Asset vs. Lease
Hold on a second. That’s something that we haven’t touched on in our other conversations. Give everybody a little bit more insight into what you just said, ’cause I think that’s one of the most important lessons I learned early in my restaurant career. Talk about asset versus lease, and what it means in New York City.
Sure. Even before the pandemic and the lockdowns, we were seeing a tremendous flight of younger, talented cooks and chefs leaving New York City. It wasn’t for want of venture capital to invest in restaurant creation. It was more they were looking for the stability of a restaurant. You can go back to your home in Washington, or Minnesota, or Indiana. And just because you leave New York City doesn’t mean that you all of the sudden forget how to cook fine dining or innovative food. You need to be sensitive, obviously, to the market that’s there. I think that New York, Chicago, and Los Angles are a bit more receptive to it because you’ve got a larger group of people who are into cultural activities, and there’s a vibe movement afoot.
But that being said, a young 30-something chef decides he or she wants to open a restaurant, you’re looking at, say 1000-square-foot restaurant. You’re looking at rent somewhere around 17 to 19 thousand dollars a month. You add on the insurances, you add on the city…we’ll call it a regressive tax, the DOH inspections; the fines; the compliance. You’re looking at a nut that is incredibly huge. Throw in in the fact that a liquor license in the city will cost you…lawyers and everything else…around fifty to sixty thousand dollars, not to mention appearances before the community boards, and fighting with the SLA [State Liquor Authority]. So, your initial investment – build-out, furniture, we’ll call them the tangentials – you’re looking at a million dollars, minimum. And even more, if it’s a new build-out, not an existing restaurant space.
Now there are spaces that you can get away with things that are cheaper. But when you’re paying almost $20,000 in your required three months’ rent, first, and security, and then the first and last. There’s a hundred grand out of your pocket.
Chefs are Leaving Big Cities
Maybe it was the lawyer esthetic in my head. I thought, if we’re going to do this, taking into account the failure rate of restaurants, we want to have some kind of parachute should it not work. Even if it does work – say for example for seven or eight years like The Crimson Sparrow – at the end of the experience you have an asset that’s increased in value. So, we looked in a 20, 25-mile radius of my house upstate, probably at 40 or 50 properties. We settled on one in Hudson. And by the grace of God and good old capitalist greed, the building increased in value almost 75% when we sold. We also had all the things that were in the facility that we sold to the next buyer as well. But that allowed us, if you take into account the yearly depreciation, the write-offs for taxes, salaries pulled from the property, and then you’re able to lump a big sum on your four or five investors and get them, if not whole, even a little bit more – it’s a zero-sum gain with other people’s money. So, we did very well. And it’s a model, I think, that is becoming much more popular as these urban centers become much much more difficult.
Until the larger metropolitan areas start viewing restaurants as an asset to draw tourists and income, instead of a revenue source for fines and levees, and things like that, I think there’s going to be a continued look for places that aren’t eight, ten million people. Maybe I discussed it with you or Mr. Winston, the great chefs in Kentucky. Ed Lee is down there. You don’t need to be in a large urban center to be a success.
I don’t know if we were rationalizing it, but we were doing a lot of research. If you look at the number of franchises that are in the United States that are not located in any of the big northeastern cities and that their multi-million-dollar operations, it just brings you to the conclusion that it’s not a path of least resistance. It’s not a fear of doing business in New York. It’s simply financial. Couple that with a lot of these younger chefs that were leaving even before the pandemic. It’s also a lifestyle change. They can go back to where they grew up. They can go back to a community that they know. And they can give back to that community the things they’ve learned in NYC and LA and Chicago. And be very happy with cooking, making money, servicing their community, and being part of that again.
