Embracing the Middleman - How to Maximize Your Lease Value in the Food Delivery App Era

September 27, 2019 Published Article

My office is located in Walnut Creek, California. Two blocks from my office is a street that is lined with retail space for restaurants. Unfortunately, the number of restaurants on this street continues to decline as rent, labor, and other costs cause business owners to look for ways to stay competitive. In my experience, my food industry clients that have embraced the Middleman Economy through Uber Eats, DoorDash, Grubhub, Postmates, etc. are changing the way they reach customers to accommodate the way their customers purchase products and services. One of the biggest changes my clients have to make is the way they maximize the value of their retail space. Leases, especially retail leases in the food industry, are often crammed with clauses premised on the "old" economy, not the Middleman Economy. The most common example of this is the percentage rent the tenant pays to the landlord once the tenant surpasses an annual gross revenue. On the surface this clause seems like a win-win for both parties, but is this still true in the world of the Middleman Economy where prime real estate location may be less of a priority than efficiency? I would argue it is not, and I would re-negotiate now to maximize your lease value. Here are 5 tips for leveraging the best lease terms in the Middleman Economy.

1. Make Sure You're Accounting for Your Full Gross Revenue. Successful restaurants often surpass their percentage rent threshold and pay a small percentage of that surpassed gross revenue figure to the landlord as extra rent. There was a time when the retail space rented was one of the most important factors in a restaurant’s success, but restaurants embracing the middleman through food delivery apps should take another look at their lease to see what they are paying and how it’s calculated. Landlords should also look at creative ways to enable their restaurant tenants to maximize their tenant’s ability to embrace the middleman because maximizing the profitability of the rented space is good for everyone.

Why? Food delivery apps include a fee charged on each sale; although this fee is not directly paid to the restaurant, the total sale figure appears as a gross sale on the restaurant’s books. These fees can add up substantially, and each food delivery app company has their own fee structure, some of which are a flat delivery fee independent of the order amount. In some cases these fees equal or even exceed the cost of the food. Restaurant owners need to be mindful of how these fees are treated in their lease and negotiate accordingly. If the restaurant is not successful in negotiating away all of the food delivery app gross revenue from its percentage rent, the restaurant should demand the delivery app fees are removed from the gross revenue totals.

2. Align Your Parking with Your Business Goals. Some retail leases include parking areas either through Common Area Maintenance (CAMs) in a multi-tenant location or as a separate clause within the single tenant lease. The value of parking space for patrons is taking a back seat to short term parking for food delivery app drivers. If the restaurant is embracing the middleman through food delivery apps the restaurant needs to provide efficient access for pick-up and delivery. Short term parking should be addressed in your lease negotiations. However, this may be something outside of your landlord’s capabilities. That’s why I recently attended a meeting with food industry businesses, the downtown business association, and the local police to discuss how parking impacts customer access to the restaurants. One suggestion was to allow for longer parking limits from one or two hours to three to six hours. I suggested if parking times were to be increased to allow patrons to stay longer at the restaurants, there should be designated spaces in front of the restaurant that have 5 minute parking limit to accommodate the food delivery apps. This suggestion was accepted and short term parking to accommodate food delivery app drivers will now be taken into consideration when the city’s parking plan is restructured.

3. Optimize Your Rentable Square Footage. Most retail leases charge rent based on the rentable square feet within the premises. Areas commonly excluded from this calculation are the storage closets, dividing walls, and patio area. That is why historically in California, where outside dining is possible year round, restaurants focus on areas with large patio spaces to maximize the value of their space. In the Middleman Economy, restaurant owners should also look to designate specific areas, whether on premises or offsite, for food delivery app pick-up areas. Chipotle recently developed its own clever approach through its Chipotlanes, which operate like drive thru pick-up for food delivery app drivers. Not all restaurants have the space for a drive thru, but designing the restaurant lay out to include the pick-up areas outside the rentable area and away from the ordering counter will reduce delivery drivers blocking customers wishing to order food directly from the restaurant and allow more efficiency.

4. A ‘Ghost Kitchen’ is No Longer a Phantom Concept. The term “Ghost Kitchen” is now commonly used to describe the kitchen where the food delivered through middleman delivery apps is prepared and, in some circumstances, shared with other tenants. Often located outside of the primary high rent retail space, this kitchen serves to eliminate the food ordering volume placed on the existing kitchen at a lower cost. While most leases have restrictions on use and subleasing, shared kitchens are now becoming more popular due to food delivery apps. In fact, the Ghost Kitchen model for restaurants has become so popular that some leases now include a collective tenant option. This is also a great way for a restaurant that is stuck in a long term lease to share the burden of rent and maximize profits.

5. Renting in an Opportunity Zone Has Significant Advantages. The second round of guidance regarding the 2017 Tax Act and the Opportunity Zone programs came out in late April this year. Restaurant owners should be looking at renting spaces in opportunity zones which allow the restaurant to pay lower rent while attracting investors seeking to pay $0 capital gain taxes on their investments upon a sale. The Middleman Economy, coupled with the Ghost Kitchen concepts, are now making investments in restaurants located in opportunity zones a viable option.

As you can see from these five points it is time for restaurants to embrace the middleman and maximize the value of their leases . If you are interested in learning more about how your business can embrace the middleman you can contact Michael Krueger at [email protected] or call 925.988.3237.