'An Entire Industry Is Being Wiped Out': Failed Lease Negotiations Forcing D.C. Restaurants To Close
Iconic Capitol Hill restaurant Tortilla Coast is hanging on by a thread.
The popular happy hour spot for congressional staffers, where Paul Ryan famously waited tables before ascending to speaker of the house, has not paid its rent since March and discussions with its landlord have ceased, owner Geoff Tracy tells Bisnow.
The restaurant wasn't bringing in enough sales to pay rent and asked for a decrease in its monthly bill. The landlord offered a deal that Tracy viewed as unreasonable.
Frustrated with the failed negotiations, Tracy announced on July 10 he planned to close the restaurant by the end of this month. The news led Tortilla Coast's regulars to flock to the 32-year-old Capitol Hill restaurant, and Tracy said Tuesday the increased sales would allow him to keep it open through August. But he is still not paying rent, he told Bisnow, and the restaurant's future beyond the summer is uncertain.
"We're in a damaged aircraft and it's approaching the ground, but there's still a chance," Tracy said. "We're looking for a margarita miracle."
Tortilla Coast is one of hundreds of D.C. restaurants struggling to survive the pandemic, and many others will need a similar outpouring of support in order to keep their doors open until business returns to normal levels.
The continued uncertainty of when pre-crisis sales will return is a main factor causing restaurateurs to decide to close, business owners and brokers say. The inability to pay rent and the inflexibility of some landlords is also contributing to the spate of closures.
At least 30 restaurants in the D.C. area have announced permanent closures since March, according to a running list Eater has maintained. At least 19 of those closures have been announced in June and July, and two new closures were announced Tuesday: Cleveland Park's Firehook Bakery and Maddy's Taproom in Downtown D.C.
"When you take margins, which are 10% for most people ... and then you say, 'By the way, you can only do takeout,' of course you're going to see lots of closures," said Carlie Steiner, who announced in June her Petworth restaurant Pom Pom would close permanently. "It's devastating. An entire industry is just being wiped out."
An estimated 10% of all independent restaurants in the U.S. could shutter by year-end because of the coronavirus, according to financial firm Stephens, The Wall Street Journal reported. Steiner and other restaurateurs in D.C. think the 10% figure may be low, but even so, it would have a massive impact on the city's business landscape.
There were 2,457 eating and drinking establishments in the District as of last year, according to the National Restaurant Association. Restaurants employed over 65,000 people in D.C. last year, 8% of the District's total employment, according to the Restaurant Association of Metropolitan Washington.
D.C. restaurants brought in an estimated $4.4B in sales in 2018, and they accounted for 31% of the District's sales tax revenue last year, according to the Office of the Chief Financial Officer.
"The public health emergency has disproportionately impacted the restaurant industry," Hollinger said. "This is simply not sustainable for an industry that has limited reserves and high fixed costs, such as rent."
The top expenses for a restaurant are payroll and rent, and as business owners have adjusted to making a fraction of their pre-crisis sales, they say they need a break on the latter in order to survive.
"Commercial landlords need to understand there is no amount of intelligence, planning, strategy or pivoting we can do that, in the current state of emergency, would bring us back to pre-pandemic numbers," Thamee co-owner Simone Jacobson said. "It will take time, no matter how savvy a business owner is or how supportive the community is. If your sales are reduced to 50% or less, [landlords] have to come to the table not just with compassion, but with logic."
Jacobson penned a Washington Post op-ed, which was signed by several other restaurateurs, calling on landlords to help restaurants survive. The op-ed proposed that landlords restructure leases from the pre-pandemic flat rates to a percentage-based rent model that would allow restaurants to pay more as sales gradually increase.
Thamee reached this type of percentage-based rent agreement with its landlord, Sam Chung, Jacobson said. The restaurant agreed to cover the landlord's monthly mortgage and pay a "small" percentage of sales, she said. If business returns to normal levels, she said the agreement will lead to Thamee paying the same rent it paid before the pandemic, but the percentage-based structure allows it to stay alive while it works its way back.
Unfortunately for restaurants, Jacobson said this type of deal is more the exception than the rule in D.C. She organizes a group chat with 50 restaurant owners who are Black, Indigenous and people of color, and she said no one else in that group has reached a similar percentage-based rent agreement.
"The percentage rent victories have been few and far between," Jacobson said. "I think that's because of the shortsighted refusal to accept our current conditions. This is the reality. If they think that there's a secret moneyed tenant waiting in the wings, I think they're going to have a rude awakening when their buildings sit vacant."
Neighborhood Retail Group CEO Bethany Kabaza, a broker who represents restaurants, said she has seen more landlords express an openness to the percentage-based rent model as the pandemic has continued. But she said she still doesn't see enough understanding from landlords that the market has changed fundamentally and requires an overall reduction in rents over the long term.
"At this time, I don't see landlords being willing to accept the correction in the market of what rents should be, because if they did they would realize the percentage rent is still a great deal," Kabaza said. "A lot of tenants were paying too much to begin with, and that's why you have all these closures."
