The biggest factor determining whether a restaurant or bar business can survive this pandemic — more important than pivots or its customer base or neighborhood — is the relationship between the tenant and the landlord. Or more specifically, the willingness of said landlord to cut said tenant a deal.
Some people are making concessions, whether it’s temporary or longterm abatements or newly structured partnerships. And some landlords, even some without mortgages, are letting tenants walk.
To get a sense of what it’s like on the inside of these negotiations and deals, we invited hospitality lawyer Jasmine Moy on the Eater’s Digest podcast this week to talk about the deals she’s seen, why some landlords prefer empty storefronts to reduced rents, what kinds of restaurateurs are actually signing new leases right now, and how it all works with hotel/chef management deals.
The biggest takeaway: “It’s important, more important now than ever, to not get into a longterm relationship like this with someone who you don’t think is a good person, with someone that you don’t think you trust, with someone who you don’t think feels that your business is an asset to their neighborhood or to their property.”
Listen and subscribe to Eater’s Digest on Apple Podcasts and read our full conversation with Moy below.
Amanda Kludt: So Jasmine, tell us what you do and the kinds of clients you work with, and then also how the pandemic has affected your business.
Jasmine Moy: Sure. I’m primarily a transactional attorney, which means I’m a business attorney who does nothing but looks at contracts all day, and many of those contracts are leases. So when all of this was going down, I was in the middle of a half a dozen leases, six or seven different leases, that were in various stages of negotiation. The minute people realized that this was looking bad, March 12th or whatever day the shutdown occurred, all of those offers to find leases got pulled by the tenants, by the person who was looking to get into the space.
Daniel Geneen: Right.
JM: Because I think most of these people saw the writing on the wall. They realized that the rents were possibly going to drop and that certainly there would be a lot more empty locations available to them on the other side of this.
DG: And also it wasn’t fertile ground to open a restaurant.
JM: Oh, sure. Yeah. I mean, not only that but the idea of the cessation of all of these services. People weren’t going to be able to... We weren’t sure if any construction was going to happen, and so it certainly doesn’t make sense to commit yourself to a 10 or 15 year lease at a rent that you think is not going to be great in 6 months, with work you’re not sure when it is going to get done, for a restaurant that you’re not even sure is going to be able to operate the same way that it might have pre-COVID.
AK: It’s become clear that a lot of restaurants’ ability to survive depends on their relationship with their individual landlord and whether or not that landlord is willing to cut a break. Over the last 5 months have you seen a willingness to cut breaks to these tenants, or is it just all over the map?
JM: Yeah, I would say that this is the one thing that has really, I think, surprised me, is that for all the years that I’ve been doing this, I think the general perception is that landlords are greedy jerks and who cares if you don’t like your landlord, just sign the lease and mostly they leave you alone until you’re ready to go. But I do think that this has really brought to light that there’s an honest to God difference now in who you’re working with, the integrity of who you’re working with, and that I think people should be much more selective going forward about their landlord.
That being said, I want to caveat this by saying that I’ve seen this happen both ways, in that you have a landlord you’ve love, but maybe he dies or maybe he sells the building and then you get a landlord you hate. So even signing a lease with somebody, does not guarantee that, for the rest of the term, you’re going to be taken care of and you’ll have this amiable relationship. But I do think it’s important, more important now than ever, to not get into a longterm relationship like this with someone who you don’t think is a good person, with someone that you don’t think you trust, with someone who you don’t think feels that your business is an asset to their neighborhood or to their property, and who don’t feel like they value you as a tenant, and that they don’t give a shit about who’s there, whether it’s a restaurant or a bank or whatever. So I do think that that probably is going to be much more important going forward.
And I don’t want to say that even a nice landlord or having a good relationship with the landlord, in my experience, has ensured a better lease deal. I think it helps to have a certain amount of goodwill and a good relationship because it means the conversations come are much more open and productive, but that doesn’t mean you’re still going to get to the place where both people need to be, especially if the landlord has a mortgage on the property or is otherwise leveraged or otherwise has their own liquidity or cashflow issues. Some of those folks, their hands are just tied. They’re like, “We’ve talked to the bank, the bank is only going to give us as much. We can’t give you the kind of discount you’re asking for.” And a restaurateur then at that point, it has to have a come to Jesus moment and they’re looking at their numbers and they’re saying, “Either I can make this work or I can’t make this work.” So, you know, a good relationship or a nice landlord, isn’t even the end-all-be-all, it depends on what the surrounding situations are for that specific landlord.