New York City
I think New York was a wonderful place. I think it’s gonna go through a decade of very, very difficult times. But I think there is something to be said to finding first peace in place, and then pursuing what you want to do. Just because you live in Peoria, Illinois doesn’t mean you can’t fly to Japan, and go to Spain and bring back what you’ve learned. There used to be an obsession to be in New York or Chicago or LA, or even Atlanta. I think that has passed, at least from what I’m seeing and what’s happening. There’s still a desire to be in New York, but again, if you’re not in that pipeline of available capital it will be incredibly difficult.
I’m an adviser to the New York Japanese Restaurant Association, run by some very experienced and well-known Japanese restauranteurs in New York. We set it up as a 501C6, which allows us to do lobbying and other activities. One of the main things that we saw at the beginning and outside of the pandemic and lockout was the difficulty the restaurants were having in paying their rent. And in fact, it’s only gotten worse.
The last survey from the New York City Hospitality Alliance showed that almost 70% of the restaurateurs are not meeting their rent. Now the difficulty comes in looking at it from a business perspective. The landlords are, almost to a person, unwilling to negotiate, renegotiate, or give breaks on rent. Now there are anecdotal examples of landlord slashing rent, or putting it on the back end of the term of lease, or taking up to 10% of your gross sales, which is the limit under the state liquor authority. Almost across the board, the landlords have not budged. Which means that someone that’s paying $15,000 a month for rent is trying to make that nut solely on delivery, takeout, and only for the last month – 25% capacity. Evidence would suggest that’s nearly impossibility, if not a complete impossibility.
The reason for that, if you want to have a discussion about the economic pipeline, is that the state and city have done zero to alleviate the property tax burden on landlords. Couple that with the fact that Morgan Chase and other banks that hold mortgages on these properties want their cut as well. And there’s been no relief on the mortgages. So, you know, everything rolls downhill, from a lack of action by Congress on the Restaurants Act, any direct help to landlords and restaurants. So, as it continues to flow down, everyone’s looking to the last man standing, who is unfortunately the restaurant operator.
And the one with the least capital.
There’s no capital. And as they’re all standing on the shoulders of each other, the one getting crushed is the restaurant operator. And until there is a, well at this point they’ve had ten months to come to Jesus and say ‘we understand you have no income. You can’t service your rent, which then means we can’t service our property tax burden or pay the bank. Therefore we’re gonna go into default.’ And I’m not saying all landlords are that way. There are some multi-billion-dollar real estate conglomerates. We’re talking about a lot of the smaller buildings in what most people would consider the quaint areas of, say, Manhattan – brownstones. Those are typically somebody that’s had a building in their family. They may rely on one or two buildings to actually be their income. But there’s been nothing to adjust it.
So, as we come to the end of the pandemic, we’re hoping that restaurants will soon be able to open up, with a vaccine, etc. Although we believe that soon Cuomo’s gonna announce an elimination of the indoor dining at 25 percent. [Governor Cuomo subsequently did suspend NYC indoor dining.] But as we come out of it, if there is no adjustment on the economic realities of rent in New York. We’ll be at 70% vaccination and everyone’s got their papers and cards, and everyone’s gonna be healthy, and there will never be a flu case again. I don’t think the rent is going to adjust. So even though this may have been an opportunity…I don’t want you to say opportunity because it means taking advantage of it, but if there were a time that rent was going to readjust or adjust itself in a downward fashion that would hopefully, after a travesty like this, result in the promotion of more entrepreneurial activity due to the availability of property and the access allowed by lower pricing seems to have passed us by. That’s my, well…you know, near illiterate economic view of what’s happening. But the realities are there.
I think that’s a pretty good understanding at observation. I’m glad you shared that with us, so we can share it with others.
This is based solely on my interaction with existing restaurant operators who are hoping to pull out of this and stay in there. One of the bigger things to come out of this that I think is going to affect the entire restaurant industry is the actions of the insurance companies. Most insurance policies did not include business interruption coverage, or if they did it had to be a physical damage to a building. There’s legion lawsuits out there trying to get business interruption coverage. But I will tell you, we’ve been in this cycle almost ten months now, this means that on a year-to-year basis, the new insurance policies are going to contain the most onerous and heinous exceptions to viral, bacterial, and other food and airborne diseases. And what’s being a big concern is that these policies are so restrictive that they’re actually removing the policies’ foodborne illnesses from coverage. So, restaurant operators are very aware what the impact of the COVID is, beyond just you know avoiding COVID and getting a vaccine.
