What is in this article?:
- Restaurants wrestle with rising rents
- Negotiating a lease
Post-recession recovery means higher costs for big bottom-line item
Negotiating a lease
(Continued from page 1)
In lease negotiations, Haslem recommends operators look at the rent, the rent escalations, the lease term and the options to renew.
“What is often overlooked by restaurant operators is that the rent is among the top three costs in the restaurant profit-loss statement with cost of goods sold and labor,” he said. “Often, rent is No. 2 on that list.
“In good times or bad times, you have to pay the rent,” he said. “In the work that we’ve done in a bankruptcy context with those companies that have filed for Chapter 11, we’ve analyzed the locations that have failed.
“Rent is a highly determinative factor between success and failure,” Haslem added. “A restaurant can be doing everything right — the menu, the food, the service, the marketing, the following are all dialed in — but if the rent is not right for that restaurant, it can be the main reason the restaurant fails or put the restaurant at a high risk of failure. It’s often overlooked.”
Fox of Firehouse Subs said the recession led to a reduction and sometimes halt in commercial retail construction, which is now coming home to roost for those brands wanting to expand as the economy improves.
“That reduction in inventory has put some pressures on availability,” Fox said. “The normal change in supply and demand puts pressure on rents.
“Over the past year and a half, we’ve seen the pendulum start to swing to the landlords’ side,” he added. “They’ve become more aggressive in an increasing number of markets. The number of brands that are back on track financially and back to expanding is starting to outpace availability.”
Fox said the move is now similar to pre-recession “but not quite as crazy.”
The most significant increases are being seen in the major metropolitan areas, Fox added.
“We really don’t want to see our rents creep up above 8 or 8.5 percent of sales,” Fox said. “Once you get beyond that point, you are very hard-pressed to find those points on the P&L.”
Consultant Haslem agreed.
“People when they are looking at a location, for retail or restaurant, think they need to ask, ‘Am I paying a market rent?’ But market rents are subjective,” he said.
“The more germane question is: What is the right rent that this restaurant can bear at this particular location?” he suggested. “If you have a portfolio of restaurants or multiple locations, you can sift through those leases and compare the occupancy costs as compare with sales. Look at the profitability of those locations. You should then be able to develop what I call the target metric for the concept.”
That target, he added, will vary by segment.
Fox said lease negotiations can include tenant improvement money, which would be figured in to the lease terms, but that some landlords are less likely consider that in post-recession negotiations.
“What’s most critical for success is having that great relationship between the landlord and the tenant,” Fox reiterated. “If they have a fundamental understanding of each others business, it is a symbiotic relationship. That was a lesson learned from the recession. We should make sure that’s not forgotten.”
Haslem noted that some restaurant concepts are especially at a disadvantage in lease negotiations if their name is specific to a location.
“Union Square Cafe, which is a fantastic restaurant, and Danny Meyer, who is a fantastic operator, face a challenge,” he said. “It’s a storied restaurant that is in a storied location, which creates a difficulty if you have your restaurant associated with a particular location. That adds risk if you have to relocate.”
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