If you made a list of industries and business categories that have been severely impacted by the Pandemic it would be a very lengthy list, but the Hospitality Industry and restaurants in particular would certainly be at the top. A complete shut-down occurred for extended periods which varied in time depending on state and local rules. The shut-down was replaced only with more restrictions that were nearly as crippling. If you owned a restaurant at the start of the Pandemic, now one year later chances are you do not. If you still have a restaurant and want to re-open, you’ve got some serious re-structuring to consider. And if you are planning to open a new restaurant after the Pandemic, congratulations: you’ve won the “Optimist Of The Year” award.
Even the very notion of “after the Pandemic” is problematic because no one is able to predict whether or to what extent restaurants and the world in general will ever be Covid-free, allowing us to return to business as “normal”.
From a design standpoint, we’ve already seen the changes needed to operate a restaurant if social distancing becomes a fixed interior space requirement. Restaurants conceived to prioritize the maximum number of diners within the usable square footage won’t be able to function if such requirements continue or are ever re-instated. Although good ventilation has always been important, restaurants old and new have to upgrade and improve on air filters and ventilation throughout their space.
With occupancy restrictions that, as we have seen, can be imposed or changed with little or no notice, a restaurant owner has to maximize turnover. Some efficiencies can be obtained by staff training, and some by automation, both within the kitchen and in the front of the house. But menu decisions could also make a significant difference in table turns. There are always exceptions of course, but purely from an economic perspective, fast or fast-casual restaurants and restaurants with fewer menu items will stand a better chance of surviving Pandemic-conditions than a tablecloth restaurant with a varied menu of selections having a longer prep time.
The first step and the key to every restaurant is starting with a good location. The Pandemic has shown that this is a more critical step than ever because of the need to consider an even greater number of factors and scenarios that can intervene and force changes to restaurant operations as conceived and planned. Is there street visibility and direct street entry, as compared with entry through a building lobby? Will the restaurant’s success be dependent on the tourist trade, or office workers, or will there be a consistent flow of local residents or, perhaps best, a balanced mixture of all three?
And if location is the first step for almost any business, a good lease is next in line as crucial for a strong foundation for any restaurant. Unsurprisingly, landlords will offer a store lease on a form developed to protect their interests. For example, if your restaurant lease is on the standard form for store leases printed by the Real Estate Board of New York, Article 26 provides that the rent obligation, “shall not be affected, impaired or excused by reason of government preemption or restrictions.” That provision, unmodified, has cratered many restaurants in New York in the last year. Landlords and restaurant tenants have to negotiate some alternative to cover interruption or stoppage in restaurant operations reducing sales to the point where paying a fixed monthly rent is just not possible. Percentage rent is a likely alternative and is currently the basis for re-negotiating many existing leases as well as the way new leases are being structured. Combinations of a lower base rent and an additional percentage payment if sales exceed a threshold amount are also currently in discussion. A reasonable landlord should want the tenant to succeed and not be forced to close, leaving the landlord with a vacant space and unrecovered landlord improvements and commissions.
If you think the restaurant industry is entering a brave new post-Covid world, you are correct. If you’ve won the Optimist of the Year award and still want to be a restauranteur –I’m already working with several of you who believe people will always value good food prepared for them by others—here at Offit Kurman we have the expertise to steer you through it. We encourage you to consult with us sooner rather than later.
ABOUT STUART NEWMAN
Stuart B. Newman has been engaged in corporate and securities practice for over forty years, focusing on corporate law, private equity transactions, mergers and acquisitions, and capital formation through public offerings and private placements.
Stuart studies his clients’ businesses thoroughly and has made valuable contributions on a broad range of business topics such as joint ventures, product development, finance, investment banking, marketing, and personnel. He has served as a director on the boards of both publicly-traded and privately held companies, contributing his unique combination of business acumen and broad legal experience.
ABOUT OFFIT KURMAN
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