In March, when Boston restaurateur Garrett Harker and his partners shut down their seven restaurants after Massachusetts issued lockdown orders, Harker assumed the closures would be painful but temporary.
Six months later, three of Harker’s restaurants, including the flagship Eastern Standard — once described as the “perfect restaurant” by the Boston Globe’s food critic — remain shuttered. Harker and his landlord for those three restaurants are in a standoff: He can’t afford to pay the six-figure arrears he has accrued while his restaurants remain shut, and the landlord, he said, has refused to grant a deferral or discount.
“We’re probably going to lose money for another year to a year and a half,” Harker said. “It doesn’t work financially to reopen without a new lease.”
Similar sagas are playing out nationwide as Main Street businesses try to figure out how, or if, they can dig out of debt.
Nearly 98,000 businesses have closed permanently since the pandemic took hold, according to an analysis by Yelp. And the fate of many that remain open increasingly hinges on their ability to renegotiate their leases. A recent survey by Alignable, a social network for small-business owners, found that one-quarter of those polled had fallen behind on their rent since the shutdowns began. For those in the fitness and beauty industries, the number rose to nearly 40%.
The problem may worsen now that an initial flood of federal aid has dried up and Congress has been unable to agree on further relief measures.
“For 10 weeks, our revenue went to zero and stayed at zero,” said Rhonda Stark, the owner of three Orangetheory Fitness gyms in Ohio that were shut down from mid-March until late May. Stark’s collective rent bill, her largest fixed expense, tops $32,000 a month. She hasn’t paid it in full since March. Although she got PPP loans ranging from $45,000 to $75,000 for each of her gyms, most of it went toward payroll, as the loan rules required. Stark’s gyms have reopened at a reduced capacity, cutting her sales by about 30%. To stay open, she needs to strike new deals with her landlords.
Retail rent collections plunged in April to just 54% of the total owed, according to Datex Property Solutions, a software company that tracks data on thousands of its clients’ retail properties nationwide. By August, collections had rebounded to nearly 80%, but some tenants — such as movie theaters, hair salons and gyms — were much further behind.
“When tenants can’t pay the rent, it imperils landlords’ ability to pay their own overhead and their loans, and the whole thing cascades,” said Mark Sigal, chief executive of Datex.
For both sides, it’s a complicated dance. Property owners have their own expenses to pay, including taxes, insurance, mortgage or debt payments and maintenance bills. Buildings owned by real estate investment trusts or Wall Street bondholders have governing covenants that can limit the property manager’s ability to make a deal.
Lance Osborne, president of Osborne Capital Group, owns a retail plaza in Copley, Ohio, that houses four businesses, including one of Stark’s gyms. Eight of his tenants have declared bankruptcy or are on the brink, Osborne said. He has sued one business — which he described as open and thriving — for nonpayment. For others, he’s gradually negotiating new deals. Stark said she hasn’t signed anything establishing new terms for any of her gyms, which means her landlords could at any time declare her in default and crack down.
Harker fears for the future of Eastern Standard — his first restaurant and the only one he owns outright.
The brasserie opened 15 years ago and sits in a retail space within the Hotel Commonwealth that has changed hands twice since Eastern Standard opened. The current owner, UrbanMeritage, disputed Harker’s claim that his company was unwilling to negotiate. Discussions have continued during the pandemic, Jammen said.