Michael Stoler — Wanted: Tasty food along with good real estate

Upstart restaurateurs turn to landlords for help
By Michael Stoler | November 01, 2010 07:00AM

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Opening a restaurant in New York City is not an easy task. NYC & Company, the city’s official marketing and tourism board, reports that there are 18,696 restaurants in the five boroughs. And there are always more optimists: Each and every year, at least 200 new restaurants launch in the Big Apple. Yet the odds of success are low. “Few will survive their first year of operation, and less than 10 percent will be in business in five years,” said industry legend Alan Stillman, founder of T.G.I. Friday’s and Smith & Wollensky.

Even though it’s a food business, real estate is a main ingredient for those who endure.

After all, great chef or not, restaurateurs know a simple real estate truism. “The key to the success of your restaurant is your location,” said Phil Scotti, CEO of Clarke’s Group, owner and operator of P.J. Clarke’s.

Zane Tankel, chairman of Apple-Metro, the franchisee of 35 Applebee’s in the New York metro area, said the Times Square Applebee’s serves more than 20,000 meals a week, making it the highest-grossing Applebee’s in the world. “We meet the needs of our customers, serving breakfast, lunch, dinner, pre-theater and after-theater,” he said.

Of course, it’s not just a good spot that matters. Shelly Fireman, president of the Fireman Hospitality Group, operators of Bond 45, Brooklyn Diner, Redeye Grill and Trattoria Dell’Arte, said: “Location is important, but you better have the ability to serve, at a minimum, lunch, pre-theater and dinner. A restaurant cannot survive on one meal a day.”

Financing is another major challenge. A limited amount of financing is available from government sources and capital firms (such as GE Capital) for franchisee operations, but few financial institutions are willing to provide backing for upstart restaurants. (At one time, North Fork Bank was a player in the financing of restaurants, but that changed when the bank was sold to Capital One.) Some restaurant operations are publicly traded companies, such as Morton’s, or strong regional operators, such as B.R. Guest and Union Square Hospitality, and may have term loans and lines of credit for their business, but that’s the exception rather than the rule.

Most restaurants, then, have to secure financing and capital from investors. The owner of a newly opened restaurant in the Park Avenue South area, who asked to remain anonymous, said: “The cost of our new restaurant was close to $9 million. The landlord provided about $1.5 million, and we secured a group of 30 investors who, together with the principals, provided the capital for the leasehold improvements, security deposits to the landlord, opening working capital, and funds for public relations.” The site was previously a different restaurant, giving the new place a leg up with the landlord.

Certain landlords look at restaurants as amenities for their real estate, while most prefer to lease to other retail establishments. “When we opened Nobu 57, our landlord, Richard LeFrak, embraced the restaurant, which helped in the future success,” said Drew Nieporent, founder of Myriad Restaurant Group. LeFrak provided a portion of the funding for the construction and leasehold improvements for the Midtown restaurant, Nieporent said. In most instances, however, cutting a deal with landlords is a difficult proposition.

Established restaurant operators like Fireman, of Fireman Hospitality, said that the longer the lease, the better. Fireman even endorses the concept of paying a percentage of sales to his landlord. “I have no problem with a percentage rent based on my sales. If I make money, my landlord deserves to share in the rewards of the success of the operation.”

Nieporent prefers to own his restaurant as opposed to leasing. “Part of the success of the Tribeca Grill is that the partners own the actual real estate, protecting our asset when the lease is up for renewal.”

While it might have looked easy and sexy to own and operate a restaurant, it takes patience and some real estate know-how.