Rent Payments Loom For Restaurants As Capacity Restrictions Lift
Many restaurants in D.C. and across the country have been paying little to no rent over the last 14 months as the pandemic has depressed their sales.
Now, with the warm weather and vaccinations bringing more customers, and with cities like the District lifting their capacity restrictions, restaurants will soon have larger bills to pay. But the difficulty of hiring back staff and the uncertainty of whether people are comfortable enough to crowd into restaurants could make it difficult for restaurants to pay the rents their landlords will soon demand.
The D.C. government last week said it will lift all capacity restrictions on restaurants this Friday, while some bars, clubs and entertainment venues will be allowed to return to full capacity on June 11. Maryland lifted all business restrictions Saturday.
In some cases, this lifting of restrictions is triggering automatic clauses in temporary agreements made last year that will force tenants to pay higher rents than they have paid during the coronavirus pandemic. In other cases, the improving situation for restaurants is leading landlords and tenants to negotiate higher rents.
For some restaurants that failed to reach agreements with their landlords last year, they owe tens of thousands of dollars in unpaid bills, and they could be forced out when D.C. lifts its commercial eviction moratorium, part of the state of emergency that isn't tied to capacity restrictions.
The money flowing to restaurants from the latest federal stimulus bill could help them pay their landlords, and it will likely factor into the coming negotiations. But some restaurant owners say this money is meant for other expenses than rent, and others are frustrated to see newly opened restaurants without rent debt receiving hundreds of thousands of dollars from the program.
And while restaurants may be allowed to return to 100% capacity, the shortage of available workers is leading many to reopen at a slower pace. This could make it difficult for some restaurants to return to pre-Covid rent payments, and the situation is especially challenging for restaurants that owe months of deferred rent from the last year.
CBRE Executive Vice President Michael Zacharia, a retail broker who represents landlords and tenants, said many temporary rent deferral agreements were set to expire either by a set date or by the city's return to 100% capacity, whichever came first, so he expects a large number of agreements to expire in the coming days and weeks.
He said deferred rent will likely be paid back over an agreed-upon period of time, but he expects monthly payments will soon return to normal levels.
"I think landlords will have every expectation of rent going back to the agreed-upon rent in the lease once restaurants can open at 100% capacity," Zacharia said.
Rents Going Up, But Business Isn't Back
Thamee, a Burmese restaurant on H Street NE, received two months of rent forgiveness at the start of the pandemic, and it then reached an agreement with its landlord that is set to expire at the end of this month, co-owner Eric Wang said.
The agreement had Thamee pay about half of its typical base rent, plus about 3% of its monthly sales. The restaurant has only operated for takeout and delivery, so its sales have been far below normal levels, but it is preparing to relaunch sit-down dining this summer.
Wang said he and his partners will be negotiating with their landlord this month, and he expects the talks will lead to a higher rent than Thamee has paid during the pandemic.
"I anticipate we're not going to stick with the base-plus-percentage because things are opening up and they know our business is going to pick up soon," Wang said. "It'll definitely increase."
But Wang said Thamee is still losing money every month while only serving takeout and delivery. He hopes to reopen soon, but he doesn't expect to return to full capacity until weeks or months after it is legally allowed, largely because of the labor shortage. Given how many D.C. restaurants are trying to ramp up operations at the same time, he expects very few will be ready to serve at 100% of their pre-Covid capacity by Friday.
"Staffing is the biggest factor right now that's stopping me from opening right away," Wang said. "There's just so many open positions right now in the market, and there's a lot of competition for great staff right now. That's one of the biggest challenges."
ThinkFoodGroup Chief Operations Officer Eric Martino — whose restaurant group, run by José Andres, includes Downtown D.C. dining spots Jaleo, Oyamel Cocina Mexicana, Zaytinya and China Chilcano — said it has reached rent agreements with most of its landlords to pay a percentage of sales during the pandemic.
Martino said the restaurants are currently doing about 55% of their 2019 sales, up from 35% when he spoke to Bisnow in November. He said Chinatown-area restaurants have received a bump from the Capitals bringing back fans and playing in a playoff series this week, and he expects business to increase over the course of this year as more office workers return. As that activity increases, so too will the rents his restaurants have to pay.
