The Ant Eating the Anteater

Twenty years ago, I negotiated a deal for Grady’s American Grill in Johnson City, TN. Grady’s was a small regional chain at the time. The other party to the negotiation was Toys R Us, the largest toy retailer in the USA. In trying to finalize the contract, a fairly amicable negotiation turned heated. A seemingly reasonable request on Grady’s part was deemed overreach by the retailing giant’s negotiator. He said, “that would be like the ant eating the anteater!”
 
In reality, the risks of a restaurant investment are similar for a small regional chain or a publicly traded national chain. Whatever the risks, they need to be addressed or the long-term investment won’t be viable. Given today’s economic challenges, the need for financial and operating flexibility is great.
 
A restaurateur’s financial and operating flexibility is largely a function of its real estate contracts. A knowledgeable adviser can help maximize that flexibility. For a new client, Foremark creates a Letter of Intent that starts with the basics, like rent and term of lease, but covers other important issues too.
 
Lease Guaranty:  The Tenant is usually liable for the entire rental stream of the lease term whether the restaurant succeeds or not.  Is the full amount of the rental stream objectively fair, or should the amount be the unamortized Landlord/Tenant Improvement Allowance? And, for what period of time? The entire primary term, or the first half of it? The point is this: all terms are negotiable. Through negotiation, it is possible to reduce your exposure.
 
Use:  Concepts go in and out of favor. Landlords typically ask Tenants to operate as the original concept for the entire length of the lease.  In uncertain economic times, the ability to re-concept a location, or to assign or sublease is imperative.
 
Common Area Maintenance:  For most restaurant leases, the Landlord passes through the costs of taxes, insurance and common area maintenance (CAM).  If not well managed by the Landlord, CAM costs can increase significantly over time.  A restaurant may be able to “opt out” of CAM, or at least cap the Landlord’s CAM increases.
 
There are many other points like these that can be addressed and successfully negotiated by an experienced real estate and legal team.  This complement of talent on your side can allow the “ants” of this great industry to at least snack on the “anteater” landlords we sometimes face.