There is going to be a ripple through this industry on so many levels, not to mention the fact that insurance rates are going to skyrocket. Just typical response of the insurance industry. But these are things that we’re dealing with on a micro and macro level at the New York Japanese Restaurant Association, in conjunction with another great group called the New York City Hospitality Alliance, who really take the point on a lot of these issues. But that’s what we’re doing. We’re trying to help these restaurant operators deal with the day-to-day issues that come up, in terms of restrictions, regulations, lockdowns. But also trying to anticipate what business considerations they need to take into the equation to ensure that they’re gonna make money.
So, based on your experience there with the associations in New York, and knowing that these ripples are not just in New York, it’s across our whole industry, right? Are you aware of any super PAC or hospitality associations that are going to say, ‘we’re one of the largest employers, as an industry.’ Do you see anything coming in the future or in the works now that are going to get better representation for independent operators?
The National Restaurant Association is one of the largest groups out there. The New York City Hospitality Alliance, like I said, is another great. We have another New York State Restaurant Association. There’s a lot of associations. I think the difficulty they are all having, and that we have all had, is that there is a logjam in the Congress. And when one side is fighting for a billion dollars and another one is fighting for 1.6 billion dollars, for some reason they can’t come up with a solution. Only those who are truly in need and vulnerable are the ones held hostage. And frankly, you know the Restaurants Act, which is the one act that I think is really going to be beneficial in that it provides direct payments to restaurants and workers, has been stalled. And if we look at what’s going on today and probably until the January 19th, there is slim to no chance that that’s ever going to be addressed unless there is a concerted effort to take care of the restaurants.
Now the actions of the mayors and governors in New York, Massachusetts, and California should highlight the situation that these restaurant operators and workers really need now. And hopefully someone is going to take notice. There is some hope for the restaurant operators. I think if you look at how…I’m not going to say it was shortsighted…how optimistic the PPP program was. That provided loans to restaurant operators, allowed up to 20% of it to be used for something other than salaries. But if you applied back in March or April, that money is already been expended. Unfortunately, there wasn’t a second round of the PPP. That program is basically extinguished. So, we were optimistic in March. We’d get through the summer and PPP money, and you’re back up and kicking for summer or late summer, early fall. It just didn’t work out that way. So, we’re in a situation where right now there’s no money in the pipeline to help these businesses and help these operators and entrepreneurs. It’s really an abject failure of everyone involved – President, Congress, whoever you want to blame, that there’s not been a view to helping one of the largest small business sectors in the country.
So, with all that said, I think it brings me to two more questions. One, as somebody like yourself, or myself, or other chefs, or other restaurant operators, or even people who like to eat in restaurants, what can we do to help that out? And then also, let’s just assume that something is done that gets our industry back on track. What does that look like when we’re back really operating and open?
So, a couple of things. One, I would urge everyone to contact their reps or senators and push the National Restaurants Act. This needs to be done ASAP. Number two, I’m a bit cynical about it, because I think my lawyer mind kicks in. Even if the restaurant operators and workers were to get money through the restaurants act, you have a group of mayors that is arbitrarily and without constitutional authority locking down businesses, telling them they cannot operate. So, if you give these businesses money but you tell them they can’t open, you’re essentially perpetuating pain.
