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A recent survey found that 87% of New York City’s restaurants, bars and nightlife venues couldn’t pay their full rent in August. The culprit, of course, is pandemic restrictions imposed on these businesses by government.
Further complicating the situation, 60% of the businesses surveyed said their landlords hadn’t waived any of their rent in response to the coronavirus pandemic.
For those landlords who are offering concessions (or looking to fill vacant restaurant space) percentage-only rents may be the most likely outcome.
That means switching from fixed-rate rents to rents based only on a share of the tenant’s gross sales or revenue.
Thin profit margins
Percentage-only rents are especially helpful in an industry with notoriously thin profit margins of around 3%-6% and, now, with slumping sales.
The percentage applied to a restaurant’s rent in a pandemic-era agreement typically ranges from 5% to 15%. The figure sometimes includes common-area expenses like property taxes and insurance, but sometimes excludes them.
Other considerations
In some cases, the percentage-only rents come on the heels of rent deferrals that went into effect earlier in the pandemic.
Not every restaurant can take advantage of percentage-only rent, though. For instance, some landlords are limiting percentage-only deals to tenants that operate multiple restaurants rather than just a single “mom- and-pop” location.
Without percentage-only rents in place for some restaurants, vacancy rates will likely climb even higher.
Some restaurant landlords might even benefit from percentage-only rent if a tenant’s sales numbers happen to rise above the average. Still, the most important consideration for a landlord agreeing to percentage-only rent is to simply keep a restaurant space occupied.
The National Restaurant Association reports that in the first six months after pandemic shutdowns took effect, nearly 100,000 restaurants closed either permanently or for a long-term period. Thousands more could be on the chopping block.
For the percentage-only rent structure to work from the landlord’s perspective, a restaurant must supply up-to-date sales and revenue data. This puts landlords in a “trust but verify” position.
Some believe the percentage-only rent model will remain as a restaurant lifeline for the next year or two before traditional rent structures kick in again.
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About Beau Beach, MBA CCIM
Beau is a tenacious Commercial Real Estate Broker, author and adoring father of four. His clients appreciate his no-nonsense demeanor and his legendary work ethic.
Beau leads Beachwood which is a commercial real estate broker for sellers in the Nashville, Milwaukee and South Florida markets.
He’s the author of the books The 3 Reasons: Why Most Commercial Properties Don’t Sell and True Wealth: What Every Seller Should Know About 1031 Exchanges.
Beau can be reached at 800-721-3287, click to schedule a call or Beau@soldbybeachwood.com