CHICAGO — Restaurants, their receipts less than a third of what they customarily would take in, are unable to pay rent. Landlords, with mortgages and property-tax bills due, can’t survive without income.
Since the coronavirus pandemic hit, resulting in the forced closure six months ago of restaurants and bars across the country, restaurateurs and landlords have been forced into an uneasy dance, as both camps fight for economic survival.
It’s a give-and-take struggle that will last months more, maybe into next summer.
Partners Allan Perales and David Goldberg, whose GoldStreet Partners brokerage matches landlords to restaurant tenants, from big brands such as P.F. Chang’s to single-operator restaurants such as Tzuco and Galit, see the issue from both sides.
“We’re seeing a lot of panic from the landlord and tenant perspectives,” Perales said. “It’s been a rough four-five months, and nobody’s winning right now. The greatest fear a landlord has is that their restaurant tenants aren’t able to pay rent. That could result in losing ownership of the building altogether, having it go back to the bank or to investors.”
And so, often with little choice, landlords are willing to deal. But how?
“There definitely is no one blanket negotiation,” Goldberg said. “It’s case by case, tenant by tenant. When we try to negotiate, we hope for a win-win, but there are different economic constraints on both sides.”
For restaurants, the constraints are obvious. The government shutdown kept them dark for months, after which they were permitted to serve only outdoors (though not all restaurants had that option), and later allowed to serve indoors at no more than 25% capacity. Income plummeted.
For landlords, the difficulty varies.
“The truth is that not all landlords are in the same position,” Perales said. “Depending on the loan you have, some landlords are dealing with their lenders, and some lenders won’t even speak to them. I’ve talked to some whose lenders won’t give them any relief. In the next six months, we’re going to see a lot of those landlords going into default.”
What can be viewed as inflexibility by landlords, Perales said, may be a matter of limited financial options. “Tenants need to see the landlords’ perspective,” he said, “and landlords need to see their tenants’ perspective in order to work together.”
For those landlords who can and will be flexible, there are several ways to ease a restaurant tenant’s burden. First is abatement, in which the landlord agrees to waive rent entirely for several months. “Just forgiving rent is very rare,” Perales said.
Then there’s partial abatement, in which months of unpaid rent are added to the end of the lease, extending the lease and keeping alive the hope that the money will be paid eventually. A third option is renegotiating the terms of the lease, often setting the rent as a percentage of the restaurant’s gross sales.
“If you can get to that deal, when the landlord is willing to do it, it’s the best option, really,” Perales said. “As sales go up, landlords make more money, but if they go down, it’s nice to say the rent is whatever percentage of sales. Sometimes it’s a pure percentage, or sometimes the landlord will say, ‘I can do that, but at a minimum, you’ve got to cover my real estate taxes and operating expenses.’”
Albert M. Friedman is chairman and CEO of Friedman Properties, which owns and manages more than 50 properties, totaling some 5 million square feet, most of it in the River North area. Chicago magazine once called him the “mayor of River North.”
“And I’ve apologized to every mayor thereafter,” Friedman said.
Friedman likened the current restaurant landscape to an episode of “The Twilight Zone,” except to note that it’s really happening.
“You have the pandemic on one hand, the economy significantly impacted, and then civil unrest,” he said. “It’s a perfect storm. The smartest, most hard-working person couldn’t possibly be prepared for all this. You know about counting sheep? The other night, I started counting (restaurant clients), and it was 60. Out of necessity, we had to come up with a solution.”
“One size doesn’t fit all,” Friedman said. “A mom-and-pop is different than a national tenant. Lunch is probably the toughest sell across the board — that’s not coming back until the office workers do. In the theater district, what do you expect to happen down there?
“So we worked on a program where we tried to understand each exact individual case,” he said. “What was their need? Where was their soft spot? We have two full-time people documenting, analyzing, to understand each situation.”
This has led to some creative solutions, including a recent deal with Nonnina restaurant, owned by Tony Priolo. In return for a partial ownership stake (unspecified), Friedman Properties is keeping the Italian restaurant afloat and even investing funds into new furniture and an air-purifying filtration system.
Other arrangements are less involved.
“We’ve worked out formulas that relate to a percentage of (the restaurant’s) sales,” Friedman said. “Sometimes it’s a base against a percentage. But as long as you’re willing to work with us, a quid pro quo, so there’s something the landlord ultimately will get for kindness paid at this time — if you lose a tenant, do you think that’s smart? That doesn’t make sense.”