AK: And is it that the corporate landlords are more likely to cut a deal because they have more capital, or is the other way around? They’re less likely because they’re less personal and less-intimate?
JM: Completely anecdotally, the large landlords are making much better deals than small landlords, and I do think that this is directly related to their ability to negotiate with their banks, to their liquidity, and to their financial diversification and packages. A huge developer might not need all of the rent money as urgently as maybe a small landlord needs, or a mid-sized landlord needs it. But completely anecdotally, the best deals I’ve seen and I’ve heard of are from larger landlords, institutional landlord.
DG: So can you actually talk us through that, like what was the trajectory? So for what, you said like 6 weeks you weren’t doing anything because people weren’t negotiating new leases, and then what started to happen? Because we started to hear that restaurants were going to their landlords and trying to cut deals, but was that the next wave of business that you were doing?
JM: Well, so what happened is right when all of this hit, I sent everybody an email and I said, “Here’s what we know, here’s what we don’t.” The PPP then came about and I was like, “Here’s the deal with the PPP. Here’s how you can, and can’t spend it.” Sit down with your bookkeeper and your accountant, start running these numbers, because we are going to eventually have to put offers together with the landlords, but I was also immediately approaching the landlords saying, “Hey, can we get an agreement here that you’re not going to try to send default notices.” Which is what you send someone who’s behind in rent in order to further the eviction proceeding. I said, “Can we have an understanding here, you’re not going to send any of default notices, you’re going to give us time to work this out?” And everybody immediately said, “Yes. Yes we’re going to give you time, but let’s see how this shakes out. Let’s see about the PPP. Let’s see if the amount of PPP that you can use for pay for rent, let’s see if that changes.” Which it did.
So nobody was willing to put anything on paper until they, I think, let the dust settle a little bit, but it was my recommendation that everybody open a line of communication saying that they want to talk about it, saying that they were ready to have the conversations, but then nobody wanted to have the conversations right then. They all wanted to wait a couple of months to see how bad the virus was going to get and all of the other things before they were willing to make a deal. So I don’t think any real deal, like the substance of conversations about what the deals look like, happened until really the shift in the PPP requirements changed, and that’s when everybody started to get a better handle on their financials.
AK: And that’s when the Paycheck Protection Program loans shifted from what, 75% on your staff to 60%?
JM: To 60, mm-hmm.
AK: So then people could spend much more towards their rent?
JM: Yeah, exactly. And I think that actually I was making a lot of arguments at the time about not paying rent because such a limited amount of the PPP was being able to be used for rent, and having that shift, I think, I don’t want to say it like pulled the rug out from under me, but it definitely changed the argument that I was making and made my argument much less-strong about not paying rent during those closed months, because everybody knew. If you have somebody EIN, you can basically, for a while, look up how much money they’ve gotten, so many landlords had a sense of how much money their tenant had gotten and said, “You could pay rent with this. You could pay 100% of your rent with this for these number of months.”
JM: And so in negotiating, I really switched my tac. I started saying, “Okay, well yeah. We can use that money for rent and we will use it for rent, but the winter is going to be impossible. We’re going to have some sidewalk dining until October or whatnot, but November, December, January, February, they’re going to be really, really hard. If you’re going to take a hit on this, I need you to take a hit then. Can we agree to three months of rent abatement, and then maybe another month that you use the security deposit as rent or something, we need four months of a rent-free period in the winter.” And I’ve been having decent success arguing for that.
So certain landlords are willing to take some sort of a hit, but they’re reluctant to take a hit on the rent for the long-term. They are very reluctant to change the rent. But they will, for the next year, come up with some sort of alternate situation, but they don’t really want to change the rent going forward.
DG: Oh, interesting. So they don’t want to change what’s on the agreement, but they’re willing to take a cash payment of something and then combined with something else. Actually, could you actually give us some examples of some deals that you’ve actually worked out?
