What Happens When a Restaurant Dies | Hacker News Reader

What Happens When a Restaurant Dies

seriouseats.com

156 pointsbjterry61 comments

The theme of the article is in part how Real State can royally screw over business...

A sad, really sad thing happened in Rio de Janeiro, in Brazil.

The city center, had multiple very old business, a particular square, that had been a hotspot in imperial times when Rio was the Imperial Capital, had many business opened at those times, and that were still open... Business that survived many depressions, crisis, regime changes, world wars...

Then because of the recent real state price boom (example: in São Paulo prices on average rose 300% in 4 years), they all got outpriced in their rent... There was 250 year old shops that were still only a single location, and still renting their original location, but landowners just bumped the rent prices up by like 100% in a single year, and kicked out all those multi-hundred year shops out.

The end result looked like a sort of historic defacing, lots of shops that were there since the monarchy times, that had lots of history (for example a library where famous writers, poets and musicians used to hang out for about 200 years) were just shut down without mercy.

Some people even tried to ask the government to help... But it didn't work.

It's unfortunate for those business who were unable to afford (or decided not to pay) the new rent, but IMO it would be a greater tragedy for property rights if the owners of the buildings were exposed to all the downsides of a market where rents might fall but unable to participate in the upside if rental demand and rents turned to the upside.

"Heads I lose; tails nothing changes" isn't a stable economic system either.

In the US, buildings can be designated as historic landmarks and so cannot be altered in a way that would destroy that. Often it's the building owner himself getting it so designated, in exchange he gets tax breaks.

It's not perfect, but it's a workable system.

Landmarks are extremely contentious and doesn't always prevent the shady actions suggested in the original article. One example from recent memory:

http://www.ibtimes.com/save-rizzoli-bookstore-effort-heats-5...

http://gothamist.com/2014/04/04/everybody_has_been_bought_of...

> Sources say Vornado Realty Trust (NYSE:VNO), which co-owns the three properties at the center of the dispute, deployed contractors to deface the exterior of the buildings in a premeditated effort to derail the landmark-evaluation process. “Preemptive demolition,” as the tactic is known, is not an uncommon strategy for property owners, which have been known to purposely disfigure a building’s distinctive features after catching wind of an effort to designate a property for landmark protection.

Once the building is defaced there is no going back in the eyes of the LPC (rumours of the LPC being bought off is another matter, but even proof of such actions would not reverse this point). Generally though it is indeed a "workable system".

If the owner was willing to go that far, then there's a bit of an injustice going on in the form of "taking property without just compensation". Since making something a landmark is a public benefit, it would be fair for the government to compensate the landowner for the lost value a landmark designation would exact.

They do get compensated in the form of large property tax breaks.

Well, obviously the tax breaks aren't enough since the owner is willing to deface it to avoid the situation. Partial compensation is not really a defense. This is still a regulatory taking.

Landlords driving out tenants who have a contract doesn't sound like a blow for property rights to me.

My read of the typical situation is that the rent increases are made within the bounds/scope of the contract (the lease) and yet tenants still complain.

When a lease expires and the rent goes up at the renewal? Tenants complain.

When a tenant is month-to-month and the rent goes up with 30-days notice? Tenants complain.

I didn't read anything in the original article, nor in the GP comment to yours about Rio to suggest that the rent increases were contravening an existing contract.

Tenant: The rent is too high

Landlord: The rent hasn't been changed for a long time

---

Tenant: With other costs going up, I can't afford to pay more for rent.

Landlord: With other costs going up, I need more rental income.

---

Tenant: The place needs painting.

Landlord: He has given that place heavy wear and tear.

---

Tenant: I know people who pay less for a comparable place.

Landlord: I know people who pay more for a comparable place.

---

Tenant: Small businesses like me can't afford to pay high rents.

Landlord: Small businesses like him tend to manage money badly and have risky businesses.

---

Tenant: The rent ought to be low because the neighborhood is rundown.

Landlord: We landlords should raise rents in order to improve the quality of the neighborhood.

---

Tenant: I am a desirable tenant with up and coming customers.

Landlord: The music drives me crazy, and neighbours complain.

---

Tenant: I always pay the rent whenever she asks for it.

Landlord: He never pays the rent until I ask for it.

---

My point is, both sides complain.

> Landlord: With other costs going up, I need more rental income.