For Howard Adelstein, vice president of Dynaprop Development Corp., the numbers are different. “We’re not a big player,” said Adelstein. “We have three properties. One of them has one restaurant tenant, another has two and the South Loop property (Pointe 1900) is heavily retail with five restaurants. This plays strongly into how we can manage issues. A property that’s strictly restaurant space is difficult; having a building with other offices helps us weather it.
“We learned a lot from the last recession, about being well-capitalized and better prepared for a turndown or event,” Adelstein said. “Fortunately, when this hit, we were in a better position than some guys were. Having said that, that only goes so far; expenses don’t go away, real-estate taxes are a huge liability and they don’t go down. And of course mortgage and interest expenses.
“Our initial thought was, ‘everybody’s gonna take a hit, everybody will have to suffer costs to a certain extent.’ Those (restaurants) aren’t in this for something they did wrong. This is something they didn’t ask for.”
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Gino Battaglia has been in the restaurant business, as a manager, bar owner and landlord, for some 50 years, and owns more than two dozen properties in Chicago, with a concentration in Humboldt Park. He also owns Blue Chicago (which has been closed since the state shutdown) and is landlord to adjacent property Brindille restaurant; chef/partner Carrie Nahabedian credits Battaglia’s flexibility as key to Brindille’s ability to reopen.
When chef/restaurateurs Jason Vincent and Jason Hammel hosted the now-famous, invitation-only chefs summit on March 14, when dozens of chefs shared thoughts on how to survive the newly arrived pandemic, Battaglia was there.
“The first thing I recommended is that all of them start dialogues with your landlord,” he said. “Work together. And that’s what we did. We were completely transparent with our tenants — our mortgage obligations, taxes, insurance and maintenance costs. Real estate taxes are really, really high; the building where Brindille is, those taxes are $60,000 a year. My wife and I mortgaged our house to make up for shortfalls and meet our obligations. We’re paying rent out of savings, paying employees out of savings.”
A restaurant’s location can make a big difference in its situation. Areas of Chicago facing the biggest disruption from coronavirus-related bar and restaurant closures are the Loop, River North and the Fulton Market district, real estate experts say. All are high-density, high-rent areas feeling the effects of other sectors of the economy that have been hit hard: offices, tourism, entertainment and shopping.
“Those are the trade areas that have large, sophisticated landlords matched with large, sophisticated restaurant operators,” said retail broker John Vance, a principal at Stone Real Estate. “They’ll have to figure out the next 12 to 18 months to survive this thing.”
Even the biggest real estate investors typically have mortgages to pay, though, which has led to three-way negotiations for rent relief.
“Then you get into a love triangle: tenant, landlord and lender,” Vance said. “I don’t think any lender needs to be educated about what is going on. Lenders are more open to that conversation now. But it will still be a balanced conversation, with the lender wanting to see financials so they can understand the situation.”
Well-capitalized restaurant investors and landlords are best equipped to upgrade their spaces, such as creating covered and heated outdoor areas for the upcoming winter, Vance said. But with revenues way down, it’s difficult to justify pouring more dollars into existing bars and restaurants.
“Restaurants don’t have that money right now, and restaurant investors are wary of making that kind of investment,” Vance said. “That property owner has to be large enough to invest in an existing tenant.”
Large numbers of restaurants and bars are expected to close their doors for good, which may contribute to a slow economic recovery and a yearslong effort to fill vacant storefronts. Those that survive may do so with an altered business model, experts say.
“There are going to be tenants that lose their spaces and very harshly lose their livelihood,” Vance said. “There’s going to be landlords that may never really recover from this. If they can get out of an asset without losing their home, that may be a win. That’s cold and hard and really sad. Then what’s going to happen when COVID is over is, the people who somehow survived this thing should be smarter and stronger.”
Scott Harris, who owns Francesca’s restaurants all over the city and suburbs, said he’s doing fairly well in the suburbs, where he’s back to paying full rent, and hanging on in the city, where he renegotiated leases based on a percentage of gross sales.
“Most of our landlords have been as nice as could be,” he said. “Only two of 26 have been completely awful. Some people just want their money; they don’t care about anybody but themselves.”
Harris did close his two Taylor Street restaurants, Francesca’s on Taylor and Davanti Enoteca, but said both closings were inevitable.
“COVID was the final nail in the coffin, but, honestly, that street has been hurting for years,” he said. “Ever since Fulton Market and Randolph Street. We used to get all that business after Bears, Blackhawks, Bulls, Sox games, but that street’s over.”
