Real Estate Opportunities Abound for Entrepreneurs with Cash at the Ready
One man’s misfortune is another’s gain, as the saying goes. With some once-solid food and beverage operations and brands going belly up, others opting out of lease renewals in prime real estate locations like Manhattan and still others teetering on the edge of profitability, the present may seem an inopportune time for anyone vested in the hospitality channel to be shopping for startup locations or going all in with expansion plans.
For all the dark clouds on the economic horizon of an industry accustomed to high single- and double-digit growth rates, however, the real estate sites available because of the recent economic upheaval represent a golden opportunity of career-making proportions for those with the cash to take advantage of them.
In the words of Alex Picken, owner of Picken Real Estate and Nightlife Brokerage and a well-known New York City real estate broker, “What we are seeing right now are some of the best deals that we have ever seen in real estate, and I have been doing this for 20 years.”
Buyer’s Market
Widely recognized as the go-to person in Manhattan for restaurants, nightclubs, bars and other entertainment-oriented properties, Picken’s real estate deals include iconic nightlife brands such as Copacabana, Providence and The Tunnel. He says the current favorable climate for acquiring once untouchable locations in New York City transcends the good times of the 1980s or the cyclical nature of the on-premise industry itself. “Sometimes, we have fully (outfitted) nightclubs or lounges where there is no key money or fixture fee included,” Picken says.
Unquestionably, he says, the 10-foot-tall New York City landlord of legend is being cut down to size in an entertainment marketplace where the supply and demand dictates of nearby Wall Street readily apply. Gone are the days, at least for the foreseeable future, according to Picken, when property owners can expect to routinely receive the 3 percent annual rent increases long standard in Manhattan and other prime hospitality locations across the country.
“The rents are lower than the norm over the past few years,” Picken says. “That is not always the case. Many landlords are asking for market values, but we are seeing rent reductions on an average of 25 percent. Someone renting [to a tenant] for $20,000 per month could be lucky to get $15,000 now.”
In short order, Picken says the tables have turned considerably in favor of tenants and would-be buyers versus the landlord interests. “On the new leases that are signed, [landlords] are telling tenants, ‘We may not be seeing profitable times for two to three years, so I am going to ease your string.’ That is some of the new standard negotiation regarding lease signings that we are seeing.”
Indeed, today’s available real estate could potentially remake the nightlife scene of a city where Manhattanites enjoy fewer nightclub options than ever. “I am not noticing it to be the big players, the ones who have several operating venues. I’m not seeing those guys jumping into the buying picture right now, but there are guys out there who are still generating a lot of cash and those are the ones who are eyeballing these rather exciting deals,” Picken observes.
At press time, one such property available to those with the financial resources was a restaurant location on Franklin Street that a tenant recently surrendered back to the landlord. “I’ve had some giants in the industry come to see it. It’s ready to go, available for no up-front money, with rents that are a third less than a year ago.”
Opportunity Knocking
One East Coast nightlife impresario who’s taking advantage of the turning of the tables in hospitality real estate is Barry D. Gutin, president and CEO of Libre Management, which operates three Cuba Libre restaurant locations in Philadelphia, Atlantic City, N.J., and Orlando, Fla., and two nightclub concepts, Shampoo (Philadelphia) and 32 Degrees (Philadelphia and Atlantic City).
Despite seeing his own restaurant and nightclub revenues fall significantly within the past 12 months in the wake of the global economic downturn, Gutin and partner Lawrence Cohen recently acquired a lease on a space located inside the U.S. Mint Headquarters building for a long-anticipated expansion of his Cuba Libre Latin restaurant and rum bar into the Washington, D.C., market.
“We spent three years looking in the area of Washington, D.C., for a new Cuba Libre location,” Gutin says. “But when the economic recession deepened late last year, we started to see deals that had not been offered before.”
Gutin and Cohen acquired an 8,000-square-foot space that they are expanding to 10,500 square feet with the addition of a mezzanine. “We are working on finishing the design now,” Gutin says, with the planned opening of the fourth Cuba Libre set for spring of 2010.
