I wrote this article on location 3 years ago stressing that the only fair leasing rate for the restaurateur was a percentage rent structure and using 7% as the benchmark. At the risk of telling I told you so, that % rent structure is the only restaurant lease deals that can be struck post Covid.
Furthermore, if they didn’t have that % rent deal pre-Covid they won’t survive the pandemic unless their landlords offered them significant rent relief (abatement not deferral) and without the burden and paying back rent from profits that are now years away if at all. It was always hard for even the experienced operators to make a profit if their all-in real estate, taxes and CAM charges exceeded more than 7% of their gross volume. The difference between pre and post Covid is that you can longer convince yourself, investors, bankers or even landlords that you can survive without the amount of unknowns currently associated with dining experience without a % rent deal.
Getting everything right is no longer a guarantee of success. Great, food, competitive pricing, impeccable service is now overshadowed by cleanliness and distance between tables and a staff whose friendly face you could count on is now hidden behind a mask.
Restaurants now have to radically adjust to the consumer’s ever changing comfort level of diners, which seems to change hourly in some cities, and could grow worse in the near future. How could anyone possibly staff, procure fresh produce under that environment against the backdrop of an inflated fixed rent based on rent per s.f. that was negotiated under a completely different leasing environment?
It just doesn’t work; it never really did. Restaurateurs working for the landlord was always overrated. If in fact “we are all in this together”, the only fair deal moving forward for every single restaurant is a % rent structure.