JM: Sure. The best deal that I’ve seen from a client of mine was a huge developer, I can’t say which one, but it was a huge developer, and they offered a full rent abatement through the end of the year, so through the end of December, and then 50% off their rent for the entirety of next year.
AK: Oh wow.
JM: Which I think is great. But this is not a sit-down restaurant, this is more of a quick service, so I think that the rent, they have a smaller footprint, the rent is not insignificant, but it was smaller than say someone who has two floors of full dining rooms or something.
JM: So that’s the best deal that I’ve seen. I have a bunch of weird sort of wonky hybrid situations where they got into the weeds on their numbers and agreed to various low-base rents, supplemented with percentage rents for the next two years, and that, for any three month period, if the percentage rent exceeds whatever the base-rent would have been in the lease, then you switch back to the lease rent. Everybody wants to get back to the lease rent, but it’s a matter of when and what triggers that, and for how long you can get a discount when we all are not exactly sure what the next 12 to 18 months are going to look like. So people are finagling very complicated, weird tailor-made deals, but, and like I said, I’m trying to prioritize free rent through the winter so that some folks can try to just get through the year and we can hopefully be in a better place next year and come spring.
DG: And will you work with new people who are interested in talking to their landlords about making a deal, or are you only focused on working with people where you did their contract initially?
JM: No. I will totally talk to... I’ve given out a lot of free time, I will say, to existing clients.
DG: Can’t imagine.
JM: I have said, “This sucks and I don’t want to pile on, I’m going to give everybody a certain amount of free time to try to work this out.” But for new clients, I wouldn’t do that. I mean, that’s an offer for the same for existing clients. New clients I’m happy to do it, but I’ve told them, “Listen, the last thing they want to be doing is spending money on a lawyer.” So what I’ve been doing is sending people emails that say, “If I were you, this is what I would do. I would reach out to my landlord. This is what I’ve put together. I would put together a proforma, I would really put together a proposal, I would explain it, I would make my best effort to get a deal done with the landlord without involving me, until you’re at the point because you want to document it and like at lease amendment or something.” Because I just didn’t want them to waste money on me when I thought a lot of this they could do themselves. And a lot of it, they had to do themselves.
So I’ve been telling people, “Hey, have enough conversations on your own first, and if you’re not having productive conversations, come to me.” But realistically speaking, I’m not a litigator. So if people are fighting with their landlord, if their landlord is trying to evict them, if they can’t come up with a deal and the landlord is threatening to sue them for six months of back rent that they haven’t paid, I’m referring that work out to people who spend all of their time in landlord-tenant court, to deal with someone who can fight this in the courts and try to get some protection that way.
So, yeah. I would certainly take in new clients and help them negotiate, but a lot of the negotiation is on them to really figure out where they max out and what they have the capacity for. They have to do all of that work first, before I can help them get to where they need to be. If that makes sense?
AK: A common question I’ve been getting is, why would a landlord rather have a vacant space than have a tenant that’s paying a discounted rate? So I know that these people have mortgages if they are mom-and-pop landlords. At first I thought it might be tax breaks, but then I see that’s not necessarily the case, especially in many cities. So what is the motivation there?
JM: It is a direct relation that the rent has to the value of the property. And when I talk about the value of the property, I’m not even talking about the assessed value of the property, I’m talking about the value of the property to the bank and the security that the bank sees in that building or in the space, because the kind of money a bank will lend to you, is directly related to how much income you can see from the property, and by income on the property, all you’re talking about is rent.
So the minute you lower the rent, you lower the ability to borrow money or to get any kind of liquidity from a bank. And so people are very reluctant to do that. So they would rather, versus lowering the value of their building and reducing the rent, they would rather leave it empty. And I’m not a tax attorney, but I do know that there are various write-offs and things you can take if you’re taking a loss on any given year, so there’s no financial incentive to lower the rent on any space, they don’t take a hit. The hit is to them in terms of what they have access to as far as money goes, capital goes.
So, yeah. Until we tax people, until we disincentivize people, or find a way to disincentivize them from leaving a premises open...I talked to a developer who said he could leave a space open for like 6 years before he’d actually start to lose money.
AK: Oh wow.
DG: Oh my god.
