Creative Leasing Tips When Emerging from the Pandemic

The Covid-19 pandemic has evidenced two truths for restaurants and landlords. First, a huge number of restaurants have closed resulting in empty storefronts and available space. Second, restaurants have lacked financial resources and financing to be able to pay their rent and other expenses.

Landlords want to fill restaurants’ empty spaces to generate necessary rent revenue. Restauranteurs want to reopen or start anew to offer their fare to the public. But, the standard leasing structure of rent, percentage rent, and tenant allowances may not work in this post-pandemic new world. Around the U.S., in addition to rent abatements, deferrals, and percentage rent only deals, some landlords to keep the restaurants open and the rent stream flowing also have elected to become “partners” with their restaurant tenants.

To be sure, there is no “one size fits all” in entering such a partnership or joint venture. Much depends on the nature and character of the restaurant and whether it is in a position to benefit from the economy’s reopening (e.g., is it a lunch place that will benefit from a return of office workers?). Much also depends on the landlord’s own financial resources and capabilities (e.g., is the landlord well capitalized and does it have a willing player in its own lender?).

Landlord’s investments in its restaurant tenants may take on any number of attributes. For example, some landlords may fund tenant improvements, particularly those that improve the health and safety of workers and customers, or they may agree to fund a certain percentage of other restaurant costs. The restaurant tenant may agree to provide a certain percentage of its revenue stream for a limited time until the landlord has recovered its investment, or the parties may share in profits.

What does a partnership or joint venture mean for landlords and restaurant tenants?

Benefits and Implications for the Restaurant Tenant:

  1. At the time or opening, reopening or retooling, the restauranteur would be able to reduce its financial investment because the landlord would be the restauranteur’s primary investor. Restaurant tenants could rely less heavily on their existing lenders or other investors to pony up such funds.
  2. Restauranteurs would be exposed to less financial risk because the risk of opening, reopening or retooling would be shared with the landlord.
  3. Restaurant tenants would need to share with their landlord investors their financial information more openly than may have been their general and past practice.
  4. Restauranteurs may need to relinquish some decision-making over operations and other aspects of the business because as a primary investor, the landlord may wish to participate in certain major financial and operational decisions.
  5. The restauranteur would need to share a negotiated percentage of the business profit until the landlord receives its return on the investment.

Benefits and Implications for the Landlord:

  1. The landlord would need to conduct greater due diligence in selecting a restaurant tenant to vet the restauranteur’s background and operational experience.
  2. The landlord would realize the immediate opportunity to fill an empty store front.
  3. The landlord’s financial return would be based on the restaurant’s financial model which the landlord would have had the ability to help create and control, and the landlord likely would be more involved in the restaurant’s business operations and decision-making. 
  4. The landlord may have the opportunity and responsibility of maintaining ownership of the liquor license.

Every partnership or joint venture with a landlord will be unique. If you would like to learn more or hear additional leasing ideas, please email or call us.