Restaurants have struggled immensely in the course of the pandemic. Many were forced to close their doors to in-person diners back in March 2020. To date, a large number have yet to open their indoor dining rooms at full capacity. Throw in the fact that there's been limited aid available to restaurants, and it's no wonder more than 100,000 have permanently closed their doors in the past year alone.
Now the good news is that commercial landlords have been willing to work with restaurant tenants throughout this mess. Specifically, many have allowed restaurants to enter into deferred rent agreements, where they pause their payments temporarily and then catch up on them by a later date. These arrangements may have initially served as a lifeline for dining establishments with sluggish revenue, but at this stage of the game, they may be more like a death sentence. So what should commercial real estate investors know at this point?
The problem with deferred rent
Though deferred rent may read as a good solution to a glaring problem, it's really only been a temporary remedy. The problem with deferred rent is that eventually, restaurant owners need to catch up. And given the hit many have taken over the past 12 months, that could be next to impossible.
According to an NYC Hospitality Alliance survey in December, 37% of 403 restaurants in the city deferred their rent payments during the pandemic with their landlords' permission, with the understanding those payments would be made at a later date. But many dining establishments are no better off now than they were back when they made those arrangements. The result? They risk shuttering regardless of flexibility on their landlords' part.
Relief is on the way
While it's definitely been a hard road for restaurants, including those that were given the option to defer rent payments, relief may finally be on the way. President Biden has signed a $1.9 trillion coronavirus relief bill into law, which includes a $28.6 billion grant for restaurants specifically.
Under the new bill, restaurant groups will be eligible to apply for grants worth up to $10 million, while individual establishments will be entitled to grants worth up to $5 million. That grant money can be used to purchase supplies, pay staff members, and, just as importantly, pay past-due rent. As such, restaurants that entered into deferred rent agreements and are way behind may now have a shot at catching up.
Still, not every restaurant is eligible for a grant, and as was the case with the Paycheck Protection Program, there could be delays in getting that money into restaurant owners' hands. As such, some dining establishments could land in a scenario where they need to make good on their deferred rent agreements but don't yet have the funding they need to allow that to happen.
The Millionacres bottom line
In such scenarios, landlords would likely work with their tenants or otherwise risk vacancies galore. But that's not guaranteed, and some restaurants may, at this point, be on the hook for quite a lot of money -- money they need to cough up before their relief arrives.