Rent in Rio de Janeiro have grown widely above inflation for many years. Its one of the most expensive cities in the world in terms of rent.

Yeah, but there's nothing particularly wrong about rent growing above inflation. A consumer price index is basically a weighted average of prices. Naturally some of these prices will be above the average.

My "read" of the article is the landlord drove the leaseholder out using extralegal means because he thought the rent was too low and the lease was not ending anytime soon. We're talking about commercial leases here which are generally much longer than apartments.

It isn't quite that simple. Real estate is one of the most widely-available assets that can be as levered as it is allowed in so many nations.

This leads to perverse incentives. A property owner with a paid-up property can lever up, kick out tenants, post an out-sized rental rate, and use the credit to cover costs and missing income until a new tenant willing to pay the rental rate steps forward. Usually they step forward with the simple progression of time and inflation catching up to the new rental rate, or it's a business more heavily capitalized and banking on serving much more flush clientele (interesting discussions around the bifurcation of the economy and just how many businesses can thrive crowding into that wealthier end).

This puts lots of incentive to keep inflating real estate valuations until the credit spigot is turned off. Meanwhile, the hands on the credit spigot gets paid by the velocity of credit granted, so they get lots of incentive to keep granting credit on inflated valuations. This circle turns until it doesn't, usually with some form of falling demand exposing who wasn't wearing swimsuits as the tide goes out.

Contrast this with the asymmetric credit access available to most small businesses. They could have a longer tenure and track record than the present owners of the real estate, but still be considered a great risk because (rightfully) the credit granter will assess growth prospects to practically nil. So faced with a 200+ year old business that can definitely pay back $100K in five years, or a new property owner of the underlying real estate that might, maybe, possibly pay back $2M in 10 years if the right valuations can be signed off, which deal looks better come bonus time?

This isn't a nefarious plot or the yield of some evil; it is simple human nature played out on the canvas of time and incentive structures. There are some interesting issues to ponder here with how agency, compensation and influence are structured in the valuations process, and how that ties in with the overall cycle. As well as many other factors that don't show up on an initial cursory take of the industry. But suffice to say...it isn't quite that simple.

As for what can one individual do about it, that's a fascinating and long discussion in itself.

I think your comment is very good and agree with virtually everything you say. That said, I think the difference in access to credit is driven in large part by the collateralization and very little to do with the growth prospects (IMO).

The real estate loan is collateralized by a building and land which can be foreclosed upon in the case of default, dramatically lowering the worst-case outcome for the lender. That land and building might not be worth the face value on the loan (especially if there was a bubble pop type of event), but it's going to be worth something, probably something north of 60% of the loan's face value, which was probably capped at 75% of the apparent market value of the property for a commercial cash-out loan.

In the case of a small business, especially an opex-heavy, capex-light business like a restaurant, what's the lender going to get in bankruptcy? The rights to the name of a recently failed restaurant and the picked-over remains of whatever equipment wasn't stolen or fire-sold during the last day of operation? The lender's downside asymptotically approaches 100% of the loan's face value.

If my downside as a lender is 40% in one case and secured by a hard asset and 100% in another case secured by nothing, it's no surprise that people are lined up to make the first loan relative to the second. (There's also a strong, secondary market for performing and non-performing mortgage loans that has a far weaker parallel in the small business lending arena, but that secondary market's existence is largely a consequence of the collateralization. Yes, it also suffers from or contributes to the velocity point you make.)

Um, the landlord chooses to take on a contract. Nobody forces them to.

The fact that a landlord gambled that real estate prices would be stable or downsloping and signed a long term contract is not the fault of the other party.

"Heads I win; tails you lose" isn't a stable economic system either.

I think we're talking about something different. As I understand it, both sides honored the terms of the original contract.

Once that contract expired and it came time to negotiate a new one, the market rent was much higher and the tenant chose not to renew at the newly offered rate. No one has to have breached the original contract for this outrage (misplaced, IMO) at landlords to surface.

No, reread the article. The contract was still in force and the landlord was trying to force the restaurant to cave in buying the contract out.

> Finally, after months of struggles and eventually litigation, the owner, who was also recovering from two hip surgeries, caved. The hotel bought out the remainder of his lease.

> No, reread the article.

My bad (and thanks for the bluntness; really! have 2 upvotes...).

