Overview.The restaurant business has picked up recently as a result of the cautious optimism felt throughout the country regarding the vaccine being implemented and the country opening up. California is officially targeted to open June 15 short of any pandemic setbacks. This potentially means that there will be more lenient restrictions regarding the percentage of indoor and outdoor seating allowed however there will be some distancing requirements and use of masks may still be required for restaurant and bar employees however customers may not have to wear them when eating or drinking.
The general mood in the restaurant industry is one of cautious optimism. Due to the pent-up demand from folks who have experienced cabin fever and are tired of cooking their own meals and/or consuming qualitatively inferior take-out and delivery meals the consensus is that the remaining restaurants in business that are professionally operated should do very well. There is a decrease in the number of food and beverage businesses as a result of approximately 30% of all eating and drinking businesses in California that have gone out of business during the pandemic. This has resulted in many landlords regaining possession of these spaces that have been turned back to them from their former tenants which will be released to new restaurant and bar businesses and/or other retail uses or will potentially be vacant for a period of time.
Many restaurant and bar businesses that have struggled to hold on to their business will be able to regroup partially as a result of the United States Small Business Administration (SBA) loan monies they received through Round 1 and/or Round 2 of the Paycheck Protection Program (PPP) Loan Programs. For many of the recipients of these PPP monies they will be able to have the loans forgiven if they fulfill the loan forgiveness requirements. Additionally, some restaurateurs will perhaps receive grants through the Restaurant Revitalization Fund which will also be funded through the SBA. These programs are discussed below.
The restaurant and bar businesses that do survive and are professionally operated should do very well as a result of much less competition temporarily.
Factors that will impact some seller’s decision to sell at this time.
The various Small Business Administration (SBA) programs discussed partially above will potentially influence a perspective sellers’ decision to put their business on the market at this time. The Paycheck Protection Program (PPP) monies which include the First and Second Rounds of PPP loans which many sellers want to use up and have forgiven before they put their business on the market. Additionally, the Restaurant Revitalization Fund (RRF) which are grants up to $5 million per location and not more than $10 million for multiple locations is also a reason some sellers will sit on the sidelines before they put their business on the market if they decide to do so. The formula for RRF grant monies is the difference between 2019 sales and 2020 sales less any PPP loans the operator has received. This could result in sizeable monies to the owner and defer his/her decision to sell their business in the near future. As a result of the RRF program some landlords who were willing to give major economic lease concessions to tenants are reneging on these concessions realizing that their tenants will potentially obtain sizeable grant monies from the government.
Older baby boomer restaurant and bar owner operators can’t physically and/or mentally go through another traumatic event in the future after having gone through The Great Recession in 2008-2010 and most recently the Covid 19 Pandemic from 2020-2021 or later. These events have stressed out this group of owners to such an extent that regardless of the government help programs indicated above they no longer have the physical and/or emotional capacity to continue in the business. Many in this group feel it is better to get out now and get a percentage of the sales price they would have realized pre-Covid rather than struggling through a new turn around period to get their business back to pre-Covid operating results.
Buyer demand is very strong at this time.
As a result of many people being laid off during the pandemic and a good number of the companies, they worked for having gone out of business or being down sized these people don’t want to experience this job insecurity again in the future. Consequently, they want to control their future destiny and believe if they own their own business, they’ll be in a better position to do so.
Who are the restaurant and bar buyers today?
1) They include the pre-Covid group of buyers made up of past and current restaurant and bar owners as well as restaurant and bar managers and/or employees that worked for many years in the hospitality industry and now want to own and operate their own business. Some of these pre-Covid restaurant and bar owner operators that closed their businesses for good are now finding better opportunities which require far less investment and provide more favorable lease opportunities. 2) This latter mentioned buyer group is augmented to include a new group of prospective restaurant and bar buyers who come from other industries or who have gone out of business or industries that have been down sized and these people need a livelihood to support themselves. In this case since most landlords require prospective restaurant and bar tenants to have prior experience in the industry due to the high failure rates many of these new crops of inexperienced restaurant and bar buyers are forming partnerships with experienced restaurant and bar operators to meet the landlords’ criteria.
What are the premises lease requirements from the buyer’s/tenant’s perspective at this time?
Many prospective buyer’s/tenants will have the following lease requirements:
∙ A below market base rent and no net expenses. If there have to be net expenses the tenant will want them capped so they can only be raised by the amount of inflation yearly with a cap on the inflated amount. For example, if the yearly inflation rate is five percent (5%) the tenant will want the increases to be capped at two percent (2%). In particular the tenant will want a cap on property taxes because if the building sells for a substantially higher price the tenant’s pro-rata property taxes will potentially go up sky high.
∙ The rent is either a straight percentage rent or if there is a minimum rent the rent will be fixed for a couple of years before any increases kick in and when increases kick in yearly increases not to exceed two percent per year.
∙ No personal guarantee and the only guarantor is the business entity set up such as a corporation or limited liability company. If the landlord is adamant that he needs a personal guarantee initially, have the personal guarantee burn off after a few years or capped at a reasonable amount (one year’s rent, etc.).
∙ If there are options the rent in the first year of each period will not go up more than two percent (2%) over the preceding years rent and subsequent yearly increases will not increase two percent (2%).
∙ The base term will be five (5) years with as many five (5) years options as possible.
∙ Lease and any options are assignable.
∙ As broad a use term as possible such as a restaurant serving alcoholic beverages.
∙ Free rent for the first six (6) months of occupancy and/or landlord contributions of a negotiated amount per square foot towards tenant’s capital improvements to the space.
∙ The tenant having a first right of refusal or the first right of offer to purchase the building.
Summary. The food and beverage industry has needless to say been negatively impacted as a result of the pandemic. However, people still have a desire to eat out and experience a variety of different types of foods and beverages as well as to eat out as a form of entertainment. Consequently, I believe that the industry will survive and become stronger then ever as we work our way out of this pandemic. Irrespective of the pandemic we have sold and/or leased over 100 restaurant, bar and/or club businesses and related commercial buildings since Covid began.
We have hundreds of food and beverage opportunities available throughout the state so please see our website www.restaurantrealty.com to identify these various opportunities.
Most importantly we wish you and your families good health and best wishes for a bright future.