Hispanic purchasing power has influenced the marketplace. Hispanic shoppers generally spend more on food purchases because their families are usually larger. But the longstanding trait that Hispanic families are more likely than others to prepare and serve food at home appears to be changing, especially as younger generations make more family decisions about meals and adopt typically American lifestyle habits.

With close to 8 million Hispanic residents, the presence and influence of the Hispanic culture within Texas where we live has been prevalent for decades and continues to increase. According to 2007 U.S. Census data, people of Hispanic or Latino origin constitute 36% of Texas’ state population making the Hispanic/Latino demographic a significant segment of the state’s consumer market. Retail marketers and consumer brand managers have long been aware of this sector’s purchasing power, and it appears restaurant concepts are following suit.

One popular example is Pizza Patron, a Dallas based pizza concept since 1986 that has “centered their entire brand to the multifaceted traditions and heritage of Latin life.” Since franchising began in 2003, the brand has grown from four local stores to 90 in six states, with more than 40 additional stores under development and plans to have 750 stores within the next decade. The majority of Pizza Patron’s stores is community-based in Spanish speaking or Hispanic neighborhoods and offers Spanish-titled pizza such as La Patrona and Le de Carnes.

Another Dallas based, Hispanic influenced restaurant concept, Burguesa Burger, opened just recently in May 2009. Jeff Sinelli, the accomplished and well-known founder of multi-unit brands Which Which and Genghis Grill, created Burguesa. Sinelli explains his new concept was inspired by his travels to Mexico and Argentina where ham is predominantly used to make burgers instead of customary American beef. (Seems to me the burgeoning Hispanic market I mentioned in the beginning of this report might have also inspired the successful entrepreneur.) Burguesa’s Latin/Hispanic influence is evident in every aspect of its business. Sinelli has incorporated Latino suppliers, Spanish (and English) menus, and Burguesa’s accepts both U.S. and Mexican currency. In addition, customers who purchase a burger are allowed one free phone call to Mexico from the store’s phone booth.

The state of Texas’ population is projected to increase by 71.5% between 2000 and 2040 to 35.8 million. Of this 35.8 million, it is estimated that Hispanic population will increase to almost 19 million. What is now often phrased as a niche market, the Hispanic/Latino population will comprise more than 50% of the state’s total population. One can only speculate that countless developers, retailers, brokers, and restaurants will follow in capturing this demographic.

*Sources U.S Census, Pizza Patron, NRN Magazine

As another sign of the times and the tight lending standards that exist today, Landlords needing to backfill existing space have little capital resources available to contribute the extensive tenant finish out dollars we’ve all become accustomed to “receiving the last several years.”  With the capital intensive nature of new store development for restaurants, there are creative ways to achieve Landlord contributions to help offset the Tenant’s capital investment on a new location. “If the restaurant company has adequate cash reserves, one avenue to receive TI Allowance is in the form of rent abatement.”  Depending on the parameters of each deal, I’ve seen this range from as little as two months to as much as 18. “The benefits apply to each party: During the abatement period, the Landlord receives tenant payment of typical operating expenses such as taxes, insurance and maintenance that would otherwise add to the sunk costs of a landlord’s vacant space. This also helps accomplish the investment goals of the Tenant.”  By withholding rent payments during “these” positive cash flow months, cash reserves are increased, allowing for the allocation of capital to new or existing projects. Keep in mind, a tenant must take into account the time value of money when agreeing to a deal of this structure. “$200,000 paid back to a Tenant in monthly installments is not worth the same as having that cash in hand today.”  The Tenant’s negotiations and proforma should reflect this.

A tenant agrees to accept the premises “as-is” a phrase commonly used in the leasing of restaurant real estate, even more so now because of the availability of closed restaurants. It represents an understanding between a landlord and tenant that the Tenant will perform whatever work is required to open a new restaurant on the property.

However commonly used, restaurateurs can improve their deals by reviewing their Letter of Intent templates and omitting this language. Restaurant operators agreeing to accept a premises “as-is” disclaim landlords from some implied warranties, including workmanlike quality, that automatically come with the property in a lease transaction.  In agreeing to “as-is,” the tenant accepts the premises “with all faults” including some that may not be apparent.

Much more equitable when parties have this understanding is the language, “Tenant agrees to accept the premises with no additional work required of landlord.” This simple revision acknowledges that, even though the landlord is not doing any additional work, the agreement continues to convey certain assurances, as previously mentioned.

Finding a bright spot in today’s bleak economic and development environment isn’t easy. If there is one silver lining in this otherwise ominous cloud, it may be the cooperativeness shown from both municipalities and developers alike in ensuring that certain zoning restrictions and architectural standards don’t create deal-breaking issues for willing tenants. 