I originally read that section too quickly and internalized it as "oh, they had a 15 year lease that the landlord had previously tried to buy them out early and now that 15 years is up, they can renegotiate."

You're absolutely right that the article strongly suggests otherwise and that my reading comprehension was poor.

In fairness, when I initially read the first few paragraphs of the article, I got the same impression you did. It wasn't until I read further that I saw it wasn't the case.

You're right, property rights have gone too far and should be limited and curtailed.

For the past decade, the café hasn't had a lease with its landlord, the Edison Hotel. Its owner was another Holocaust survivor who said the café could stay as long as it wanted. Then, Strohl says, he died and his son took over. "He decided that he didn't want us here; he didn't want Café Edison and he wanted a white tablecloth restaurant, with a name chef," Strohl says.

http://www.npr.org/blogs/thesalt/2014/12/08/369359855/dont-l...

Just two weeks after Cafe Edison was forced to shutter, Jeremiah Moss finds the legendary Times Square lunch counter barren. Booths have been torn out, signage is down, and swivel stools at the lunch counter no longer have their seats. Everything is packed up in storage, with the hope that it will make an appearance if Edison owner Jordan Strohl can find an affordable new home for the restaurant.

http://ny.eater.com/2015/1/5/7493575/weeks-after-closing-tim...

Ferris Restaurant, Edinburgh. I went there in 1990s and again a few years ago. Family run Scottish Italian restaurant. It was a bit strange seeing the same waiter after a 20 year gap (glamorous sharp suited younger man, plump slow ponderous but amusing older man, same as me except for the suit).

Closed. Overnight. A (no doubt fine) Lebanese opened instead.

http://en.wikipedia.org/wiki/Kitchen_Confidential_%28book%29

In 2007 my mom and I opened up a deli/cafe. We had previous experience in this industry so we didn't think we would struggle. We went bankrupt two years after that. It was an awesome experience.

It is true the rent can kill a business but it also comes down to its location, parking, getting in a out of the parking (which pisses people off if its a busy street and they have to wait because of traffic), everything needs to be running smoothly.

Starting such business is also super expensive. The good thing is that we only had to purchase the equipment. I have a construction company so the reno and everything that needed to be done was done by us. I also have a web design and marketing company so all the advertising was done in-house. These probably helped us save 50k if not more.

I remember, we had snitches coming in an out who were hired by our competitors. They would also come in and look at the expiry date of every produce in hope to find something that has expired so they can make it public.

In the end, we were about 100k out.

Anyhow, it was an awesome businesses and people loved it, however, it just wasn't enough to keep it running.

> we had snitches coming in an out

How did you figure out that they were snitches?

If you're in it for the long haul, then sock away money to either buy the property, or buy property elsewhere to relocate. That will go a long way towards preventing the "hey, I want a bigger cut of your action" scenario, and provide a cushion against hard times. Of course, there's also the possibility of the local government jacking up your property taxes (something that happened to a place near me).

This really isn't practical in New York City. Almost all of these spaces are leased, even the ones for institutions like Union Square Cafe. There are very few restaurants here where the owners own the building as well.

My brother is a restaurant owner. He bought the building one of his places was in, along with several other businesses. Initially it was a struggle to keep the mortgage payments going, but over time the other shops faded out and he replaced them with higher rental rate tenants. His restaurant there eventually died a slow lingering death, but even then he just got in a new tenant with higher margins that could afford more than the rent he was paying himself anyway. In any case, he's now got a lot of equity and a steady stream of income from the building.

His partner in his other restaurant owns the building they're in, and also owns 3 of other 5 businesses in the building. Nice setup if you can get it.

Yeah buying space for a restaurant in new york city...doesn't happen.

Unless you're a bank. http://observer.com/2012/04/mr-brownstoners-crown-heights-cr...

It happens: http://www.slate.com/articles/business/continuously_operatin...

It's hard enough to make money in the restaurant business much less to also take on a mortgage. And then you have no guarantee your restaurant will still be around in three years and then what what do you do?

Source: me. Multiple restaurant owner for 30 years.

>> The IRS comes after you because you're behind on sales taxes.

Nitpicking here, but that would be the state revenue department, not the IRS. The IRS doesn't collect any sales taxes afaik.

Was struck by how they got them out despite the lease - sure, on paper you're supposed to pay x, but we want more...

