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4 Options for When Your Rent Increases

By Kevin Hirson - Warshaw Burstein LLP; Matthew Hayes, Summer Intern - Warshaw Burstein LLP

August 10, 2017

New York City restaurants have been closing due to rent increases since the introduction of fine cuisine after World War II.

In May, Craftbar, by Tom Colicchio in Gramercy, Po in the West Village and Prohibition Brewery on the UES all closed their doors due to rent increases ranging from 40% to 120%. In a recent OpEd in Crain’s New York, the former Executive Chef of Cibo in Turtle Bay, wrote about the restaurant closing on February 28th, 2016. The space has remained vacant after being occupied by Cibo for 20 years as the landlord is unable to secure someone willing to pay twice Cibo’s rent. This is a common story in the restaurant industry and the problem is likely to continue, as landlords are willing to let commercial space remain unused hoping to obtain higher rent.

There are multiple reasons why Landlords allow their properties to go unused. They may be looking for a “credit” tenant, a bank or drug store, that consistently pay and is substantially less risky than a restaurant. Financially, it might also be better for the landlord to take the passive loss on their income which could reduce their income tax obligation, than take less rent on leases with terms of ten to fifteen years. The landlords could also be waiting for a buyout from a foreign investor. As a tenant-restaurant, you have options and opportunities to try and maintain in business at your present location.

Option #1 Buy the Building

Although not practical for a lot of restaurateurs, many famous restaurants can remain in their neighborhoods due to owning the building such as Katz’s, Patsy’s, Peter Luger, and the Carnegie Deli. Buying the building is an easy way to avoid the increase in rent when a neighborhood improves as you continue to occupy it. A lot of restaurants who help to revitalize a neighborhood are eventually priced out as they are doomed by their own success like Danny Meyer’s Union Square Café which had to move locations after 30 years in Union Square due to the revitalization of the area. If financing is available, this could be an option to ensure your restaurant a place in the neighborhood for years to come.

Option #2 Re-Negotiate Early

Two years out from when the lease is up is a good time to start negotiating with your landlord about renewing the lease. In this way, you can scout locations, research comparable rents in the neighborhood and have a better idea of places you could move to if the landlord is not budging. It is important for you to let the landlord make the first move, to see what price he or she is thinking the space is worth and working from there. This will ensure that you do not offer an increase in rent if the Landlord wasn’t expecting one or only expecting a modest increase.

Option #3 Protect yourself in your original contract

Obviously, the landlord wants the yearly rent for option terms to be calculated at the  time of the exercise of the option based on the fair market rent. Of course, it is better for the tenant if you can set the rent during the option years you on hard terms of fixed rent or fair market value with caps. Try to negotiate that if the fair market rent is not set by the time the option term that the rent during the last lease will be paid until such new option rent is determined. Certainly, if you agree to fair market rent, make sure you set new base years for determining operating expense and real estate taxes increases. 

In this way, you can budget for the increases and know what is coming instead of being surprised when the rent increases.

Option #4 Occupy until a new tenant is found

While the landlord may expect to find a tenant willing to pay the exorbitant asking price, walk around any block in New York City and you will see countless, empty commercial real estate spaces, waiting for a new occupant. Tenants should consider entering into lease extensions with he landlord and tenant having flexible rights to terminate if latter find that they are looking for. Ensure that you give yourself a grace period so that when the new tenant is found (or in some instances when the building is sold), you do not need to immediately shut your doors and have time for your workers to find other work or for you to leave the location on your own time.

For more information about this article, please contact Kevin Hirson at 212-864-7782 or khirson@wbny.com who is the firm’s practice chair of the Hospitality and Alcoholic Beverage Businesses Group.

 

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