Rasa Indian Grill co-owner Sahil Rahman, who is part of Jacobson's BIPOC group chat, said his Nationals Park-area restaurant has experienced a "substantial drop" in sales because of the lack of baseball games and other summer activities. He said he is in ongoing discussions with Rasa's landlord and declined to provide the details, but he said he understands they face their own challenges.
"Restaurants are saying, 'If you don't help us out, we're going to end up going out of business,' and landlords are also saying, 'If we don't get paid, we're in a tight spot,'" Rahman said. "It's a tricky situation."
Venable partner Evan Pritchard, an attorney who represents landlords, said his firm's clients prefer to reach agreements that defer rent rather than forgive or reduce the monthly bill.
"Folks have agreed to defer on a wait-and-see approach," Pritchard said. "They're having struggles sometimes where the landlord wants certainty as to when tenants are going to pay rent, and tenants aren't able to make any predictions. There have been situations where people are deciding to shutter their business."
He said he expects more closures to occur as restaurants continue to bring in sales around 50% of their usual levels. He said it has been difficult to renegotiate leases because tenants are unable to forecast what their revenues will be in the coming months.
"Everybody's having trouble deciding what they can agree to," Pritchard said. "Nobody can agree on what a reasonable timeline is for forecasting increased revenue, so everybody's been a little reluctant to do a full-blown renegotiation."
CBRE Executive Vice President Michael Zacharia, a broker who represents landlords and tenants, said some landlords want to give tenants a short-term break in rent but have them pay it back on top of what they would owe next year. He said tenants don't want to agree to this type of rent deferment because they can't predict when sales will return to normal levels, and even when they do, it would be difficult for a restaurant to pay extra rent next year.
"It just doesn't work for the restaurateur, because they're not going to be able to pay it back come 2021," Zacharia said. "It sets the restaurant up for failure because there's not going to be an incredible uptick in sales that exceeded the pre-coronavirus number."
Zacharia said at least 25% of landlords are not offering flexibility on rent, either because they do not have financial partners that would allow flexibility, or because the tenants are national chains that they believe should be able to pay.
"Some landlords are being put in a tough position where lenders or investment partners aren't being flexible, so they don't have the ability to be flexible," Zacharia said. "That outcome is bad for everybody because I don't think there's a stockpile of restaurants waiting to backfill spaces at equal rents."
Papadopoulos Properties principal Tom Papadopoulos, a broker who represents tenants and landlords, said he has one landlord client whose restaurant tenant closed and has now brought the space onto the market at 75% of its previous rent. He declined to name the parties involved, but he said the rent reduction is typical in what he's seeing across the market.
"That's the Catch-22: if the landlord forces the tenant out, it takes a while to re-lease the space, and he most likely will not get the same rent he was getting, so he's in a tough position," Papadopoulos said. "But if the tenant's not paying rent, you're really not losing anything and are better off re-leasing the space and getting a little less rent than no rent at all."
The landlords he works with have tried to be as flexible as possible, Papadopoulos said, but he thinks that may be starting to change.
"We've been talking about this since March and we're now approaching August and landlords have bills to pay, too," Papadopoulos said. "Most major landlords are being flexible, but I don't know how much longer they can be flexible."
Tracy said he doesn't think Tortilla Coast's landlord, New York-based Midwood, has been flexible enough to allow the restaurant to survive. Midwood didn't respond to requests for comment.
The restaurant owner said he asked for a reduction in the rental rate to about 10% of sales. The landlord's offer, he said, was to lower rent by 33% for the next two years, but then to add three years onto the end of the lease term and have Tracy guarantee the rent with his other businesses. Tracy also owns Chef Geoff's, which has two D.C. locations.
"Asking someone to use their entire company to guarantee rent into 2028 just seems very unreasonable considering what's going on in the world," Tracy said.
Tortilla Coast hasn't paid rent since March, but landlords cannot evict tenants in D.C. until the expiration of the State of Emergency, which the mayor last week extended into October. Tracy said he decided to keep the restaurant operating in hopes that Congress would pass a major stimulus bill that would bail out the restaurant industry. He said he accepted Paycheck Protection Program funds and thinks they have been "a miracle" for the industry.
"It's tough for everybody: Landlords need their rent, and tenants need to be able to operate at full capacity, and neither side is getting that right now," Tracy said. "That's why we have a very weird economic situation where PPP, as soon as that money runs out, you're going to see a restaurant apocalypse."
Steiner said Pom Pom's landlord was accommodating and its closure was not related to the rent. She said she didn't think she would be able to cover payroll costs, and she didn't feel comfortable asking employees to come to work and risk contracting COVID-19.
"I wasn't willing to be the boss that said, 'You have to go back to work,' and even if I did do that, the numbers were going to be a different game, and I wouldn't have been able to pay people," Steiner said.
The only way Pom Pom could have survived, Steiner said, was if she took out a personal loan, a step she didn't want to take.
"I wasn't willing to start going into debt with the possibility that we might be open now," Steiner said. "I'm glad I made that decision because now more people are closing and COVID is having another spike. No, thank you."