expensive for entrepreneurs and small businesses — typically between 6 to 10 percent of gross revenue, according to Paul Pruitt, an industry consultant in LA — especially during a pandemic that’s led to mandatory shutdowns and a steep drop in customers.

Industry figures are baffled as to why many landlords don’t want to negotiate some sort of rent relief, especially when they face an uncertain future as well. After all, they have their own mortgages to pay, and it seems unlikely, if not impossible, that they will find new tenants as the pandemic, and its economic effects, continue.

Many involved in these rent relief negotiations cite an array of factors that dictate a landlord’s willingness to negotiate, including the landlord-tenant relationship, the financial position of the landlord, and perceptions about the industry’s future. There are some instances where reduced rent comes with the deal. Leases for property in malls and large shopping centers have what’s called co-tenancy clauses. If an anchor client like Macy’s goes under, or a certain number of stores in the development close, then other tenants have the right to pay reduced rent due to the loss of foot traffic. Landlords in these situations may seek out a deal to provide relief to restaurant owners to avoid renegotiations and bigger losses. Sadly, clauses addressing pandemics aren’t common business practice.

“There are going to be people who are inflexible for whatever reason, and some that understand a restaurant can only do so much, that no customers means no tenants and it’ll be difficult to rent the space,” says Yin.

To be fair, not every landlord is playing hardball. Most “know they can’t get blood from a stone,” says Stephen Boyd, a senior director at Fitch Ratings. They want to preserve the income they can and set up deals with tenants that allow them to eventually recoup their losses. In Chicago, El Che Steakhouse has been able to work with landlords (who also happen to be investors), and Bay Area chain Wrecking Ball Coffee was given half-off rent by landlords for all three of its locations, with the balance due at an unspecified future date. Other landlords may want to budge, but can’t, says Milford Jones, the operator of Sellingrestaurants.com and a national broker who sets up lease deals for restaurants. Many landlords’ mortgage deals with banks include covenants that forbid charging rent below a certain figure.

“Of course, then there are landlords who are just plain assholes,” says Jones. “They always think there’s another, better tenant out there.”

The size of the landlord can often determine their relative openness to rent relief. Big-name developers, who have lots of capital and understand the value restaurants and bars bring to their larger developments, tend to be flexible. Small mom-and-pop landlords, who may have one or just a handful or properties, are “real people,” Helbraun says; they don’t have the reserves right now to risk vacancy, and tend to have better relationships with tenants.

The real trouble, Helbraun says, are the mid-size property owners with a few dozen buildings. He calls them the shark pool; “cultivating a reputation for being tough and not budging is how they’ve survived in the past.”

Another key factor is the relationship restaurant owners have with their landlord. Paying rent on time is just 50 percent of the relationship, says Salar Sheik, a consultant with LA-based Savory Hospitality. Is the restaurant/tenant an amenity that drives foot traffic, a famous name that brings in business, a corporate chain with deep pockets and consistency, or a business with a grandfathered liquor license, a huge asset, that may be at risk if a property were to remain vacant in a downturn? That means more leniency.

Some landlords see the fallout from COVID-19 as a time to cull poor-performing restaurants and strike a better deal. Consider a small bistro that signed a deal two years ago in an up-and-coming neighborhood; the landlord, looking for a tenant to drive foot traffic in what may be a gentrifying neighborhood, offered a sweetheart deal for a five-year lease. If that bistro is looking to negotiate some rent breaks or deferment, the landlord may look at how much more he could charge a new tenant, and decide that refusing to provide a break — which may mean months of an empty storefront — will be more than made up by a new tenant paying higher rent.

“It’s kind of like chess, and your landlord is thinking, are you a king or a queen, or are you a pawn he can afford to lose to win the game?” says Sheik.

Finally, a landlord’s own financial cushion will play into their strategy. Those who own multiple properties or have cash reserves can afford to leave a handful empty if the majority of them are profitable. Jones says that some of the big corporate landlords are “brainless” and will just sit with retail and restaurant space empty for years.

“While everything else is dying, they still want these premium rents, and you just shake your head,” he says.

Some landlords are even bullish, says Pruitt. They see sidewalk dining proliferate (even though it can cover at best only 20 to 25 percent of previous income, says Helbraun). They know that Paycheck Protection Program loans from the CARES Act and Economic Injury Disaster Loans from the Small Business Association are out. They see this as a small slump; the world will get back on its feet again and people will want to eat out again. If that’s your perspective, maybe you’ll offer payment deferrals, but why forgive rent?

Restaurateurs are at a breaking point. Helbraun says that the stimulus money has run out for many of his clients, and it doesn’t look like there’s more forthcoming from D.C. Once they have to close, they may just put their furniture and fixtures in storage, wait until rents fall in line with what they think they should be paying, and try to start again. (Many seek to take advantage of New York City’s Law 1932-A, which exempts restaurants owners, among others, from personal liability if they have to declare bankruptcy due to COVID-19-related closures. That hasn’t stopped many landlords from threatening to sue anyways, say Helbraun.)

“Where does that leave landlords? Who knows?” he says. “I just assume they have so much money in their portfolios they can write it off and just wait until things get better.”

While struggling restaurant owners asking for rent breaks don’t have the high ground today, things may change. Pruitt points to the high number of restaurant closings in 2019 as signs of development saturation; when things begin to take shape post-COVID-19, there will be a mounting number of vacant spaces landlords will lease at steep discounts. Yin plans to relocate High Street on Market to a new location, and says she’s been approached by lots of brokers offering open space; it’s nice to be seen as a good potential tenant, she says, but to her, that also signals that there are a lot of vacancies and people interested in cutting deals.

“I think the tough stance from landlords is really denial,” says Adam Weisblatt, CEO at Los Angeles-based Last Word Hospitality. “Considering that retail is also in dire straits, I think many landlords aren’t facing up to the fact that their business model is broken.”

Weisblatt thinks leases will also be different: He foresees deals where tenants pay a base rate, and then a percentage based on net sales, with clauses clearly spelling out what happens during a pandemic or other such disasters. “What you’re seeing is creativity on the business side is as important as the branding and food side,” he says. “A landlord is your partner, whether you like it or not, so that relationship is important.”

Chefs and owners who can’t catch a break can perhaps take solace in the fact that, when the industry does start bouncing back, new restaurateurs will know exactly which landlords weren’t great partners in the past.