"A lot of things have just been negotiated to a percent, and as we ramp up and get rightsized, it's either a conversation about a higher percent or just going back to the base that was negotiated pre-pandemic," Martino said.
Martino said ThinkFoodGroup is in no rush to bring its restaurants back to full indoor capacity, despite the lifting of the restrictions, and he plans to stay around 50% capacity for the foreseeable future. He said the group doesn't have enough workers to return to full capacity, and it wants to maintain a safe, quality experience for customers without stretching its staff too thin.
He said hiring is difficult because many previous restaurant employees moved away from D.C. or changed careers, and some workers who remained at restaurants throughout the pandemic feel burnt out and are leaving the industry.
"There are a lot of things hindering us from getting people back," Martino said. "And there's new restaurants opening up, there are restaurants that are reopening, and everyone's trying to get the same talent pool. It's definitely difficult."
Geoff Dawson, whose restaurant group owns bars including Penn Social, Franklin Hall, Church Hall, TallBoy and Astro Beer Hall, said most of his businesses have reached agreements with landlords for a percentage-based rent model, and in some cases it has extended a lease with extra months at the end as a way to pay back rents.
"It's like 'OK, let's extend another two months, let's extend it another two months and see where we are,'" Dawson said. "At some point if they say to me, 'We've got a tenant who wants to pay full rent right now lined up,' I don't think I'd stand in the way of them taking the space."
Penn Social and Astro Beer Hall are still closed, Dawson said, as downtown has remained a "ghost town." TallBoy in Shaw has opened with an outdoor patio that he said is doing well. Dawson hopes to see downtown activity increase soon, but he doesn't currently have the money or staff to return to full capacity.
"A lot of our staff have gone onto other careers, which I would have," Dawson said. "For us to suddenly reopen everything would be hard all by itself, even if we had 60% or 70% of our old staff come back."
An owner of a Northwest D.C. bar, who chose to remain anonymous, brought in no revenue throughout most of the pandemic because it doesn't typically serve food and has no available patio space. The bar reopened at 25% indoor capacity recently, but it still hasn't paid any of its rent.
The business tried and failed to reach a temporary agreement with its landlord, the owner said. Now as it attempts to increase its capacity so it can bring back a more normal level of revenue it is also saddled with more than $100K in back rent.
The owner said it doesn't plan to start paying back rent until the city ends the public health emergency and lifts the commercial eviction moratorium, which could happen as soon as July. The restaurant has tried to reach a repayment agreement with its landlord, the owner said, but the landlord has been "intransigent."
"Come July at the expiration of the public health emergency, we're going to be facing rent more than double our typical rent at a time where demand is still going to be pretty low," the owner said. "People are still pretty nervous about going out ... and it's really difficult to hire back employees."
Dochter & Alexander Retail Advisors principal Dave Dochter said he has seen situations where tenants are operating in default and haven't been paying landlords. He said the path out of these situations requires landlords and tenants coming to "workout" agreements regarding their past debts and future rent payments.
Many landlords may be tempted to evict a tenant as soon as they are allowed and try to bring in a new restaurant, and Dochter & Alexander released a report this week showing full-service restaurants account for 28% of the more than 120 retail tenants actively on the market for space this year. But Dochter said that isn't always the smartest path for landlords.
"If you look and see where vacancy is and account for downtime, new concessions, brokers fees, all of these costs, a number of times it's going to be better that a landlord tries to do a workout with an existing tenant," Dochter said. "It's not always going to be a better situation just to go to market and get a new tenant."
Zacharia said that while landlords expect to soon receive higher rent payments as demand improves, they understand that restaurants still face challenges and likely won't be able to immediately return to pre-Covid levels as soon as the restrictions are lifted.
"I don't think landlords all of the sudden are going to say, 'On June 11, I want 100% of the rent, I'm not going to listen to your stories anymore or be flexible,'" he said. "They've already come this far, they've proven that they want them in their space for the long term, so I think there's going to be a continued reasonableness in these discussions between landlords and tenants."