JM: Which is a really long time, which is why you walk in the West Village and everything’s empty, it’s because they can.
AK: Unless there’s actually a vacancy tax, like in San Francisco, people are just going to keep doing this. They will let their tenants walk, rather than lower the rent for them.
JM: Yeah. Unless, and again, this goes back to what we talked about as far as a landlord being a partner, sometimes landlords need somebody in there, food and beverage in particular, because maybe they’re developing something in a neighborhood that’s a little bit of a dead zone that doesn’t have a coffee shop within half a mile, that doesn’t have X, Y, or Z. Those partnerships are bound to be better partnerships because they need you a little bit. So to the extent that you’re in a neighborhood that has a ton of walk by where a landlord doesn’t really care what is in their space. Yeah. They’re not going to give a shit and they’ll leave it open. They’ll let you go, they’ll leave it open.
The people who I think are more incentivized to work out a deal are the people who need you for whatever reason, because they’ve got this mixed-use property because they need a grocery there, they need a coffee shop there, they need a restaurant there. So I do think those sorts of projects are probably going to be more attractive to people moving forward, because the landlord actually has a vested interest in your success.
DG: So just in terms of the deals you’re seeing, that makes sense that the larger corporate landlords would be much more interested, or would be entirely uninterested, in renegotiating a contract, because the last thing they would want to do is have a lower rent on paper, because they can’t borrow against it.
JM: Uh-huh (affirmative).
DG: That’s so interesting.
AK: And the mom-and-pops too.
DG: Right. Right, right. So if they do cut restaurants or cut anyone a deal and say, “We’ll allow you to skip rent for the winter.” Does that not leave any kind of paper trail for them and the banks wouldn’t see that in terms of in their borrowing practices?
JM: So what happens is the base rent on paper is the base rent.
JM: So in all of these amendments that you’re drafting, you’re talking about a base rent, but then maybe discounts.
JM: So the base rent is the base rent. Nobody is lowering the base rent, they’re sort of adding verbiage to give discounts in the same way in any lease that you sign, you have a free rent period. So you have a base rent, but the rent is abated, which means you just don’t pay it for a certain period. So what all of these amendments are, are like amendments at the base rent, but with percentage abatement. Percentages of the rent abated so that the base rent stays the same, it’s not being altered. And when you give that to the bank, while the bank understands that for the next 6 months there’s some differential there, they know that after that period, the base rent is the base rent and that’s what they’ll be able to see.
And banks are giving forbearances on mortgages and things like that, for the most part, so these landlords, by a large, are not having to pay mortgage during periods in which they’re not collecting rent. But every landlord has a different cashflow situation. And listen, some landlords don’t have mortgages on their properties and some lands are just being greedy.
JM: Some of them are just... I have a client who had just built, of, The Banty Rooster, Delores Tronco, had opened The Banty Rooster in the Village, put a lot of money into that space and made it beautiful, and I think her landlord was completely, they have no mortgage on the property, her landlord was completely unwilling to make a deal with her, because I think she’s looking at it and saying, “Oh, you just added millions of dollars worth of improvements, and so I’m going to be able to sell this I’m not going to have to drop the rent because someone’s going to get all of this stuff.”
AK: Wow. And that was a new restaurant, yeah.
JM: Yeah, that was a new restaurant. And she might be right.
DG: So in the case like The Banty Rooster where, obviously, you’re not happy with, I guess, the ethics of the landlord, will you steer future clients away from that property?
JM: Oh, 100%.
JM: Yeah. That landlord is someone who, I hope Delores doesn’t mind me talking about a little bit, but Delores is a very diligent worker. She’s so smart, she’s so organized, she communicated at every turn, she wanted this woman, her name is Shelley, she wanted Shelley to be happy at every turn. And I just feel like Shelly did not even meet her halfway. From the time she signed the lease, they dragged their feet on doing the work that they were supposed to do. And I think this woman’s not like a developer, I think this is like an investment property for her, I don’t think she has three or four buildings on her management, I think this might be her building, she lives in Connecticut somewhere. I just don’t think that she cares because she’s not invested in the neighborhood, she doesn’t live there because she doesn’t have a whole lot of buildings in the neighborhood.
