The SevenRooms Clients Who #NailedIt in 2019
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Suppose you are the owner and operator of a restaurant in New York City. After a difficult first few years, things have finally started going well. Before, you absorbed losses due to the typical challenges of opening a new restaurant in a crowded market: you needed to establish your brand, generate some buzz in the neighborhood, find the right menu and price point for your clientele, and accomplish the many other tasks associated with opening a restaurant. Now, after finally starting to operate comfortably, your landlord starts already making noises about raising your rent.
He tells you the neighborhood has gentrified and that he has received numerous inquiries about when the space will be available and what rent he will charge. He tells you all of this before suggesting that his first preference would be to keep you as a tenant but that he “regrets” that he has to raise your rent more than 20%.
Your landlord says he “needs to be competitive” and that keeping your rent anywhere near the current rate is simply infeasible for him. He tells you his position is nonnegotiable—and that if you are not able to agree to his terms, he will expect you to be out by midnight the day the lease ends. This leaves you with relatively little time to find an alternative. Or so you think.
Despite the doomsday scenario your landlord is proposing, you do have options. Part of what your landlord is telling you is pure bluster. You don’t need to simply accept whatever increase your landlord proposes. Nor do you need to start planning to relocate or close your business.
Renewing a restaurant lease in New York City is a much more involved process than just the numbers your landlord is throwing out. Set forth below are tips and considerations to help you resolve a difficult lease renegotiation or renewal if your landlord is seeking to substantially increase your rent.
Against the efforts of both Mayor Bill de Blasio and the commercial real estate industry, New York City is considering steps to give commercial tenants a fairer shot in lease renewal negotiations. In November 2019, a City Councilman from Brooklyn proposed legislation that would extend rent control laws to businesses in the retail, manufacturing and office sectors under a minimum square footage of 10,000 square feet for office and retail space, and 25,000 square feet for manufacturing. It also would create a commercial rent stabilization board to set the maximum permitted rent increases and deal with related issues.
Although the law is not yet effective, its existence is influencing commercial lease renewal negotiations in New York City. Landlords are taking this potential law into account when completing current lease renewal negotiations and in looking ahead to those in the near future.
This law, if it passes, would give substantial leverage to restaurants whose commercial leases are up for renewal. In the hypothetical scenario above, the landlord’s threat to raise your rent 30% may be nothing more than a puff of smoke. In fact, your landlord could no longer raise your rent in this scenario by any arbitrary amount. Instead, your landlord will be capped in how much he or she can raise commercial lease rents when those leases are up for renewal.
There are some things you can do as a restaurant owner or operator to increase your negotiating position vis a vis a threatened large rent increase from your landlord.
Understanding your landlord’s pain points is important when renegotiating your existing lease. This helps you maximize your leverage as the tenant whose lease is up for renewal. One unpleasant thing they’ll be looking to avoid is turnover in their space. There is always risk associated with losing an existing tenant, even if another is lined up for the day after the current tenant’s lease expires.
Many landlords have an idea about what a particular commercial property is worth. However, they may have never taken the time to figure out the cost per square foot for what they are asking in lease renewal negotiations.
They also may not have factored into their thinking that the reason the space may be worth as much as they think is due to the fact that you operate a successful restaurant in that space. Similar to how homeowners often think their property is truly unique when in fact very few properties are, many commercial landlords unintentionally inflate their self-assessment of their property.
Luckily, there is an established market for commercial real estate that makes it easy to value space. If a landlord’s competitors are charging X per square foot for similar space, there needs to be a good reason for your landlord to feel that they have a property worth 1.5X or even 2X. Often, there’s not one.
A new tenant is typically less profitable for a landlord than an existing tenant, particularly on the front end. This is especially true in the restaurant business, which has its own unique arrangements when it comes to leases.
First off, a new tenant may attempt to negotiate some period of time where he or she either is not paying rent or is paying reduced rent while renovating or modifying the premises. This is particularly common in the restaurant industry, where tenants may pay no rent or extremely low rent in the first year of the initial term of a lease given the high likelihood that the restaurant may not succeed or even make it to the end of the original lease period.
Keeping an existing tenant, even one who may be paying below-market rent, is better than renting space for a fraction of its value in the hopes that the new tenant will be more lucrative than you down the line. Again, this is especially true for restaurant tenants. For example, if your restaurant declined to renew the lease due to the landlord asking for too much in lease renewal negotiations at the end of your first lease term and the landlord finds a new tenant in a different business, the property will need to be modified in order to accommodate that new tenant. No two restaurants have the same theme and decor and there will be costs associated with a transition to a new theme or decor or setup.
In addition, the landlord may need to pay a broker fee in order to obtain a new tenant at his or her desired price point. In New York City, landlords typically pay commercial brokerage commissions if a commercial broker finds a new commercial tenant for the landlord. Feel free to remind your landlord that they won’t have to pay such a commission fee if you simply renew your lease.
Your restaurant has completed a certain period of time successfully if it is still in business to even be able to discuss a lease extension. It has proven that it has the ability to generate enough revenue to successfully pay the rent you negotiated in the beginning of your lease. This alone gives you a certain amount of negotiating power. Your restaurant has survived what is often the most daunting hurdle for a restaurant: surviving the first term of your lease.
Not all the cards are in the landlord’s hands when it comes time for renewing a restaurant lease in New York. The landlord who blithely claims that he or she will be able to find a new tenant that will pay whatever increased rent he or she is asking for may be bluffing, ignorant, or both.
As a restaurant owner, rent will always be one of your most expensive cost items. Taking every step you can to ensure that your rent is as low as possible doesn’t just help increase your margins; it helps you stay in business. With these steps, you can effectively push back on your landlord’s demands to increase your rent by an exorbitant amount for your next lease period.