Harsh as it sounds, there are circumstances in which a landlord would rather lose a tenant than offer assistance.
“There are businesses and restaurants sitting on what’s perceived as a site for future development,” Goldberg said. “If you have a tenant paying very low rent, that makes the property harder to sell. Or if your tenant is paying a below-market rent, you might want to get that tenant out, if you think the market will be better in two years.”
Already, restaurants such as Bar Biscay have closed, and La Sardine decided not to reopen as a result of landlord disputes. (Bar Biscay’s owners and landlord are in litigation.) Battaglia has a dispute, also in litigation, with a tenant who moved out of a property; Battaglia’s suit alleges unpaid rent and damage to property.
“It’s expensive to lose a tenant,” Goldberg said. “The typical downtime on a restaurant space, even a great space, is nine to 12 months minimum. It takes 30 days to hire a broker, market it, then another 30 to 60 to do lease negotiations, 45 for architect blueprints, and another 60 to review and approve. And that’s if you found a new tenant right away. You could be talking a year, two years to replace a tenant, and the new tenant will want a few months’ rent free while working out the kinks. That makes it very difficult to let a restaurant go.”
Finding a restaurant to replace a departed tenant presents a problem for another reason: There are fewer of them.
In Fulton Market, Chicago’s meatpacking and food distribution hub that has transformed into a mix of corporate offices, residential towers, hotels and retail, restaurant rents in some spaces have more than doubled over the past five years, said commercial real estate broker and property owner Scott Maesel.
“If somebody opened a restaurant in the last two to three years, they’re probably paying north of $50 or $60 per square foot,” said Maesel, managing director at SVN Chicago. “If your volumes are down, the rent alone is not sustainable.”
Boka Restaurant Group, whose Fulton Market restaurants include Girl & The Goat, Momotaro and Swift & Sons, laid off about 275 employees in August. Nearby One Off Hospitality’s Blackbird shut down after more than 22 years.
“It shows that anybody, unfortunately, is susceptible to taking a big hit,” Maesel said. “This is the first hiccup or challenge the neighborhood has seen. The neighborhood has been on steroids, and now some of the wind has been let out of the sails.”
Many property owners who bought at peak prices have large mortgages to pay off, limiting their flexibility to renegotiate lease terms. But letting the space go vacant could create even bigger challenges.
“Who’s the next restaurant to fill that space?” Maesel said. “We’re advising our clients to work with their tenants, because there are fewer tenants out there right now.”
Future leases, Perales and Goldberg said, also are likely to contain provisions to guard against another pandemic.
“We’re seeing some leases now including pandemic language, adding provisions for riots, and figuring out an alternate rent structure ahead of time,” Perales said. “And when rent is a percentage of sales, saying to landlords, ‘well, yeah, but carve out delivery sales.’
“We’d never thought of that before,” Goldberg said. “If you’re paying 30% for (third-party) delivery, you don’t want to give another 5 to 8% to the landlord. Every new solution creates a new set of problems.”
Friedman praised Chicago’s efforts to lend a hand by allowing street and alley closures to create more outdoor dining space, and by waiving fees and easing the regulatory hurdles for new outdoor spaces. These changes would never have been considered a couple of years ago, said downtown Ald. Brendan Reilly.
“We tried it at Bellevue and Rush in the Gold Coast,” Reilly said. “Turns out it’s incredibly popular, not just with the patrons but with the neighbors. We took down four blocks of Clark Street for outdoor dining, and it’s been very successful. It’s helping those guys stay afloat. We’re shutting down Kinzie Street in River North for the same kind of program.”
Reilly also is advocating for more flexible regulations governing bars and restaurants, such as expanding liquor-serving hours and increasing the level of indoor seating allowed.
“Whenever I can give these guys a little bit of aid here and there, we’re doing it,” he said. “The city does not have the resources to provide grants or loans to these businesses. That’s where the feds have to come in. What we can do, as a matter of policy, is to be flexible and lenient.”
“The key is, how long does this need to continue?” Friedman said. “If it’s 30, 60, 90 days, that’s not bad. If it lasts much longer than late spring of next year, there will be no way to save this economy. We’re going to see a large number of restaurants close that will never reopen. So many people will be laid off — think how important the hospitality industry is.”
Friedman remains hopeful that federal assistance will arrive sooner rather than later.
“The government will come back with a round of financial help,” he predicted. “They have to; it’s critical. Probably around the election, because everybody wants to look like they’re being helpful then.”
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