In addition to the issue of bringing staffing levels back to 100%, Zacharia said some restaurants are concerned that customers won't immediately be ready to sit in restaurants that as are as crowded as they were before the pandemic.
"Whether restaurants will be able to ramp right back up and afford this is all about the customers," Zacharia said. "If we come back cautiously and the restaurant is at 100% capacity but only operating at 50% because the customers aren't there, it's going to delay the return to profitability."
Rappaport Executive Director of Brokerage Bill Dickinson, whose firm owns retail space and represents tenants and landlords with its brokerage arm, said he has seen situations where temporary rent agreements were set to expire when the city returned to 100% capacity.
He said discussions about returning to normal rent payments are happening now, and the nature of the talks varies depending on a variety of factors, including the corporate structure of the landlord.
"Particularly corporate landlords, bigger organizations have a fiduciary responsibility to shareholders," Dickinson said. "Due to their ownership structure, they often have less flexibility as to what they can do."
The Role Of Federal Stimulus
The federal government is pumping nearly $30B into the industry with its Restaurant Revitalization Fund, a round of assistance that could help tenants pay back obligations to their landlords, but not all tenants agree that rent payments are the purpose of the funds.
Wang said Thamee already received its deposit from the fund, an amount of money he declined to disclose but described as "pretty big." He said the restaurant doesn't plan to give the money to its landlord, and he expects the property owner will understand.
"We have a good relationship with our landlord, we're not trying to squeeze dollars out of each other, so they understand the money is meant for other things," Wang said. "Just because we got a big cash injection, it's not like they're entitled to that."
Morris, Manning & Martin partner Bonnie Hochman Rothell, an attorney who represents retailers and landlords in Maryland, said rent payments are one of the permissible uses of the stimulus money.
"That's the reason for these stimulus checks and additional grant money is to clear obligations up and down that ladder, so landlords get paid their rent, so they can in turn pay mortgages and potentially utilities or other things that need to be paid, and that the bleeding stops a little bit," Hochman Rothell said.
She said most landlords are willing to work with their tenants and aren't expecting a check for the full amount of back rent owed as soon as restaurants receive stimulus or return to full capacity. But she said landlords do see the stimulus checks as a way for them to start receiving the money they are owed, and they are looking into ways to receive that money.
"One of the things we're looking at with landlord clients is there a plausible way to make payments of past due indebtedness through the grant money and moving forward being able to sustain rental payments through new income now that businesses are opening," Hochman Rothell said. "I'll tell you, that isn't always taken too well."
Dawson said his restaurants have applied for the Restaurant Revitalization Fund money but haven't yet received approval. He said the potential injection of cash, which would be a sizable amount, would help it reopen restaurants and pay back landlords.
"If this federal bailout comes, we'll be able to do more for landlords," Dawson said. "The federal bailout money will absolutely, 100% save any business that gets even 50% of what we've applied for. But without it, we're going to be really nip and tuck."
Martino said ThinkFoodGroup is also working to get money from the federal stimulus program but hasn't yet received it. And he said the group hasn't yet had conversations about how it would use the money.
The anonymous Northwest bar owner was frustrated to see that newly opening restaurants are receiving money from the program, including the Las Gemelas taqueria near Union Market. The taqueria opened in March and landed a visit from President Joe Biden after it received $600K from the fund.
"This is a restaurant that just opened in March, they don't have any back rent, so how do they get 600 fucking grand from the federal government, which I don't understand," the owner said. "It's putting existing restaurants at an incredible disadvantage compared to new ones that are popping up now."
Dochter said that the dozens of restaurant users actively searching the market for space do have some advantages over existing operators, such as not having accrued debt and benefiting from a tenant-favorable leasing market with high vacancies. But he said it isn't always that simple.
"In some instances, a tenant that's active in the market that's going to be opening new would have some advantages, but that also depends, because while getting an operating restaurant going again is costly, it's going to be less costly than a complete new build-out," Dochter said.