There exists an inevitable struggle between a restaurant’s desire to maximize brand identity through architectural design and a developer or jurisdiction’s insistence that potential restaurants meet certain zoning classification requirements and/or development project guidelines without variation.  In the past several years, developers and municipalities were afforded the luxury of strong demand to enforce their material requirements and architectural guidelines rather strictly. Historically, in our client’s experiences, site fallout has much too frequently been attributable to a conflict of design ideals.  “However, I’ve seen two or three different situations in the last 6 months where a developer has personally taken the initiative to persuade planning commissions/architectural review boards to approve a concept’s prototypical design (including colors, materials and signage) with surprising success.”  It has also been prevalent on the municipal end. A recent conversation with a Planning Commissioner at the County of Henrico regarding a signage issue resulted in his admission that the County would assist our client in whatever capacity they could to ensure the store’s opening.

In the face of trying economic times for all individuals and organizations (public or private), it seems that entities who were once unwilling to deviate from their standards are now adopting more flexibility to accomplish store openings. Concept operators can benefit from this paradigm shift by maintaining prototypical designs in new locations and continuing to build brand identity with an expanding customer base.

As most restaurants tighten their belts to face declining sales and cash flow, others are finding costs savings through higher initial investment on the front end of development. A prime example is the design and construction of LEED certified buildings, devised to create efficiency through energy, water, and solid waste reductions. LEED-efficient designs can create energy savings of 30-50 percent. Creativity is exploding, as architects find ways to build with recycled and reclaimed materials, catch and reuse rain water for irrigation, and optimize electrical and plumbing usage. Yum! Brands recently opened a KFC-Taco Bell in Northampton, Massachusetts, designed to reduce energy and water consumption by 30 percent. 

In addition to energy efficient cost savings, counties and cities are now offering incentives such as tax credits, expedited reviews, reduced development fees, and government grants for buildings that meet certain LEED standards. Such is the case in San Antonio, Texas where an ordinance passed in 2006 allows for an administrative waiver of certain development fees for projects reaching specified scores on a LEED scorecard.

Many cities are also mandating LEED certified building designs. Rather than avoiding desired locations, many restaurants are wisely investing the capital to design LEED certified prototypical plans as the requirement to “go green” spreads quickly.

As land values fall, one should understand the financial dynamics facing the developer in today’s environment. Tenants automatically assume that rents should be drastically lower than in previous years because the land costs less. A major factor influencing the rents developers must receive to create acceptable returns for their investors is the ability to leverage. Assuming one can find a willing lender, lenders today require substantially more equity. Since the early 2000s, developers had been able to obtain construction and interim financing of 90% to sometimes 95% loan-to-value (LTV). Equity investors in new construction real estate typically seek returns of 20% to 30%. With interest rates on short-term financing in the single digits, this return was easily accomplished. Now lenders require up to 45% equity, pushing down the LTV to 55%. While the underlying cost of the land may well indeed be lower, the landlord’s profit margins have been squeezed. The magic of leverage for the equity investor, and therefore the tenant, has vanished.

Restaurant groups that continue to grow during these tough times are enjoying some benefits we haven’t seen in a decade “less competition, more inventory of existing restaurant sites and more aggressive rents to name a few.” 

Another benefit in certain areas of Florida is the willingness of the county to reduce or eliminate “traffic impact fees for new developments.” From our experience developing restaurant sites in the state, this represents a savings of anywhere from $50,000 to $150,000+, depending on the size of the restaurant and the jurisdiction.

The county believes this will act as a “stimulus plan” to help encourage developers and retailers to start growing again. In turn, this would create more construction jobs, service jobs and additional tax bases for the county.

Brevard County has enacted a two-year moratorium on their traffic impact fees that is schedule to last until March 1, 2011.  They hope this will stimulate the Viera Health Park Hospital to begin construction on a 275,000 square foot facility estimated to create 350 temporary construction jobs and 800 permanent jobs.

In 2009 alone, Santa Rosa County, Desoto County, Nassau County and Wakulla County have all suspended traffic impact fees for varying periods of time.

As 18% of retail capacity is predicted to go vacant in 2009, many are talking about retailers and restaurants increasingly requesting rent concessions from landlords in order to increase operating margins. While it is a “buyers market,” these rent concessions are not as prevalent as some operators would like to believe. Leases are longterm contracts, so to the extent that rent renegotiations are occurring, they most likely take place when leases or option periods are expiring. The landlord/restaurateur relationship is a longterm partnership, and forcing a loss on the landlords in the short term may not be in the restaurateur’s best longterm interest, since when the market turns, these memories will be etched in landlords’ minds.

There are, however, certain operators poised to benefit from the current softness in demand the ones whose portfolio of locations is largely nearing lease expiration/extension periods and who also are a significant part of a large developer’s portfolio. General Growth Properties, who recently filed for bankruptcy, is a good example. The unanswered question here is how affected GGP will be by its creditors in being able to work with restaurateurs to keep its malls full and active.