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How to Renegotiate a Restaurant Lease

Ingredient costs are spiking, for reasons that are proliferating. Competitive employee pay is at an all time high. Additional RRF appears increasingly unlikely. And all of that’s on top of restaurants’ need to recoup sales from the past two years. After two extremely difficult years, the list of financial challenges the industry faces unfortunately isn’t decreasing, and many independent operators remain searching for ways to cut costs in order to stay alive. If you’re among them, and haven’t done so already, now may be a prime time to examine and renegotiate your lease. 

“It’s 100% an excellent time to renegotiate,” says Bill Himmelstein, a tenant representation broker and CEO of Tenant Advisory Group. “The vacancy rates are high, which means rental rates have come down, and a lot of restaurateurs are probably in a lease that’s well above current market rates.”

Your landlord isn’t obligated to decrease your rent, even if you’re paying significantly above other options in your neighborhood. But it’s often in their best interest to try and keep you as a tenant. 

“Real estate is generally a long game, and if you’re a landlord and you lose a tenant, it’s going to hurt your property value,” says Himmelstein. “Rather than having a vacancy for who knows how long, it makes a lot of financial sense to drop the rental rate to keep that restaurant there. And the worst they can do is say ‘no’.”

So how should you start the process? We asked Himmelstein to share his top advice for successfully renegotiating a lease.

First, assess your securitization. 

Before commencing a renegotiation, it’s essential to look at the securitization clause in your lease. This is essentially the collateral you committed to your landlord, typically in the form of an upfront cash payment and/or a personal guarantee, and its makeup will determine your current degree of leverage.

If your securitization includes a personal guarantee, then your landlord knows even if you walk away from your lease, you’re still going to owe its value. Meanwhile, if you’re solely committed to a cash security deposit, now you automatically have more room to negotiate. “Here you can say, ‘Yes you might be keeping three months of my rent if I walk away from this lease and go down the street to sign a new lease, but I’m going to be saving 30-percent [with that new lease], and I’ll make up that three-month deposit in eight months,” says Himmelstein.

You want to prepare a strategy before entering a discussion with your landlord. And by understanding your securitization, you can determine your best options – whether that’s rent reduction, rent deferral, or potentially having to sublease.

Research the competitive market rate in your area.

Restaurant closures have forced vacancies, which Himmelstein notes has caused commercial rental rates to go down in many areas. Finding out the average rental rate in your area could be your number one key to a successful lease renegotiation.

“You absolutely need to get those competitive offers – it’s hard to negotiate from a position of leverage when you don’t have other offers on the table,” says Himmelstein. 

Even if your research reveals you're already paying well below the current market rate, this is important, as it will dictate your strategy moving forward. In this case, it’s going to be more challenging to ask your landlord to lower your rent, and you may be better off proposing alternative options, like rent deferral, from the get go.

Come into the discussion with a transparent, collaborative approach, and be prepared to extend your lease term.

Be open with your landlord about the specific challenges you’re facing so that they can understand the daily obstacles and expenses you’re enduring. And if you’re in a dire situation, clearly spell that out. Again, it’s generally in a landlord’s best interest to discuss a renegotiation before letting a tenant walk away, making it important to address if that’s a likely outcome.

You also want to take a collaborative approach. “It’s less about gearing up in your battle gear, and more about, ‘Hey listen, I have an idea that I think will make sense for you’,” he says. “You’re trying for a win-win approach.”

Often your best tool here is being open to extending the terms of your lease. Then you can negotiate a trade. For example. You may offer to extend your tenancy an additional three or five years in exchange for paying $3 less per square foot in rent.

“That additional term, even with the reduced rental rate, drastically increases the value of that building. That’s how buildings are valued by potential buyers or lenders, so the value for a landlord in a restructure is really on the extension of term,” says Himmelstein. 

If a rent decrease is off the table, ask about other options.

“If you already have a below-market rental rate or your landlord’s not willing to reduce your rental rate, I’d focus on free rent – start there,” says Himmelstein.

Free rent can come in the form of rent abatement, a total suspension of rent with no expectation of future payment, or rent deferral, requiring you to pay back rent in the future. Rent abatement was more common in the early stages of the pandemic, although partial rent abatements may still be possible, especially if you’re willing to extend your lease terms. Rent deferral may offer more success, but make sure to agree on terms that give you a realistic time frame to generate the rent money you’ll need to pay back.

A third option is to negotiate a percentage-based lease. Instead of committing to pay a flat monthly rent, you pay a percentage of your gross sales each month. “I’m not a fan of it because I’d rather have a known expense, where I can look at my books and say, ‘I know I’m going to pay this much in rent this year’, not some unknown number based on how well we do,” says Himmelstein, noting this is his least preferred option for clients. “But if we’re talking about a dire situation, where the life of your business is in the balance, then it might make sense.”

There are a variety of ways to negotiate a percentage-based lease, including a hybrid model where you still pay some rent each month, plus a proportion of sales, or an agreement where you pay a monthly percentage once you reach a certain number in sales each month. 

If you can’t come to an agreement with your landlord on any sort of renegotiation, and you’re unable to financially keep operating your business, you may need to look at subleasing. In this situation, you’re likely going to want to hire a broker to help you negotiate the terms and get your space listed on commercial real estate databases.

Hiring an advisor is a step Himmelstein strongly encourages for any type of renegotiation, even if you’re asking for a straightforward rent reduction. A real estate attorney can help you understand the legal implications of what you’re planning. And for the actual negotiation process, you’ll likely want to hire a tenant broker, who can educate you on market conditions and help craft the best strategy for your business.

Grace Dickinson is a reporter at Back of House. Send tips or inquiries to grace@backofhouse.io.

[Photo by Helena Lopes from Pexels]

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