Industry same store sales are down for full service restaurants. Technomic reports 51% of consumers are cutting back and 14% are eliminating restaurant visits. In an industry where 60-80% of restaurant sales are contributed by frequent guests it’s no wonder many restaurants are experiencing severe sales decreases. So what is one to do? Beyond what you may be working on, renegotiate your lease.

Rent is one of your highest fixed expenses. For years it was assumed rent was non-negotiable once a lease was signed. Like everything else, times have changed. According to Moody’s Investors Service commercial real estate values have dropped 22.8% through March versus the October 2007 peak, 21% versus prior year (May 2009), and further declines are expected. Bloomberg.com reports Starbucks began in January seeking 20-25% rent reductions from its landlords. In that same report, Quiznos reported as many as 90 stores received a reduction of 15-20% in rent. By combining declining market rents and declining sales your landlord is expecting to hear from you regarding your rent structure.

Before considering renegotiating your lease, execute on the basics. Know your guest inside and out. Spend time touching every table and ensure loyalty and repeat business. Be realistic about your business. If you’re not executing well, fix it. The last thing you want is your landlord surprising you with their unfavorable observations of your restaurant service, appearance, or product offering. Ensure every expense has been reduced to the point just above affecting your guest. Prove you’re doing everything you can to drive sales such as flawless service and execution, bounce back coupons, pre fixe meals, value packaging, half price wine nights, loyalty programs and every other promotion you can possibly run. Put together a terrific marketing plan for driving traffic now and moving forward. Once your restaurant is solidly executing take the next step to renegotiation.

Renegotiating your lease is rarely easy but will be easier by following these steps

  1. Know your market: Prepare diligently. Study market rents of the area surrounding of your restaurant. Your commercial broker can provide you with market rents. Know your economic alternatives. Does the space right down the street cost less per square foot to lease than what you’re paying? Are restaurants moving in or moving out of your area? Study your market demographics and changes occurring.
  2. Know your landlord: Create a win-win situation. View your landlord as your partner. While your landlord may understand times are tough, they have a business to run as well. Know your landlord’s needs, strengths, and weaknesses and look for something to offer them. Approach your problem from your landlord’s point of view. The last thing landlords want is an empty space that may take months or years to fill, restaurants don’t open overnight and they’re expensive to convert to another concept. Avoid asking for a reduction in expenses your landlord must pay such as common area maintenance, taxes, insurance and don’t ask for a release from a personal guarantee, it’s your landlord’s security blanket.
  3. Know your lease: Be prepared to discuss the term remaining and option terms. The lease term will be discussed by your landlord, after all, you signed a contract to fulfill the terms of the lease. Let them know your intention to fulfill the terms of the lease. If you think you must close within a certain amount of months, provide that information to your landlord so they can help you transition the business to someone else.
  4. Know your needs:  Be realistic about what you can afford. Typical rents range in the 5-6% range for percentage rent. Calculate a number slightly less than what you can afford to provide a cushion for negation. Make that number your new base rent. One option is to offer percentage rent above that amount. For example, if your base rent is $10,000 per month and you can afford $7,500 per month, start with slightly less such as $7,000 per month as your base rent and offer percentage rent above that until you reach $10,000 per month where the previous rent structure can resume. Remember market rents are down 20-30% so your landlord should expect a number in that range.
  5. Make the ask: Write a professional letter. Seek professional advice but have the letter come from you not your attorney. You and your landlord are working together; you don’t want attorney’s fighting it out. Be concise, convincing and professional. Provide an explanation that what you’re asking for must be done. Explain what actions you’re taking; how you’re promoting your restaurant, managing well, reducing expenses, and maximizing margins. Be prepared that whatever you ask for will be the base from which to negotiate so make sure you’re accurate-you don’t want to retract and ask for a lower number. Send your letter certified with return receipt requested. Lastly, make sure you have a plan for paying your landlord back if you’re asked.
  6. Negotiate the result: Be willing to negotiate to come to a solution. Don’t threaten to close or move unless you’re serious. Be open to compromise, you will receive less than you ask for, you’re negotiating. Remember, every dollar you’re saving in rent is a dollar more you have to use. If your landlord wants access to your financials, grant it but don’t send financials with your letter.

With the right approach to renegotiating your lease, you can reduce one of your largest fixed expenses and gain some much needed breathing room to thrive with your restaurant.

Rick Braa, AMP