Advice from the Industry – Accrued Rent

It’s no secret that restaurants, especially independent and full-service restaurants, have been hit hard by the pandemic. And as common in distress situations, with crisis comes advice from all corners. Unfortunately, a lot of the advice being offered is not so good. Like the recent article featured in a prominent trade publication titled “How Restaurants Can Survive the Next Three Months” and then goes on to recommend “laying off your staff” as if that hadn’t been done early on. Or an earlier article that recommended the path to surviving the pandemic as “…maintain your maximum legal occupancy rate.” Or the dozens of articles recommending pivots of products and services with very few of them recognizing the investment, both financial and in energy, incurred in making such adjustments. Maybe the most egregious advice was the financial guru who advised against restaurateurs considering bankruptcy, because as he erroneously stated “It’s unlikely fees will be less than a quarter of a million dollars and oftentimes more.” and in doing so, may have deterred some people from the only financial protection they have.

So rather than shrug it off, I decided that with help from a lot of friends, we could gather and distribute some solid advice from restaurateurs and others who are dealing with the effects of the pandemic daily. More than 25 people including restaurateurs, chefs, foodservice suppliers, real estate consultants, financial service professionals, marketing and PR wizards, adult beverage distributors, investors, franchisors, franchisees, hospitality consultants (like me) and hospitality investors, agreed to participate.

Now seems a particularly good time to reach out to those who might need advice. With accelerated distribution of vaccines and the Restaurant Revival Fund enacted by Congress, it appears that this is a positive turning point for restaurants, especially independents and small franchise groups, providing the opportunity to regroup and restart. 

Our charge is to address one particularly relevant issue affecting the industry each month with the goal of offering some helpful insights and paths to help others deal with the problem that they might be currently facing. While 25 people is hardly a scientific sampling size, the group represents and works with thousands of restaurant units with deep connections in the industry. And so, while our results can be better called anecdotal evidence, it does provide a good indicator of the industry at-large.

The first question we’ve addressed is “accrued rent.” Our results indicate the majority of restaurants are facing significant back rent. While business is going to get better with warm weather (more outside dining available) and Restaurant Revival Funds are going to help struggling businesses, both increased business and RRF grants are going to compel landlords to demand payment.

Here are some quick numbers collated from the responses provided by the group. Please note that because many of the respondents represent multiple locations, most answers total to greater than 100% as those respondents typically have multiple answers to the same question.

• 77% – First-hand knowledge of restaurants with accrued back rent
• 90% – Those with rent in arrears, have accrued more than 3 months of back rent
• 70% – Landlords have been cooperative
• 40% – Landlords haven’t been cooperative but they haven’t been aggressively pursuing back rent either.
• 27% – Able to keep up with rent because business has been good enough and PPP funds were applied
• 73% – Stayed out of default because landlord agreed to change the lease terms
• 16% – Landlord forgave most or all of back rent
• 39% – First-hand knowledge of restaurants that closed because they couldn’t make rent payments and couldn’t work out terms with landlord

Now, here’s the part that my colleagues and I hope is helpful. All the respondents responded that the most important aspect of dealing with back rent is communicating with the landlord.

100% of respondents offered the following –

• Talking to your landlord is the first and most important thing you can do
  •  Don’t hide anything. If things have truly been tough in your restaurants, show the landlord your books.
  • Come to the table with proposals that you can live with instead of hoping the landlord offers a solution that will work for you
  • Remember that the best solution in this situation will be a win for both parties. Your restaurant remains in your chosen location and your landlord doesn’t have to find a new tenant
• Specific recommendations were more diverse with some recommending that accrued or deferred rent be spread out over the remaining term of the lease and others recommending pushing forgiveness of at least some of the amount. All agreed that payment of something is better than nothing and landlords are appreciative of whatever you can pay.
• One of the respondents had this to say – “Debt is debt and re-payment terms are critically important when it comes to cash flow. Some landlords will allow leases to be extended to cover the back rent and allow flexibility in terms of re-payment. You don’t want to survive all this pain only to prolong it with a debt load that you cannot afford.”
  In other words, don’t let your landlord push you into an unsustainable solution.
• Another respondent offered “Negotiate options with the landlord: 1. short term equity stake in the restaurant 2. highlight that finding a replacement tenant will be nearly impossible in this environment and they risk longer term vacancy if they cannot come to an equitable solution 3. position them as a stakeholder and keep open communication 4. discuss lease extension for deferred payments”

Finally, the respondents were asked for predictions about the industry if the pandemic continues throughout 2021. Of course, the answers were not very optimistic with most predicting significant closures and conversion of full-service restaurants to a fast-casual model in order to survive. Several cited both the financial and psychological impact as untenable. Fortunately, dramatic changes have occurred in just the few weeks since the questionnaire went out. Optimism is high for the economy in general (Goldman Sachs is predicting 8% economic expansion comparing Q4 ’20 with Q4 ’21) and for restaurants spurred by increased vaccinations, relaxing of operating restrictions and the economic relief offered by the newest stimulus bill.

We’ll provide more insights on this and other topics each month (next topic is staffing and employment as restaurant’s gear up for increases in business.) 

My sincere thanks to all the respondents. See you next month!