Many landlords are agreeing to defer restaurants’ rent payments for up to 180 days as an alternative to evicting them and trying to re-tenant the spaces, as the industry faces an uncertain path forward.
Massachusetts restaurants face a menu of unappetizing choices as they seek to stabilize their finances to offset steep declines in revenues from indoor dining bans.
Federal stimulus programs aimed at small businesses don’t directly address the industry’s woes during the COVID-19 pandemic, so tenants are working with landlords on voluntary rent relief. Landlords, in turn, are seeking flexibility from their mortgage lenders.
The alternative, industry sources say, is a collapse of the real estate model that supports an industry that recently employed an estimated 350,000 people in Massachusetts, or 9 percent of the state’s labor force.
Many landlords are deferring rent for up to 120 days, in some cases adding the payments to the end of the lease, as a strategy to retain restaurant tenants, said Todd Smith, president of Boston-based restaurant brokerage Corbett Restaurant Group.
“The big institutional landlords seem to have a plan to defer the rent,” Smith said. “It’ll be very expensive to replace that tenant, hire a broker and let the space sit empty.”
As the industry struggles to find a path forward, many restaurants won’t survive and landlords will have to offer those that do new lease options reflecting a painfully slow ramp-up once dining restrictions are lifted, said Peter Gori, managing partner at Boston Commercial Realty Partners.
Leases with no base rent, and only percentage rent based upon sales, will become more common.
“You need to come to a side agreement for the next nine months to a year,” Gori said. “What I’m hearing is that landlords will be converting to percentage rent for at least the rest of 2020.”
Sought-After Tenants Come Under Siege
Restaurants had become a sought-after category in a retail industry battered by declines in brick-and-mortar sales and a series of high-profile bankruptcies by national chains. Developers of mixed-use projects have placed more emphasis on recruiting distinctive ground-floor retail tenants as destinations, and now are looking for ways to retain them in an economic crisis.
The developer of the River’s Edge mixed-use property near Medford’s Wellington Circle told his two retail operators to forget about rent payments in the short term.
Developers of mixed-use projects have placed more emphasis on recruiting distinctive ground-floor retail tenants as destinations, and now are looking for ways to retain them in an economic crisis.
“We just said, ‘Money should go into the business to retain as many people as you can,’” said John Preotle, partner at Preotle, Lane & Assoc.
Boutique grocer Free Range Market and The Porch, a Southern-style barbecue restaurant and lounge, are valued tenants in the 30-acre development, which includes a pair of office buildings and two apartment complexes, Preotle said. Retaining the existing tenants, which occupy about 30,000 square feet, is a sound business strategy, he said.
“If this were a mall, you might say, ‘We’ve got to get rent from people,’” Preotle said. “These are small enough that we can care much more about supporting the businesses, so they come out of the other end ready to go.”
CPAs Say Programs Fall Short
The $2.2 trillion CARES Act federal economic rescue package offers two major programs for businesses to weather the short-term effects of the economic disruption caused by shelter-in-place and social distancing measures. But neither program directly addresses the unique challenges that restaurants face, according to CPAs.
Neither federal loan programs aimed at helping businesses weather the economic fallout from COVID-19 addresses restaurants’ unique challenges, CPAs say.
The $349 billion paycheck protection program, or PPP, offers 100 percent federally guaranteed loans with no required collateral or personal guarantees. Loans can range up to 250 percent of the business’s average monthly payroll in the previous year up to $10 million, and can be used for payroll, group health insurance, rent and utilities. And loans can be forgiven if the business retains its workforce for a minimum of eight weeks after receiving the proceeds.
That misses the mark because many restaurants have laid off the bulk of their staffs, and it’s unclear how soon indoor dining bans will be lifted, said Anthony Mangiarelli, a partner at accounting firm KLR.
“They’ve got concerns about when the eight-week period starts to pick up their staff,” he said. “Are they able to defer the payment? If that’s not the case, they’re going to have to pay their employees to sit home in most cases to have these proceeds forgiven.”
Meanwhile, the expanded federal disaster assistance recovery loan program offers up to $10,000 to small businesses that have suffered financial injuries because of the COVID-19 pandemic. Businesses can apply for the program along with the PPP loans as long as they use the proceeds for different cost categories, Mangiarelli said.
Navigating the programs’ application process has been difficult because different banks have different forms and data requirements, said Laura Gannon, a principal at Chelmsford-based Gannon CPA. And many banks are giving first priority to their largest clients, prompting fears that the loan programs will be tapped out before many businesses can qualify, she said.
“The banks are prioritizing their own customers, and a lot of these smaller restaurants don’t have loan relationships,” Gannon said.
Steve Adams
Given the programs’ drawbacks, many restaurants are seeking rent payment flexibility from landlords, who in turn are working with their lenders on mortgage forbearance, Mangiarelli said.
“Many banks will defer the mortgage payments for up to 180 days and in turn, the landlords are not coming down hard on shuttered restaurants,” he said. “It keeps the real estate rentable and it’s a good thing.”