Some people are very invested in making a neighborhood nice because they bought 15 buildings in that neighborhood. But this woman has been difficult from start to finish, and so if somebody came to me saying, “I want to sign a lease here.” I would probably strongly recommend against them doing so. She’s proven herself to be someone who is completely unreasonable.
DG: So it might not be the case that she sees this as a huge opportunity to get someone to pay for the work that they’ve done, and maybe just that she understands rent on a very fundamental level. If you don’t get paid rent, then you kick the person out.
JM: Yeah. I mean, it’s hard to know exactly what’s going through her head at any given time, but yeah. That was one of the only landlords that I’ve dealt with, who wasn’t willing to give a little bit. And she really wasn’t. So most people are willing to give somewhat, but maybe it’s not enough. If I’m the operator and I’ve done the math and I say, “I really cannot survive unless I have X.” And the landlord is coming in at X plus $3,000, they just can’t make it work.
JM: But that doesn’t mean the landlord didn’t try, it doesn’t mean you didn’t try. It still might not work.
DG: So I guess maybe on a lighter note, are you starting to negotiate deals for future restaurants that are maybe better than you would have expected, or what everyone’s talking about is like this wonderfully exciting time to plan for a new restaurant?
JM: Yeah, I am. I’m in the middle of like four different leases right now, which is sort of a lot for me, I usually only have one or two at a time. I am, and all of these concepts are casual concepts that are prime for delivery, a Chinese thing here, a Vietnamese thing there. So spaces that were already planning on doing a ton of takeout and delivery any way. Those people are doing it. And I have to say, I don’t think market rents have really dropped so much yet. I do think, when I talk to brokers, they always say it takes at least 6 months, if not 12 months, for market rents to reflect the situation on the ground.
So I don’t think that these rents that I’m seeing are super, super below market, but they just are spaces that people saw were available and think that they can support with a take-out and carry-out, take-out and delivery, only. Nobody’s going to sign a lease right now if the rent is so high that they need to dine-in or that they need to have dine-in alcohol or that they need a cafe or outdoor seating section. And so these are spaces a little deeper in Brooklyn, a couple of spaces in Queens, spaces where the rents are generally lower and more approachable anyways.
AK: Are the brokers you’re talking to predicting next summer would be a good time? Like, let’s say I have some savings and a concept and I want to open a new thing, should I just sit on it until next spring or summer?
JM: You know what, well, number one, a broker wants their brokers fee.
JM: They’re never going to recommend to anybody to not find something, they’re always going to be incentivizing somebody to find something as soon as possible so that it can start getting paid. But yeah, I do think if rents are going to drop it’s going to be awhile. That said, a landlord who has a mortgage on a property, who has to pay rent, and who doesn’t have the cashflow, and who is in danger of defaulting on their loan and losing the property in foreclosure, they will lower their rent. They will drop the rent to whatever the rent needs to be in order for them to get paid. So there will be some people who will drop the rent because they are desperate for tenants, but that’s not going to be everybody. That’s only going to be the people who don’t have the cashflow otherwise.
So rents will drop and some rents will drop a lot, but it’s all going to depend, I think, on that exact landlord’s situation, the trouble that they’re in with their bank or whatnot. And I don’t know that it will be neighborhood-specific, and I think there probably are certain neighborhoods that are, I think the West Village, I think of Soho, where rents are just consistently high because people just walk around those neighborhoods. They’re good neighborhoods to open spaces in, they just may not drop there, like at all.
AK: I know you also do partnerships between chefs and hotels and help hotels fill out their spaces. What is going on in that world?
JM: Yeah. So a few hotel projects that I’m working on, I do work for Virgin Hotels, some of that work is so far planned out. These are spaces that are in construction that are not going to open for another year or 2 years. I’ve got a project in Dubai, that’s like 3 years away, but all of that is moving as if nothing is happening, literally as if nothing is happening,
AK: They’re not changing the concepts at all or anything like that? They’re just like, “All right, let’s keep going.”
