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Whether A Restaurant Survives The Pandemic Could Depend On An Ineasy Dance With The Landlord

By Phil Vettel And Ryan Ori Chicago Tribune

WWR Article Summary (tl;dr) As Phil Vettel And Ryan Ori report, "restaurateurs and landlords have been forced into an uneasy dance, as both camps fight for economic survival."

Chicago

Restaurants, their receipts less than a third of what they customarily would take in, are unable to pay rent. Landlords, with mortgages and property-tax bills due, can't survive without income.

Since the coronavirus pandemic hit, resulting in the forced closure six months ago of restaurants and bars across the country, restaurateurs and landlords have been forced into an uneasy dance, as both camps fight for economic survival.

It's a give-and-take struggle that will last months more, maybe into next summer.

Partners Allan Perales and David Goldberg, whose GoldStreet Partners brokerage matches landlords to restaurant tenants, from big brands such as P.F. Chang's to single-operator restaurants such as Tzuco and Galit, see the issue from both sides.

"We're seeing a lot of panic from the landlord and tenant perspectives," Perales said. "It's been a rough four-five months, and nobody's winning right now. The greatest fear a landlord has is that their restaurant tenants aren't able to pay rent. That could result in losing ownership of the building altogether, having it go back to the bank or to investors."

And so, often with little choice, landlords are willing to deal. But how?

"There definitely is no one blanket negotiation," Goldberg said. "It's case by case, tenant by tenant. When we try to negotiate, we hope for a win-win, but there are different economic constraints on both sides."

For restaurants, the constraints are obvious. The government shutdown kept them dark for months, after which they were permitted to serve only outdoors (though not all restaurants had that option), and later allowed to serve indoors at no more than 25% capacity. Income plummeted.

For landlords, the difficulty varies.

"The truth is that not all landlords are in the same position," Perales said.

"Depending on the loan you have, some landlords are dealing with their lenders, and some lenders won't even speak to them. I've talked to some whose lenders won't give them any relief. In the next six months, we're going to see a lot of those landlords going into default."

What can be viewed as inflexibility by landlords, Perales said, may be a matter of limited financial options. "Tenants need to see the landlords' perspective," he said, "and landlords need to see their tenants' perspective in order to work together."

For those landlords who can and will be flexible, there are several ways to ease a restaurant tenant's burden. First is abatement, in which the landlord agrees to waive rent entirely for several months. "Just forgiving rent is very rare," Perales said.

Then there's partial abatement, in which months of unpaid rent are added to the end of the lease, extending the lease and keeping alive the hope that the money will be paid eventually. A third option is renegotiating the terms of the lease, often setting the rent as a percentage of the restaurant's gross sales.

"If you can get to that deal, when the landlord is willing to do it, it's the best option, really," Perales said. "As sales go up, landlords make more money, but if they go down, it's nice to say the rent is whatever percentage of sales. Sometimes it's a pure percentage, or sometimes the landlord will say, 'I can do that, but at a minimum, you've got to cover my real estate taxes and operating expenses.'"

Albert M. Friedman is chairman and CEO of Friedman Properties, which owns and manages more than 50 properties, totaling some 5 million square feet, most of it in the River North area. Chicago magazine once called him the "mayor of River North."

"And I've apologized to every mayor thereafter," Friedman said. Friedman likened the current restaurant landscape to an episode of "The Twilight Zone," except to note that it's really happening.

"You have the pandemic on one hand, the economy significantly impacted, and then civil unrest," he said. "It's a perfect storm. The smartest, most hard-working person couldn't possibly be prepared for all this. You know about counting sheep? The other night, I started counting (restaurant clients), and it was 60. Out of necessity, we had to come up with a solution."

"One size doesn't fit all," Friedman said. "A mom-and-pop is different than a national tenant. Lunch is probably the toughest sell across the board, that's not coming back until the office workers do. In the theater district, what do you expect to happen down there?

"So we worked on a program where we tried to understand each exact individual case," he said. "What was their need? Where was their soft spot? We have two full-time people documenting, analyzing, to understand each situation."

This has led to some creative solutions, including a recent deal with Nonnina restaurant, owned by Tony Priolo. In return for a partial ownership stake (unspecified), Friedman Properties is keeping the Italian restaurant afloat and even investing funds into new furniture and an air-purifying filtration system.

Other arrangements are less involved.

"We've worked out formulas that relate to a percentage of (the restaurant's) sales," Friedman said. "Sometimes it's a base against a percentage. But as long as you're willing to work with us, a quid pro quo, so there's something the landlord ultimately will get for kindness paid at this time, if you lose a tenant, do you think that's smart? That doesn't make sense."

For Howard Adelstein, vice president of Dynaprop Development Corp., the numbers are different. "We're not a big player," said Adelstein. "We have three properties. One of them has one restaurant tenant, another has two and the South Loop property (Pointe 1900) is heavily retail with five restaurants. This plays strongly into how we can manage issues. A property that's strictly restaurant space is difficult; having a building with other offices helps us weather it.

"We learned a lot from the last recession, about being well-capitalized and better prepared for a turndown or event," Adelstein said. "Fortunately, when this hit, we were in a better position than some guys were. Having said that, that only goes so far; expenses don't go away, real-estate taxes are a huge liability and they don't go down. And of course mortgage and interest expenses.

"Our initial thought was, 'everybody's gonna take a hit, everybody will have to suffer costs to a certain extent.' Those (restaurants) aren't in this for something they did wrong. This is something they didn't ask for."

Gino Battaglia has been in the restaurant business, as a manager, bar owner and landlord, for some 50 years, and owns more than two dozen properties in Chicago, with a concentration in Humboldt Park. He also owns Blue Chicago (which has been closed since the state shutdown) and is landlord to adjacent property Brindille restaurant; chef/partner Carrie Nahabedian credits Battaglia's flexibility as key to Brindille's ability to reopen.

When chef/restaurateurs Jason Vincent and Jason Hammel hosted the now-famous, invitation-only chefs summit on March 14, when dozens of chefs shared thoughts on how to survive the newly arrived pandemic, Battaglia was there.

"The first thing I recommended is that all of them start dialogues with your landlord," he said. "Work together. And that's what we did. We were completely transparent with our tenants, our mortgage obligations, taxes, insurance and maintenance costs. Real estate taxes are really, really high; the building where Brindille is, those taxes are $60,000 a year. My wife and I mortgaged our house to make up for shortfalls and meet our obligations. We're paying rent out of savings, paying employees out of savings."

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