Without going into specifics as to the exact nature of the lease agreement, Gutin says the D.C. deal allows his company to pursue its long-term expansion strategy despite the economy’s reduced revenue and cash-flow outlook.
Gutin says such real estate windfalls are no minor detail on the path to success. “We found we were able to expand into D.C. while expecting a reasonable return on investment. If restaurant development costs are too high, even a successful restaurant may not make any money.”
In the coming months, Gutin hopes to expand Libre Management’s holdings with the opening of a new Italian restaurant concept in Philadelphia showcasing the culinary talents of recently acquired chef Luke Palladino. Although the precise location has yet to be identified, Gutin has a clear idea of the desired real estate.
“We’re looking for places that have just gone out of business or are nearly out of business,” Gutin explains. “We want to keep our capital costs low and re-concept or redesign an existing space that may already have exhaust hoods, an entire kitchen, bathrooms, bars and perhaps a POS system in place.”
How low those capital costs may be stems from the condition and features of the space. “It depends on how little or how much you have to do to the space to reopen. On a $3 million deal, it could be as high as 80 percent or it could be lower. We look for properties with 50 to 80 percent of the infrastructure already in place.”
For those entrepreneurs with the cash to answer, Gutin says the real estate opportunities are knocking as he has never seen before in places such as Boston, Washington, D.C., and Chicago. “Now is the time to be making deals for 2011 and 2012. People have developments that are still getting in the ground, and for which they are now offering leases that may never come around again.” NCB
A New Lease on Nightlife
More so than in recent decades, nightclub, bar and restaurant operators now have the upper hand when it comes to negotiating a lease. For those with the financial wherewithal and the will to risk it, today’s window of real estate opportunity holds the promise of sweet deals with no fixture fees or automatic annual rent increases. Additionally, it puts new operations on more equal footing with established concepts in terms of a tenant’s ability to afford the best location on the block.
But as enviable a position as this may be for hospitality entrepreneurs, taking full advantage of it requires careful thought, planning and effort.
Charlie Greener, CEO of Dallas-based Harborage International, which specializes in the design, construction and operation of major hotels, restaurant chains and nightclubs throughout the United States, says a good first step toward cashing in on the real estate bonanza of 2009 is researching the market and finding out what’s available for lease in a given city or zip code.
“There is always a realtor that lists all businesses for sale or lease, and each city has its own web site with listings of available commercial space,” Greener says. “Also, most cities have real estate brokers who specialize in restaurant, bar and nightclub properties.”
In choosing a broker, Greener says a would-be tenant can save time and money by going with a broker who specializes in tenant deals, as opposed to a firm that assists landlords. “If someone is not experienced in making deals and this is their first location, they especially need a tenant broker on their side,” Greener says. In most cases, even if a landlord hires his own broker to represent his interests, Greener says the two brokers usually divide the commission on any deal equally.
Squeezing a landlord for the very best lease deal also means paying careful attention to common area maintenance (CAM) fees built into the rent, as well as the age and condition of air conditioning and heating systems. “Systems that are efficient cost a little more, but they save money in the long run. Some can pay for themselves in a couple of years.”
As a general rule, Greener says, a landlord should be willing to give the first year’s rent back to any tenant ready to sign a long-term lease; the money is to be used in upgrades and improvements. And prospective tenants should take full advantage of their ability to landlord shop by doing business with those willing to be flexible.
“In negotiating with the landlord, tenants should ask for rents that are more oriented to a percentage of gross sales,” Greener suggests. “As long as capital expenditures, including rent and CAM fees, do not exceed 10 percent, an operator can be assured that they will make a profit. If a guy is asking $18 per square foot rent, an owner might offer $15 with a 10 percent additional bonus paid to the landlord based on actual gross sales. This is a great incentive for landlords to offer you space at a reduced rate.”
When in doubt about what to ask for at the negotiating table, Greener advises tenants to be bold. “You never get what you do not ask for. If you ask, the worst they can say is no.”