Percentage-Based Rents, Ghost Kitchens Gaining Appeal For Struggling Restaurants

The restaurant industry is still figuring out how to operate amid the coronavirus pandemic that has all but erased the most fundamental element of its business.

With indoor dining having been banned across the country for months and still heavily restricted in many areas, restaurants have faced deeply slashed revenues without a proportionate cut in costs. To address the disparity before tenants go under, more landlords have been offering to charge rent purely as a percentage of revenue rather than a flat rate, National Real Estate Investor reports. This practice is sometimes known as a variable rent lease.

The percentage rate, which tends to land between 5% and 15% of a restaurant tenant's revenue, is mostly being offered on a temporary basis until business conditions return to something like normal, financial adviser Ken Lamy told NREI. Some pre-pandemic leases used tenant revenue to determine a portion of rent payments, but pure percentage rents are increasing in frequency as a relief measure.

At least 87% of restaurants in New York City could not pay their full rent bill in August, and 34% could not pay any rent at all, according to a survey by the NYC Hospitality Alliance. The situation is only projected to get more dire unless and until the federal government provides some sort of financial assistance, the NYCHA stated in its report.

Landlords may be more inclined to strike deals as temperatures drop and cases rise, reducing the viability of outdoor dining and forcing governments to impose more restrictions on indoor dining. But the percentage of landlords offering rental assistance of any kind remains relatively low, and more than 100,000 restaurants had already closed either long-term or permanently by mid-September, according to a National Restaurant Association survey.

Online delivery service DoorDash is launching a service called Reopen for Delivery, pairing restaurateurs whose businesses have either been suspended or closed for good with ghost kitchen operators that can provide them with a delivery and/or takeout option, NREI reports. Ghost kitchens, like the migration of more retail channels to e-commerce, were already gaining steam as a trend before the coronavirus kicked it into high gear.

The first business to reopen under the program will be a barbecue restaurant called Krazy Hog in Chicago, which DoorDash matched with Á La Couch to start a delivery-only operation until it can open a new brick-and-mortar location. Á La Couch staffs its own kitchens to prepare and package food to its clients' specifications.

DoorDash has its own ghost kitchen in Northern California, but has not stated publicly if it will utilize the space for its Reopen for Delivery program or what restaurant will be revived next, NREI reports.