Restaurants Fear Going From “Closed” to “Space for Lease” By July

Caffe Dante West Village was supposed to be one of New York’s major spring 2020 openings. It was an outpost of Dante, the Greenwich Village hangout that had been crowned the Best Bar in the World in 2019 by the Tales of the Cocktail Foundation. Its owner, Linden Pride, had spent 18 months and more than $1.6 million building the 74-seat restaurant in anticipation of welcoming its first paying guests on March 16. 

But when Andrew Cuomo requested density control measures on March 15, Pride realized a formal opening was out of the question. He immediately sent an email to his landlord, William Gottlieb Real Estate, asking to negotiate the terms of his rent.

Simply put, he didn’t have enough money to pay it—for March or April. “We put everything of our savings into the buildout of the new restaurant,” Pride says. “We got to the starting line with enough money in the bank to pay the first week’s payroll and suppliers.”

Worse, he says, the new restaurant doesn’t qualify for stimulus money from the federal government’s $2 trillion package, because it has no history of payroll. 

After some back-and-forth between Pride and Gottlieb representatives, on April 7 the landlord served a notice of default. If Pride doesn’t pay past-due rent and fees by April 14 (the technical term is “curing the default”), the landlord can initiate legal action. In a worst-case scenario, once the 90-day moratorium on evictions lifts in mid-June, Pride’s new restaurant could close before it ever opens. “If I don’t ‘cure’ this, they can come after me personally,” Pride says. “I’ve just spent all this money on the space, which they could take back in possession, and our money would be down the drain.”

In an emailed response, Brian Ullman, a lawyer who represents Gottlieb’s 551 Hudson Street Property, LLC, wrote that “this tenant has been in arrears since prior to the Governor’s administrative order closing New York businesses. The notice sent relates to the prior and ongoing arrears.” The owner, Ullman continues, “is considering all tenant rent issues on a case by case basis.” (The arrears, which Ullman says date to January 2020, were for legal fees that were under dispute, Pride says. He says March and April are the only months he didn’t pay agreed-upon rent.)

Pride’s experience underscores the precariousness many restaurateurs face across the country: Often, the only thing standing between their business and bankruptcy is a landlord’s largesse.

Outliving a Crisis

“Rent is never a suggestion,” says Lee Jacobs, a partner in Helbraun & Levey LLP, which specializes in the restaurant industry. “My fear is that hundreds of thousands of unsophisticated small-business owners think that because we’re in a pause, or a shelter-in-place, that that excuses them from paying rent. Unfortunately, it doesn’t.”

Many landlords, Jacobs says, have been willing to work with tenants, particularly “landlords that are mom-and-pop—either family-owned or owned by someone who has a handful of buildings,” he continues. “Larger institutional landlords are less likely to negotiate or be helpful because they have the cash to outlive this crisis, and they can outlive having empty retail space.”

Should restaurants simply stop paying or fail to successfully negotiate, “consumers could see empty storefronts change from ‘closed’ to ‘for lease’ as early as June, and most likely in July,” Jacobs says.

The Negotiations

Restaurateurs have worked desperately to avoid that scenario. It’s made more challenging because, although $350 billion was set aside for small-business loans under the Payment Protection Program (PPP), operators will have to pay them back if they don’t meet certain requirements, such as using 75% of the money for payroll. Yann de Rochefort, founder of Boqueria restaurants, a casual Spanish concept with seven locations in Chicago, New York, and Washington, D.C., has applied for the loans. “I’m pursuing every option to keep business going,” he says. He’s not paying rent at all right now—“the money just isn’t there.” 

De Rochefort has a different landlord for each property, “from the smallest imaginable to the big guns, like Brookfield,” he says. In his case, the small landlords have been the most accommodating, but even large management companies are willing to negotiate. “The mom-and-pop owners are willing to kick the can down the road until we have more information on what this recovery will look like,” he says. His larger landlords, such as OTO Development LLC and Boston Properties Inc., “are almost uniformly offering rent deferral—to delay payments, but not waive them,” he adds. He hopes that the next phase of the stimulus plan addresses the reality that restaurants can’t get fully operational until the public health crisis has passed—and doesn’t mandate specific dates for loan forgiveness. “Otherwise, businesses fail, landlords fail, banks are left holding the bag,” de Rochefort says. “Good luck putting that all back together.”