Restaurants Are Singled Out in the Pandemic
I’ll point out that in New York City here, restaurants seem to be the low hanging fruit of resolution. Meaning, if there’s an uptick, all of the sudden it must be restaurants. Let’s shut them down or restrict their capacity. In New York there is a demand, I mean a very public demand for data. Because as of yet, we’ve been shown no data that transmission is caused and/or is rampant coming out of restaurants. In fact, to the contrary, restaurants are conducting business in a way that’s probably the safest out there, meaning plexiglass, ventilation systems, air circulation, measures that were taken, people wearing PPE all the time during the interaction. So, there is absolutely no evidence that the restaurants are the cause (meaning that you have to shut them down).
Now I’ll point out in Boston they’ve actually got the data. Boston has shown that point four, point four – less than half a percent of the transmissions identified came out of restaurants. Yet they’re not allowed to operate. In California you have a governor shutting down outdoor dining. If I can’t even bring the outdoors…I’m not sure what’s left for me. A judge in California has just shot down that edict.
The problem we’re seeing and, the problem you’re having…this comes from my lawyer brain…is that if this were a law passed by the New York Assembly, or by the House or Senate, groups out of the states, you could challenge it as an unlawful law. I don’t wanna get too political but these edicts and fiats by mayors that seem to change every two or three weeks leaves you with no judicial recourse in an appropriately time-sensitive and exigent fashion to get yourself open.
I’ll point out anecdotally Governor Cuomo shut down churches in New York. The Catholic Diocese appealed to the Supreme Court and won. Cuomo dismissed it as irrelevant, because he said that at the time the church was in an orange zone, and now they’re in a yellow zone. So, the facts don’t apply. So, we’re left with these governors and mayors doing what they wish without constitutional recourse. It’s been a very frustrating experience for those people that want to challenge authority, but there’s nothing to challenge because it’s being done in a very cavalier fashion.
Sorry for the diatribe. I think what we’re left with is hoping that there is going to be money put on the table for restaurant operators and workers, with a corresponding…not to be too cynical but we’re entering winter in the Northeast. We’re looking at flu, we’re looking at any other any other number of possible contagions. It’s not likely that we’ll see the light of day until spring again. They’ve extended outdoor dining in New York, but I’ll tell you that their restrictions on seating capacity, heating, which heat lamps and propane you can or can’t use. It’s onerous. If it snows more than 12 inches all of these restaurants are being required to break down all of their outdoor setups and semi-permanent structures, move them inside, let them plow, and then move them back out. I’m not sure that there’s going to be a stampede rush to a three-quarter paneled in the street in February when it’s 4°F outside. What we’re facing is a very very difficult situation, speaking as a New Yorker. We don’t have the conditions for outdoor dining that say LA or Dallas, or San Antonio have. We are in a completely different situation. Frankly, I’ll just say, we need help. We need help in a big way.
Here’s where the restaurant operators get frustrated. For example, Governor Cuomo several weeks ago, said “we’ve seen an uptick. So, what we’re gonna do is put a curfew on indoor dining at ten o’clock,” meaning a couple of things. One – is this a suggestion that the virus only attacks people at 10:01? The other thing that he did was required people to be moved out of the restaurant. Well, guess where they’re going? They’re going to probably what they consider illegal gatherings, either apartments or other spaces. Couple that with the fact that he also stopped to-go and delivery of alcohol after ten o’clock. I do not understand that one. If you’re looking for people to go home, if I can take a bottle with me and finish my conversation with my dinner guests in my apartment with a bottle of booze, so much the better.
They’re making these rules up without any…I’ll call it justification or rationale. If you think about it, in New York if you’re going to put a curfew on a restaurant at ten o’clock, and they don’t usually open until six, well guess what? More people are going to show up at the restaurant between six and nine. To get their eat on. This is where we get into this circular kind of frustration. We, as a restaurant group and as a restaurant community are trying to abide as best we can. I guess it’s the one opportunity we have to be part of the collective to get through it. But whatever they’re doing, they have done, doesn’t seem to be working in terms of the overall infection rate, so we’re left with trying to hold as best we can.
I hear the frustration. I feel it. I’m anxious to get this up on our website so we can show some support to everybody.