The 'New Normal'

The economic downturn has been tough on many restaurant chains, but even as the economy continues to improve, owners are finding that further steps are needed to enhance profitability and ensure continued success. Keeping struggling locations afloat and turning them into contributing units within a system are key aspects to strong, long-term financial performance. 

In the highly competitive restaurant industry, the “new normal” approach to optimizing occupancy costs combines renegotiating more favorable lease terms with remodeling locations to boost revenue. When done correctly, these strategies can be beneficial for landlord and tenant alike. In fact, a joint approach between the restaurant operator and the property owner minimizes risk and expense for both parties, while increasing return on investment for all involved.

Restructuring leases can help restaurant owners increase their cash flow by lowering costs, while at the same time allowing property owners to refinance at today’s record-low interest rates. The first step in achieving this type of win-win situation is to approach the landlord with a full and accurate picture of the restaurant’s current financial situation, whether it’s struggling, doing well or somewhere in-between. 

Similarly, the landlord should fill in the restaurant owner on topics such as co-tenants, vacancies and where the restaurant fits into the landlord’s overall financial portfolio. Restaurant owners must also educate themselves on local market conditions to understand the best approach for their particular situation.

It might be beneficial to hire the services of a qualified financial restructuring advisor to help establish the facts and work toward a resolution. Working with a firm that specializes in lease restructuring can help restaurant and property owners alike arrive at a mutually beneficial solution. For example, since the 2008 financial crisis, many restaurant owners have found themselves with outdated leases that are far above the current market. A renegotiation can help secure lower lease rates more in line with today’s standards. For landlords, negotiating a lease with a lower rent but a longer term can help raise property values, making selling or refinancing significantly easier and more profitable. 

Keep Them Coming Back

In addition to renegotiating lease terms, restaurant owners and landlords can both benefit from a carefully planned strategic remodel of a location. A simple refreshment of the restaurant’s exterior can bolster a revenue stream, while rejuvenating the interior helps to maintain the increased cash flow. Restaurants in particular are visually oriented businesses, and such improvements can go a long way toward enticing customers to drop in, see what’s new and keep coming back.  

Exterior improvements such as a new facade, a new logo or updated signage are excellent ways to capture the attention of customers without requiring extensive construction or a huge investment. It’s important that a fresh exterior be accompanied by a new interior to capture and keep customers’ attention – a strategy that is particularly important when there is competition nearby, be it an entirely new restaurant or an existing competitor who has undergone a recent remodeling. Remodeling a restaurant should always be thought of as an investment in the future of the business, and one that is sure to yield favorable results every time.

Landlords and tenants who share the cost of a remodel will both see benefits, just as they will from renegotiating the terms of an outdated lease. Restaurant owners will naturally enjoy the increase in business, while property owners can look forward to an increase in the value of their investment that may come in handy if they are seeking to sell or refinance the building any time soon. Property renovation will increase the lender’s loan-to-value ratio, making it easier for the owner to secure underwriting support for a potential loan or refinancing. A freshly renovated restaurant can also make it easier for landlords to lease-up adjacent vacancies.

The improving economy is good news for restaurant owners; however, it’s important to make the most of the recovery by adopting a proactive approach that includes the cooperation of the property owner to reap the greatest benefits for your restaurant. Partner-ships between restaurant owners and landlords in restructuring leases and remodeling locations truly are the “new normal” in our current economy. 

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