Tenants, Landlords Resort to Percentage Only Rent to Overcome Setbacks Brought by Colder Temps

Labor Day has passed, bringing the unofficial end of summer and the kick-off to the fall season.

But in this coronavirus world, the change of season means cooler temps are on the way and restaurants in the US and Canada will soon lose critical outdoor space.

Kenneth S. Lamy, founder, president and CEO of Louisiana-based The Lamy Group, said there is a solution for tenants to continue paying their rent while landlords avoid another business failure.

Lamy recommended tenants and landlords agree to percentage-only rent until the first half of 2021. Restaurants will have to cut their capacity to observe ongoing government or climate restrictions, and the next six months can be make-or-break for their survival.

“When a restaurant closes permanently, the landlord suffers as well as the tenant and its employees,” Lamy said. “Landlords have operating costs and mortgages, and need the foot traffic that restaurants bring.”

As of early September, throughout the US, indoor dining is permitted with restrictions, except for some areas that have recently seen cases of the coronavirus spike. And despite being open, restaurants are facing severe challenges.

Among the challenges restaurants face are that their patrons usually sit and dine for long periods without having protective coverings on their faces. That is more conducive to transmitting the coronavirus than other forms of retail, such as movie theaters that require masks to be worn by patrons during their entire time on the premises.

Also, in this notoriously low-margin businesses, restaurants have to operate at 25% or 50% capacity depending upon local and state guidelines. That could “prove fatal” to many restaurateurs, especially independent operators who may have limited resources to cover expenses, such as payroll and their rent, according to Lamy.

Lamy said the longstanding model of a guaranteed fixed minimum base rent plus a percentage of sales over a natural breakpoint is not viable when a restaurant is limited to as little as 25% of capacity during both the fall and winter seasons.

“You just can’t operate outdoor dining when it’s 35 degrees and sleeting,” Lamy said. “By negotiating percentage-only rent for six to 12 months, restaurants get a lifeline, and landlords can receive some monies to maintain the shopping center, pay real estate taxes and make mortgage payments.”

Right now, Lamy has seen landlords either deferring or abating rents for their restaurant tenants. One type entails the restaurant paying between 7% and 10% of sales, including a pro-rata share of the landlord’s expenses.

While the second approach is a “gross lease,” where the restaurant pays around 12% to 15% of its monthly sales as total rent. In this rent abatement, the landlord absorbed the tenant’s pro-rata share of the landlord’s reimbursable expenses. Then, when normal business resumes, guaranteed fixed minimum rent can resume.

“A percentage deal is the only fair method until the pandemic is over,” Lamy said. “It’s a tradeoff, but the upside is that restaurants can survive on half of its sales. As sales increase, so do the restaurant’s rent obligations.”