I Don't Know Man

Jep's Trying

Category: Restaurants

Let’s take a deeper dive into why your favorite spot may be in trouble.

Signs are everywhere. And they’re coming down. The last time Dallasites drove down Greenville Avenue and didn’t see the neon lights of The Blue Goose, Ronald Reagan was President. Speaking of Presidents, you’d have to go back to the days of Richard Nixon to watch Tom Garrison and his partners paint over the existing neon “harmacy”, thus creating the iconic Stoneleigh P. Garrison announced this week that the P would be closing and moving, saying their landlord wouldn’t let them re-sign a lease. George H.W. Bush (the first one, you youngin’s) was in the Oval Office when the Matt’s Rancho Martinez sign first lit up in Lakewood. Matt’s closed on April 2nd in part because, “after 35 years of leasing businesses, we just wanted a change.” Newer restaurants certainly haven’t been immune to the sword either. Uptown brunch stalwart Henry’s Majestic closed last fall after their landlord sold the building. The lauded Darkoo’s Chicken in East Dallas and their landlords squabbled over almost everything, including back payments and common area maintenance. It seems everywhere you look an independent, locally owned restaurant is coming or going while the chains keep, well, mostly coming. The reality is there’s never a shortage of reasons an eatery closes, but the growing trend of public breakups between landlords and local restaurants (even longstanding ones) is certainly troubling. Is the relationship fully broken or just on the rocks? I like to think it’s more the latter, but like all relationships, this one needs work.

            So why is this happening? Short answer: lots of reasons. Longer answer: let’s take a surface-level, under-the-hood, behind-the-scenes, how-the-sausage-is-made look at two of the biggest current pinch points between landlords and restaurants. (*note* as a longtime restauranteur who successfully exited the business, I spoke with several colleagues before writing this and no, I’m absolutely not going to tell you who they, or their landlords, are.)

  Despite a construction boom and all the obvious, easily known issues the dining industry has faced over the last few years, believe it or not, vacancies had remained relatively low. So naturally, the landlords kept pushing. They added more years to leases, a few more clauses leaning in their favor, and perhaps most notably, the 800lb gorilla in the room: more personal guarantees. If you’re unfamiliar with PGs, from the perspective of a potential restaurateur they are intimidating portions of the lease that do exactly what they say: the tenant personally guarantees the terms of the lease with their own money, assets and property. Just for the sake of simple math, imagine the rent is $10,000/month. For whatever reason, and there are plenty available, the restaurant only lasts 3 years. Now the owner has sunk their money into a failed business and every month that passes without their landlord getting the space re-leased, the restaurateur owes $10,000. It’s a life-altering proposition for many independent operators and unless they’re blessed with a crazy rich uncle or a trust fund that can fill the pot, a personal guarantee is a deep, important and frankly scary component of whether or not a talented chef or experienced operator can really afford to open a restaurant. If you’re asking “do the chain restaurants have to sign personal guarantees?” Franchisees often do, but company-owned chain locations most often do not. As for why landlords insist on daunting PGs? It’s because as Bob Dylan coolly noted- everybody serves somebody. In the landlord’s case, their capital partners or lenders often insist on some type of recoupable insurance should a lease go awry. It’s all about risk mitigation for landlords and unfortunately a delicious local pizzeria run by a passionate neighborhood resident presents a far greater risk than yet another Domino’s.

            A second issue angrily wedging itself between landlords and restaurateurs is rocketing rent prices. Like everything else, rent prices for desirable spaces have seen a significant jump in recent years. A quick survey of DFW retail rents shows numbers of $30/sq ft + NNN (CAM, taxes, insurance) for Preston and Forest and $25/sq ft + NNN in Duncanville. Existing space at The Music Factory in Irving is currently on the market for $48sq ft + NNN, and a 1,500sq ft East Dallas spot at Walnut Hill and Audelia recently came available for a rather daunting $65/sq ft. By most publicly available metrics, the average retail space in DFW has crossed over $20/sq ft. If you’re looking for space in a “hot” area or an emerging suburb, you should expect to see total rents well into the $30-$40/sq ft range.

            While restaurant operating margins are being mercilessly squeezed from every direction, rent is primarily a fixed cost that’s ideally somewhere between 6-10% of gross revenue. If we use, as an example, the 2,500 sq ft Irving Music Factory space that’s currently being marketed for $48/sq ft, and add $10/sq ft of NNN, that’s $145,000 in annual rent payments. That means, to meet generally accepted parameters for profitability, a 2,500 sq ft restaurant would need to be doing at least $1.45 million a year in sales, or $580 per square foot. That is a Panera or Wendy’s-esque sales-per-square-foot number. Independent restaurant sales tend to be lower than those of their big chain counterparts, and their lack of economies of scale typically make nearly all of the costs higher, so being a startup and strapping yourself to a lease that carries big-chain expectations can end up a recipe for serious trouble.

            Obviously, it’s easy to admit the restaurant industry is rather upside down these days. The relationship between local, independent eateries and their landlords may have never been more tenuous, and personal guarantees and exploding rents are only part of the picture. But there are some (slowly) emerging solutions. Restaurants of all sizes, including the big chains, are actively exploring smaller footprints and ghost kitchens. Landlords are beginning to open up to shorter leases and more flexible payment schedules. As for the restaurants, more and more bright eyed and talented new restauranteurs are signing leases in lesser known spaces, and betting on their talents bringing in guests anyways. (Hi there, Cry Wolf, Lounge Here and Petra and the Beast!)  As new construction is expected to be limited by sky high build-out costs and matching interest rates, the supply of restaurant spaces will continue to be tight in the short-term future. There are solutions out there to bridge the gaps between landlords and restaurateurs, but creativity will be required- because we all still gotta eat.

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