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delivery-only-restaurant FREDERIC J. BROWN/AFP/Getty Images

Restaurants Face a Challenge If They Reopen with Limited Dining Capacity. What Can Landlords Do to Help?

PPP loans and income from takeout and deliveries will not be enough to help most tenants stay afloat.

We'd like to hear from our readers about strategies they are employing to help their restaurant tenants survive as they reopen, including both financial solutions and ways to increase sales while adhering to social distancing guidelines. Please send an email to [email protected] and let us know how you are working around the current market challenges.

The U.S. restaurant sector has sustained one of the heaviest blows during the COVID-19 pandemic as national quarantines forced the closures of restaurant dining rooms across the country.

Full-service and casual-dining chains are less equipped to pivot to delivery and takeout, and many can’t survive on takeout orders and curbside delivery alone.

Those restaurants in which their normal business model is having people in the restaurants have “gotten devastated and they’re literally fighting to survive,” says Kenneth Lamy, president and CEO of The Lamy Group, a financial management consulting firm that works with landlords to help assess their retail tenants’ financial performance.

“Those closed have seen, obviously, 100 percent revenue loss, but those still operating are still seeing as steep as 75 to 85 percent revenue loss,” he adds.

Although independent restaurants have taken the biggest brunt of the crisis, national chains aren’t being spared. Oftentimes, chains rely on independent owner/operators to run restaurants, and these franchisees frequently don’t have the same healthy financial resources of the concepts they represent, according to Business Insider.

And while states are starting to reopen and lift stay-at-home orders, many have social-distancing guidelines in place. This makes it virtually impossible for restaurants to make a profit even if they reopen their dining rooms due to the limited capacity allowed. Some restaurants, therefore, have remained closed.

States including Texas, Arizona and Virginia have allowed restaurants/bars to reopen for dine-in service but with limited seating capacity, while states like Minnesota are allowing outdoor service only, with patios limited to 50 customers.

“It’s ‘start your engines, but we’re only going to let you drive in first gear,’” Lamy says. “I only have so many transactions, because I can only have so many customers in the restaurant. And I’m trickling with my takeout and delivery.”

Unless a restaurant has a unique takeout and delivery model, as well as curbside pickup dominance of its revenue stream, nobody believes that 25 percent dine-in capacity is going to be enough, Lamy adds.

Sector depends on traffic, volume

For casual-dining chains, in-house dining service makes up the bulk of their revenue. Plus, now they’re incurring additional expenses in infection-prevention measures, including disposable menus and utensils, masks for customers and employees, and increased cleaning protocols.

“The reductions in capacity and new protocols in place for public places in terms of sanitization and social distancing are creating new hurdles for numerous industries,” notes Joseph Coradino, CEO of PREIT, a Philadelphia-based retail REIT, which owns 21 malls primarily in Pennsylvania and New Jersey. PREIT has approximately 55 restaurant tenants across its portfolio. “With restaurants specifically, there are, of course, challenges presented when looking at the number of guests served pre-COVID in-house vs. the possibility to serve in-house post-COVID.”

However, Coradino points to positive signs.

“We are encouraged that some national tenants at our properties that have been able to reopen at reduced capacity have reported that they are generating sales in higher proportion than the occupancy level, as we accept the new realities of operating due to COVID-19,” he says.

The partial reopening of in-house dining services is a start for most restaurants, he notes, but often doesn’t allow them to bring back the entire staff.

“We are hoping to continue to see innovation in restaurants such as robust curbside pick-up and takeout menus, as well as those that are creating meal kits for customers… and refrigerated, pre-packaged options,” Coradino adds. “We are seeing our restaurant tenants becoming very creative in the way that they serve their consumers.”

In states where capacity has been limited or dining is only permitted outdoors, PREIT is looking at ways to help expand outdoor seating for its restaurants.

Some chains couldn’t hang on

Some restaurant chains have been pushed to the brink during the pandemic and already filed for bankruptcy protection. Others decided to just shutter all locations. Some were already gasping for air, but the COVID crisis likely accelerated their demise.

Meanwhile, some big chains announced they’re permanently closing select locations, including Steak ‘n Shake, Ruby Tuesdays and TGI Fridays. Business Insider reported that chain restaurants have permanently closed in excess of 500 U.S. locations already this year.

Meanwhile, Steve Hafner, CEO of Booking Holdings’ OpenTable and Kayak, told Bloomberg that one-quarter of U.S. restaurants won’t reopen after the pandemic due to revenue loss and layoffs. OpenTable tracks more than 60,000 restaurants on its reservation site for online/phone reservations and walk-ins.  

Total reservations and walk-in customers from OpenTable’s network were down 84 percent on June 1 compared with the same day one year ago. (Deliveries and takeout are not included). This data was based on a sample of approximately 20,000 restaurants that provide OpenTable with information.

The pandemic is taking a toll. According to the National Restaurant Association, restaurants lost $80 billion in revenue nationally during March and April and laid off or furloughed 8 million workers. The association projects a loss in sales of up to $240 billion by the end of the year as COVID-19 continues to ravage the industry.

What can landlords to do help restaurant tenants?

Aside from counseling on Paycheck Protection Program (PPP) loans, how can shopping center and mall landlords help restaurant chains stay afloat in the long term?

PPP loans are meant to help small businesses get back on their feet by offering a forgivable loan to pay for two months’ worth of payroll, rent and utilities. While these loans can be a lifeline, they impose restrictions on how the money can be used, which pose challenges for restaurants.

For restaurants to activate the forgiveness clause, they must spend 75 percent of the loan on payroll costs, and then can use the other 25 percent for rent/mortgage and utilities. However, because restaurants were restricted to takeout, delivery and curbside pickup, many may not need their full staff. Even if they reopen dining rooms, they might be restricted due to limits on capacity.

 “The PPP loan program is fantastic as a source of funding to inject some money into the restaurant’s bank account, [but] with a whole lot of rules to follow for the loan forgiveness,” Lamy says.

Rent restructuring

Leases are a big expense for restaurant operators and they’re built around full capacity. Should restaurants then be able to renegotiate leases during the crisis?

“The lease covenants that existed pre-COVID disruption and shutdown all have to be revisited because those ground rules may or may not apply today,” Lamy notes.

A landlord’s incentive is to stabilize the center’s restaurant and retail tenants if they want financial sustainability, Lamy adds. Some tenants might need assistance in the form of restructured rents. “Some may need a little breathing room like a 90-day deferral, where you work it out where maybe they pay back that money over 18 to 24 months starting in January 2021. This is about hitting the pause button long enough for everybody to catch their breath and just get started again.”

Bridge loans

It’s not in a landlord’s best interest to have to find replacement tenants, so their incentive is to work aggressively and collaboratively with their existing tenants, Lamy notes. They’ve already put dollars into build-out and TI allowances, and they may have a good relationship with that chain restaurant tenant.

“You have someone who wants to reopen, but they need some help,” he says.

Some landlords have set up funds to provide some additional lending to certain retailers and restaurants. Some businesses didn’t receive PPP money, so not everybody got funded, Lamy notes. Those tenants may need bridge loans to get through this unknown period of time. For the landlord, the expense may be worth it if the restaurant was performing well prior to the shutdown and the landlord can avoid paying for new build-out costs to bring in a replacement in the future. In addition, a broker is often involved to find that new operator for the space, which means a leasing commission.

“You have a whole stack of costs that you could prevent by working with who is there,” Lamy says.

“That’s incentive for the landlord to say, ‘We have to make this work. We have to be transparent, share data, help each other understand what we need to do so we can both survive this.’”

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