JM: No, and I’m like, “Is this...?” It’s not necessarily my realm to tell these larger corporations that I think they need to be taking this more seriously, but it’s... No, all of these hotel spaces have rooftop bars and outdoor spaces and things like that. And for the most part, the hotel deals, the person running the food and beverage gets paid a fee, a management fee, that’s based upon sales. So it’s in everybody’s best interest for the restaurant to do well, and if it doesn’t do well, everybody takes the hit. The food and beverage operator and the owner take the hit. So most of these deals or percentage deals. There might be some like base-level to the fee that is sort of low, but otherwise it’s on a percentage basis, so the way that we are changing those documents is usually the hotel owner has the right to terminate the management agreement if sales are not at a certain level. The things that I’m negotiating are like taking away the ability for them to terminate based on sales if revenues are low, because we’re still dealing with the pandemic.
AK: Right. Right, right.
JM: I’m sort of trying to take away the ability to fire the food department operator for causes that are beyond their control, but otherwise those documents stay pretty consistent. But for the folks that I have who are doing food and beverage management in hotels, a lot of the space is indoors. They don’t have a ton of outdoor space depending on where they are, they’re making do, they’re doing their best, but they’re facing the exact same issues as restaurateurs are in terms of needing to have the tables far away, fighting with people who don’t wear their masks. And all of the other issues, the operational stuff, is very consistent with what a normal restaurateur is dealing with.
AK: They just don’t have the burden of rent.
JM: It’s usually a percentage rent in the hotel food and beverage deals. It’s not technically rent, the quote unquote rent, it’s not usually fixed, it’s usually a percentage. So again, when everything is on a percentage, rising tides lift all boats, et cetera, et cetera. So that would hotel’s quote, unquote, rent, the percentage they take from those sales is going to be lower. And sometimes that is a problem, because you don’t ever build a hotel with cash you have, you build a hotel with the $50 million you borrowed from the bank or whatever. So that is affecting a lot of hotel owners, they’re having real cashflow, liquidity issues.
DG: Quick question on that, why would they want to kick out a restaurant that they need? Because you need a food and beverage operator in a hotel space. What would be their incentive to try to kick out an operator now, even when the whole thing isn’t making?
JM: Well, I think you look at the flip side of that. Why are we paying this person a premium? There are a lot of hotel companies that will open a restaurant and they’ll run it, and it, frankly, it’s probably going to be a crap restaurant. It’s going to be fine, not great. I’m thinking of, no offense to Kimpton, but I’m thinking of Kimpton who usually doesn’t run food and beverage. If you’ve ever stayed in a Kimpton, it’s fine, it’s not amazing if you want somebody good.
DG: Like a Jean-Georges?
JM: Yeah. If you want a Jean-Georges, if you want to zhuzh it up, if you want that food and beverage operator to be a draw and to increase the room rate, you pay that person a premium.
JM: You pay them for it. And so I think some of these relationships are, if they’re being terminated or considered being terminated, it’s because they’ve paid a lot extra for a chef to bring in people who are not going to exist no matter how famous that chef is. So why spend that extra money? I think it’s the... But yeah, they still need food and beverage, but they can maybe cobble something together and themselves, or maybe they can find a no name company, this anonymous company, who just runs in and knows how to make eggs in the morning and it’d be done with it.
DG: Not in the case necessarily of Jean-Georges, but a Jean-Georges might be getting paid right now, even though they’re not selling any food.
JM: Yeah. If you are famous enough or good enough, what we would you do, you’ve negotiated a base fee. So the fee could be anywhere between $150,000 to $500,000 a year. That being said, I’ve talked to people who are familiar with the workings of some of these other chefs, other deals that are not mine and not of my clients, and they’re saying, “We haven’t been paid.” So maybe they’re owed that money. They probably have not been paid that money, so you may have a lot of food and beverage operators who are leaving hotels because they haven’t been paid the minimum that they negotiated.
JM: The hotel owner might just be sort of stiffing them on that because the same reason a lot of restaurateurs are stiffing their landlords, they just don’t have the money.
AK: Right. Because hotels are just so screwed right now.
JM: They’re so screwed. They’re so screwed. Yeah, I think a lot of those deals are going to fall apart, just because they’re expensive. But when everybody’s going out to eat and when everybody’s traveling, it’s a benefit to them, net benefit, but right now it’s a net negative.
AK: Cool. Well, Jasmine, where can restaurateurs find you?
DG: Thank you so much.