This article was written in the second half of April 2020 and California is still in a Shelter in Place status, which has been in effect since March 19, 2020. Since this date, only restaurants doing take-out and delivery are allowed to operate. All other restaurants and bars have been ordered to close.
The California Restaurant Association (CRA) recently estimated that 30% of all restaurants in the state that were closed during the Shelter in Place period will not reopen once the Shelter in Place has been lifted. There are approximately 80,000 eating and drinking businesses in California which means potentially over 20,000 of these eating and drinking businesses may not reopen.
This will result in thousands of fully built out restaurants that were in operation prior to the Covid-19 crisis not reopening due to the insurmountable financial debt that these restaurant operators incurred. These include massive accounts payables including debts owed to employees, landlords, various vendors (food, alcohol, cleaning supplies, paper supplies and equipment vendors, etc.), and debts owed to government agencies (California Department of Tax and Fee Administration-State Sales Tax; Franchise Tax Board (FTB)- California State Income Tax; Employment Development Department (EDD) – Federal Payroll Tax; Department of the Treasury (IRS) – Federal Income Tax and the local city and county taxing agencies).
For an owner operator of a closed restaurant and bar business to be able to reopen they will need to take care of all their past accounts payable liabilities mentioned above. Additionally if they want to reopen their closed business they will have to deal with the additional costs of reopening their business, which will include hiring and training new employees, dealing with the costs of any deferred maintenance as a result of being closed, purchasing new food and equipment products to operate and marketing costs to notify the public that they have reopened for business.
There are some government and private programs available to restaurant owners so they can regroup and try to reopen their business. Such programs include the following:
- Various Small Business Administration (SBA) Loans such as the Paycheck Protection Plan
- Low Interest Disaster Loans from the government
- Private loans and Grants from entities such as U.S. Bank, Amazon, Facebook, etc.
The above-mentioned programs include low interest, long term loans with some potential forgiveness of portions of these loans. There are also unemployment payment programs and others state grant and loan programs available.
As a result of thousands of restaurants not reopening, tens of thousands of restaurant employees, who are currently out of work, will not have jobs to go back to. However, thousands of the closed restaurants could reopen with new owners and new concepts, and many of the unemployed restaurant employees who were laid off could be rehired by these new owners and/or become restaurant owners themselves.
Some New Potential Restaurant Opportunities Post Covid-19.
These opportunities will present themselves in restaurants that closed during the Shelter in Place period which would include the following opportunities:
- Freestanding restaurants
- Restaurants with street frontage on the ground floor or on the ground floor of multi-use buildings such as office buildings, apartment buildings, retail buildings and/or industrial buildings
- Restaurants located inside of buildings without street frontage
- Restaurants located in shopping centers including community centers, neighborhood centers, fashion centers, specialty centers, outlet centers and regional centers.
Some Specific New Restaurant Opportunities Post Covid -19.
- New restaurant owners who were looking for restaurant opportunities prior to the Shelter in Place and/or have been looking for new restaurant opportunities during the Shelter in Place will possibly be receptive to looking at desirable closed down built out restaurant facilities whose former tenants gave possession back to their landlord. Their criteria for them pursuing these opportunities will be the quality of the location, the lease terms and whether the scope of restaurant improvements meet their needs. They may qualify for these opportunities with little or no key money plus receive incentives from landlords including some free rent and/or landlord contributions for tenant improvements.
- Former experienced restaurant employees laid off during the Shelter in Place may try to open a restaurant in a closed down built out restaurant facility whose former tenant gave possession back to their landlord. If these experienced restaurant employees meet the landlords experience criteria but do not meet the landlord’s financial criteria, they may team up with partners that meet the landlord’s financial requirements.
- Other laid off employees with no restaurant experience during the Shelter in Place but have other business experience which might satisfy some landlords to open a restaurant in a closed down built out restaurant facility whose former tenant gave possession back to their landlord. Although in some cases these prospective new tenants may qualify for the landlord financially, they will most likely be required by the landlord to bring someone in as a partner with them that has had extensive restaurant management and/or ownership experience.
- Former restaurant owners who ended up closing their business during the Shelter in Place who will not reopen their former location. In some rare cases landlords of closed down built out restaurants whose former tenant gave possession back to them may be receptive to lease this space to a former restaurant owner who closed their business during the Shelter in Place as long as they have a strong case for doing so coupled with this prospective lessee having a strong financial and operational background. The motivation for this lessee to relocate from their closed down location to this new closed down built out restaurant opportunity will be a stronger location, more favorable lease terms and more upgraded improvements then their former location.
- There will be a continued sale of restaurants and bars that were either in contract prior to Covid – 19 (contracts either signed both ways between buyer and seller or in escrow) or listed that will continue to sell. There may be some adjustments in pricing and rents subject to market conditions. Although these buyers will be largely people that have had restaurant experience the buyer pool will expand to others who have been laid off and have had no restaurant experience and need a place to hang their hat and make a living. In the latter case they will most likely be required to have a strong partner that has operational experience as well as financial strength.
Other Considerations for the Future Viability of the Restaurant and Bar Business.
The big unknowns in the future after the Shelter in Place has been lifted are as follows:
1) What are the former restaurant and bar customers criteria for having a comfort level in interfacing with the business again?
2) What is the time frame whereby the owner’s restaurant and bar business will go back to some level of sales and profits similar to their former sales and profits history prior to the Shelter in Place becoming effective?
3) If there is another surge in the virus in the future prior to the government coming up with a vaccine to minimize the effects of the virus, how will that affect future business activity.
I think most of us will agree that it is difficult to answer the questions indicated immediately above. However, I think it might be safe to say that restaurant and bar customers will have a higher degree of concern regarding how safe it is for them to interface with a restaurant or bar business. It may be possible that for some period after the Shelter in Place is lifted most restaurant and bar employees will be wearing gloves and/or masks with stringent requirements by all employees to wipe down all surfaces constantly to assure customer safety. It is possible also that seating capacity will be reduced to facilitate reasonable distancing between customers in the facility.