In Chicago, Rob Katz, co-founder of the Boka Restaurant Group, which operates 20 properties including the popular Girl & the Goat, is negotiating with banks on his leases. Part of his calculations are based on his understanding of the building owner’s liquidity. “A landlord who has owned a property for decades and carries zero to little debt has the flexibility to be lenient,” he says. “From them we might ask for 90-day rent abatement. If I have 96 months on my lease, make it 99 months.”

Katz is asking his landlords for full rent abatement for April and at least half of May. He says he’s been able to negotiate with the small banks that hold some of his other leases, such as Illinois-based Wintrust Bank. He also wants the next phase of the stimulus package to extend the forgiven rent provision from the current eight weeks under the PPP to at least 12, with an open-ended start date that anticipates when restaurants might actually reopen. “I can negotiate April with my landlords; I know I’m going to need help in May and June,” he says. Katz has applied for loans under the PPP; he says that even if he doesn’t meet the requirements and has to pay portions of the loan back, the 1% rate makes sense. “Listen, March was a disaster for us, we won’t reopen in April, it looks like May is a nonstarter, I have no assets coming in,” he says. “If the loan is at 1%, it’s cheap money, I’ll take it.” 

The Landlords

Will Donaldson is the chief executive officer of the Politan Group, which operates six food halls in such cities as Chicago, Houston, Miami, and New Orleans. Each has been closed for almost three weeks due to local shelter-in-place rules.

Donaldson has waived rents for his tenants “until further notice,” he says. The people in his food halls are invariably artisanal food makers working behind counters to sell their specialty product. “Our guys are the most fledgling of entrepreneurs, there’s not a question that they could pay rent,” he says. He thinks the government should consider hitting the pause button for six months and waive rents, in a manner similar to President Franklin Roosevelt’s actions during the Great Depression. He admits that his own landlords “aren’t there yet” in terms of pausing rent.

Other landlords have scrambled to create a one-size-fits-all approach to their tenants in an effort to respond as quickly as possible.

“We’re offering tenants the option to dip into their security deposit for the first three months,” says Steve Gonzalez, the head of retail leasing for TF Cornerstone, a landlord that leases to 11 sit-down restaurants and 15 quick-service restaurants in New York City, and three sit-down and six quick-service locations in Washington, D.C. After that, tenants can pay rent based on a percentage of their sales that month, and after that they’ll go back to paying the regular rent that would have been due under the lease. That way, Gonzalez says, “we’re willing to absorb the downside, but if there’s upside, it’s good, too.”

The response has mostly been positive. “It’s a mixed bag. Some have been really appreciative that we came out with this really fast,” Gonzalez says. Others were hoping for something like rent deferment, but the majority “have been pretty pleased with us doing something rather than nothing.”

“I hear calls of ‘cancel the rent!’” says Jeffrey LeFrancois, executive director of New York’s Meatpacking Business Improvement District. “But a lot of property owners are in situations that aren’t dissimilar to restaurants” in that they have their own financial obligations and loans to pay. “Not many landlords are reaping pure profit from tenants,” he says. “They don’t want a tenant not to reopen. Then they have empty storefronts to deal with, and we are going to see a lot of those.”

Looking Ahead

One of those storefronts might be Caffe Dante. Pride is trying to be proactive. At first he was forced to lay off 45 of the original Caffe Dante’s 49 employees; now he’s rehired 12 and started a cocktails-to-go service. All of the proceeds, he says, go to paying for his employees’ health care, providing a 5 p.m. “family meal” for current and past employees, and donating 200 meals a week to hospitals. (This location, given its ongoing payroll, should qualify for stimulus money.)

After being served notice, though, Pride says he’s beginning to despair. “Here I am, I’ve got no money, and the only money that’s coming in is going to take care of people in need,” he says.

“I’m not naive enough to just say to my landlord ‘we can’t pay rent, you have to deal with it,’” he continues. “But there has to be [a rental agreement] that helps us run our business in a way that we can focus on being a good tenant for a long time.”

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