For Restaurants Fighting to Stay Open, Landlords Prove a Major Hurdle

April 21, 2020 Admin 0 Comments

Some landlords are offering monetary relief, while others are leaving things intentionally vague — possibly to leave the door open to future eviction

As soon as Ted Hopson, chef and co-owner of the Bellwether in Studio City, California, heard the governor talking about coronavirus in early March, he knew it would be bad for business. On March 16, Hopson sat down and emailed his landlord. Business was down, he wrote. “We are hoping you would be willing to work with us, maybe defer our rent to a later date, since we have zero income right now.” Two days later he got a response in the form of an official letter included in an email attachment. Essentially, the landlord said, Hopson wasn’t the first to contact him about this, and he didn’t have the financial means to change anything about the rental contract.

The Bellwether has stayed open for delivery and take-out but is operating at 10 to 15 percent of its normal business. “If we want to keep serving food, we have to make sure [our suppliers] sell us food,” Hopson says. The little bit of income coming in is going to pay food suppliers and the few remaining employees. “We didn’t send a [rent] check on April 1,” Hopson says. “We expected to hear something but it’s been crickets.” (Eater reached out to Hopson’s landlord but did not get a response by press time.)

By mid- to late-March most dine-in businesses closed throughout the country, and now most businesses that make their living from dine-in orders are struggling. Under normal circumstances, most restaurants try to keep rent expenses to less than 10 percent of gross sales. When sales are down, restaurants can adjust expenses like food costs or staffing, but rent — without help from the landlord — remains the same. Restaurants that temporarily closed due to COVID-19 were left scrambling to figure out how to pay April rent and beyond, resulting in sometimes tense negotiations between restaurant owners and their landlords, and elsewhere, calls for a national rent strike.

The Cheesecake Factory made headlines for announcing it would not be paying rent on any of its 294 locations in April. If a massive chain like the Cheesecake Factory — which took in $694 million in revenue in the last three months of 2019 alone — can’t pay rent, it’s hard to imagine how an independent restaurant can. Widespread business closures have led 22 million people to file for unemployment in the last four weeks alone. As a result, many states like Oregon, Utah, and California have put a moratorium on residential evictions and encouraged landlords to allow tenants to defer rent; in most cases, this does not apply to commercial businesses. San Francisco has also put a freeze on evictions for small- and medium-size businesses but, at the government level, orders like this seem to be an outlier. As a result, tenants and landlords are left to negotiate each case individually.

The Portland Hunt + Alpine Club in Portland, Maine closed on March 16, two days before the official order came from the government: The cocktail bar is only 2,500 square feet and was designed to fit roughly 60 customers close together; social distancing was out of the question. Staff was able to apply for unemployment before the remainder of the restaurant industry, says Andrew Volk, who owns the restaurant with his wife. In addition to other creditors and vendors, Volk reached out to his landlord, a local management company with 19 properties. “They said, ‘Let’s talk as the month progresses,’” Volk recalls. The day before rent was due, the management company sent a tenant-wide letter mentioning small business owners would receive resources through the CARES Act and that not paying rent shouldn’t be the first line of defense against reduced cash flow. “There wasn’t a demand of ‘pay rent,’ but the tone was very much ‘we’re not here to float you guys,” Volk says. He managed to pay April’s rent with money from the Paycheck Protection Program — albeit a few weeks late. The landlord was understanding of the delay. (Eater reached out to the bar’s landlord for comment but did not get a response by press time.)

But the tenor of conversations between landlords and their bar/restaurant tenants is changing as the effects of COVID-19 become more widespread. Katie Button, chef and owner of Cúrate and Button & Co. Bagels in Asheville, North Carolina is in a different position from most restaurateurs because she owns the space where her restaurants are located. But, she still rents office space from a company called Wicker Park Property Management (WPPM). In March, she reached out to WPPM to ask for rent relief. “The response we received has been cold and unhelpful,” she posted on Instagram on April 2. Vendors, insurance, and other businesses to which Button owed money were all “willing to defer payments except for WPPM,” she shared. Button saw a flood of support from the community as well as posts from other restaurateurs who were having similar experiences with their landlords. Within a few days, she was contacted by WPPM, who said they were willing to work with her after all.

