The number of independent restaurants has declined in the past two years, leaving landlords with empty buildings. In light of these economic realities, a number of restaurants, including chain, independent and franchise businesses, have successfully worked with their landlords to lower their rent. In a Foodservice Radio interview, Lou Boemia, Vice President of Lease Resolutions, Inc. explains how the focus of many landlords has changed and how to best approach a landlord for renegotiation.
“Landlord focus has been on tenant retention,” Boemia says. “It is cheaper to reduce the rent than it is to evict and replace the tenant because you have brokerage commissions, tenant improvement allowances, taxes, maintenance and insurance, along with the legal costs.”
Boemia indicates that rents are returning to more realistic and sustainable levels. “Back when the economy was going gangbusters, rental rates set by landlords were based upon the development costs of the shopping center plus a rate of return on investment,” says Boemia. “We had a correction in fair market value rental rates. Now it has gone back to where it should be where the space, land or rental location is only worth what the retailer or restaurant can generate in sales volume.”
Boemia outlines several steps to take when renegotiating a lease. First, start by getting comparable rates rates of similar space in the area. This will determine if your rent is at or above the current market levels. “Next, look at your rent to sales ratio,” Bomeia adds. “For restaurants, your rent to sales ratio should be below 8%. Once you get above 8 to 10%, you start struggling.”
It is also important to understand the needs of your landlord so you can create a win-win situation. There are a number of different options to get the lease reduced in the short term, including extending the length of the lease or modifying the base verses percentage-of-sales ratio. Understanding your landlord’s financial obligations will help you propose a solution that works for both of you.
“Once you show landlords on paper that they are financially better off with the rent reduction, they are likely to come around,” Boemia concludes. “Landlords want to do what is most financially feasible.”
Listen to the full interview, at www.foodserviceradio.net/lease-reductions.html. Foodservice Radio is the 24-hour streaming internet radio station, programmed specifically for the food service operator with industry news, business feature and culinary tips. Foodservice Radio can be accessed through the website at www.foodserviceradio.net.
For more information on Lease Resolutions, visit their website at www.leaseresolutions.com.
Station Manager/Foodservice Radio