Though mortgage and rent payments represented 5 percent of the restaurant group’s net revenue in 2019, its profit margins are only somewhere between 5 and 10 percent. “Any increase in fixed costs as a percentage of revenue will put our business in jeopardy,” Button explained to Eater. With no income coming in, the only way to keep the business alive is to somehow find a way to lessen those fixed costs.

Luckily for Button, on April 9, WPPM came up with a plan for its restaurant tenants: total rent abatement for May, and in June, WPPM would allow each tenant’s security deposit to cover their rents — with the understanding that the latter would eventually be repaid. (Eater reached out to WPPM for comment but did not get a response by press time.)

“The conversations happening today are very different from the conversations from two weeks ago,” says Chad Mackay, CEO of Fire & Vine Hospitality, which runs 12 restaurants in Washington and Oregon. “There’s now a recognition that this is everywhere. It’s not just us deciding we aren’t going to pay April rent.”

Particularly generous landlords might abate rent altogether or give a rent reduction, knowing they will never be repaid in full. Some landlords are choosing to simply not respond, leaving owners to figure out whether or not to pay rent. If the businesses don’t pay rent, these landlords are leaving themselves the option of evicting those tenants later on.

Many other landlords are simply offering momentary relief. Nick Cho, founder of Wrecking Ball Coffee, says all three of his landlords gave him a variation of “pay 50 percent now with the balance due either next year” or at “some unknown future date,” as one landlord wrote in an email Cho shared with Eater. “The fundamental idea is that eventually we will pay 100 percent of our rent,” Cho says. Landlords may not get paid now, but eventually they’ll be made whole.

“There’s going to be heroes and villains that come out of this,” says Mackay. “Some landlords are going to be terrible. When this is all over, they may not have us as a tenant,” he says, referring to the restaurant industry as a whole. Many restaurant owners are counting on the awareness that there will be few new businesses to make potential tenants when the threat of coronavirus is over. “Landlords need to be willing to make sacrifices that lead to a temporary loss of revenue because they’re playing the long game and want to make sure they have tenants,” says Button. Better a 50 percent loss of income now than no rental income at all for months at a time.

Many landlords are suggesting that business owners get loans through the Small Business Administration’s Paycheck Protection Program (part of the CARES Act), or other state-level funds for small businesses and pay rent that way. Unfortunately the PPP and many similar loan programs are tailored toward keeping people off unemployment, and appear to be a particularly bad fit for restaurants. On April 16, the PPP ran out of funds and is no longer accepting new applications. For those restaurants who applied and were approved in time, the loan can be forgiven in total, but that will only be done if all employees are kept on payroll for eight weeks following loan disbursement. “It is anticipated that not more than 25 percent of the forgiven amount may be for non-payroll costs,” a public affairs officer with the SBA says.

“Restaurants shoot for 30 percent payroll costs,” says Volk. “The PPP doesn’t leave enough money for the majority of our operating costs,” things like utilities, insurance, and — of course — rent that restaurants are required to keep paying even when closed. (Tips further complicate the payroll question since restaurants, of course, pay only a small percentage of front-of-house staff wages.) And, importantly, what happens to that loan forgiveness if he can’t hire back his full staff? Restaurant owners have endless questions about how these programs will work for them and, so far, the SBA and government have given few answers.

Button, like most restaurateurs, has applied for PPP and is planning to take it despite not knowing how helpful it will be. “You’re having to take a leap into the air, having no idea if there’s going to be a safety net to catch you and no idea if the PPP program in the end is going to mess you up or screw you over. But you have to do it because if you don’t have those funds, you’re done,” Button says.

“Our hope is that we can not pay rent until we get stable and start paying as soon as that happens,” Hopson says. “We hope that [our landlord] will work with us. It’s either that or he’s suing us.” The restaurant is doing a little delivery business and working with World Central Kitchen to provide free meals for families in need. “We’re here and that’s good, but what if one of the people who comes to pick up is sick and we get sick?” Hopson conjectures. “Then this stops, and if it stops, there’s no chance of getting it going again.” Hopson knows there’s a chance he and his restaurant will be evicted for non-payment when this is all over. “But I have a million other things to worry about between now and then.”

Tove Danovich is a writer based in Portland, Oregon.