That sounded a bit odd - I can see the issue from either side, but why were they still paying a rent negotiated 15 years ago? Did the landlord actually sign a 15+ year contract? Did they fail to bump the rent over a couple of renewals?

I'd think there's gotta be a better solution before things come to that.

Commercial leases are long. 30 years isn't unheard.

> I'd think there's gotta be a better solution before things come to that.

Well, for whom? If you have the contract that says the rent is a quarter of the market rate why would you agree to pay more?

Better for both parties, if they have a long-term outlook.

I'd say you want to be paying a market rent so that your landlord is happy with you. It's in their incentive to keep you there and happy, and they're likely to go out of their way to keep you happy. If you manage to get locked into a contract to pay under market rent, then they will be unhappy with you and motivated to go out of their way to hurt your business and make your life difficult.

Granted, this may not be that common of a viewpoint in the restaurant industry, though. Or in the NYC rental industry.

Because you should think of contracts as underspecified interfaces between two parties. If I'm actually unhappy with you and want out, I can perform my side of the deal adversarially - technically and legally in line with the contract, but otherwise not exactly what you expected. So you have some incentive to keep me happy and renegotiate up the rate voluntarily, since otherwise I will act adversarially on all the things that are not explicitly specified in the contract.

This can work depending on the extent to which the contract is underspecified. You will note, for instance, that the hotel cut off room-service access to this restaurant. Clearly they didn't specify room-service availability in the contract, and so on.

> Did the landlord actually sign a 15+ year contract? Did they fail to bump the rent over a couple of renewals?

Probably. The landlord probably got a premium up front, too, for it being associated with a hotel.

The contract probably had bumps, but there were probably limits to the bumps and the real estate got more valuable faster than the bump limits.

This is a good lesson about contracts. A contract is only as good as the money you can expend on lawyers to defend it.

If the landlord could get more than twice as much as they currently are, of course they're going to do everything they can to drive the current tenants out. How is that at all surprising?

Maybe it's just rhetorical flourish, but the article takes a hit on the ol' credibility meter when the opening paragraph says: "The IRS comes after you because you're behind on sales taxes." IRS doesn't give a hoot about your sales taxes, except to the extent you deduct them.

The guy's not a tax expert; he's probably muddled the difference between state and federal tax authorities. That's not really the focus of the article at all.

Agree with this. People forget that if they have no sales they still have to file their quarterly sales tax forms with 0 filled in. The tax service never 'assumes' if they didn't get the form you didn't have any sales. Unwinding that can be challenging.

NY charges sales tax on food/drinks sold in restaurants.. so they wouldn't have been filing a 0 return anyway.

It just horrible !

This type of incidents happens to me. I was thinking that our nearby restaurant was alive and open ! but one of my emergency reasons I went to eat at my nearby one, but unfortunately that was closed forever !

I becomes upset ! this is the moment I never forget !

First came an offer to buy out the lease from the restaurant. Once the restaurant dismissed that, the hotel's strategy changed: Starve 'em out. They cut off its room service business, then started renovations on the building during the summer (tourist season), obscuring the restaurant from public view. When that failed to drive the restaurant out, mysterious complaints to the Department of Health started coming on a weekly basis; the restaurant was shut down by the DOH no fewer than three times.

OP should have outed the hotel, and given names and, if available, addresses of its owners and management. That shit may be technically legal, but it shouldn't fucking be safe.

I mean, if DoH actually shut down the restaurant, presumably the restaurant was in fact in violation of various (at least three!) health code regulations.

The DOH might shut down restaurants, per-emptively based on reports, before actually investigating.

Where? Source?

I've been in the restaurant business for 30 years and have never seen or heard of that.

ironically, in my attempt to find a better published source, i was led to my own comment.

Having spent over a decade working as a cook in various restaurants, I can assure you that at any given time, most restaurants are in violation of far more than three health code regulations. And the cliche is true, the more expensive the restaurant, the nastier the kitchen.

When this is the case, sympathy for a shut down restaurant is gone. I don't particularly care about conspiracy to shut down a restaurant serving dirty food, regardless of the intentions of the conspirators.

Violating regulations does not necessarily equate to "dirty food". For example, in SF it's OK for a coffee shop to sell ice cream in cups, but a health code violation to do so in cones.

http://blog.sfgate.com/cityinsider/2011/05/26/big-government...

Also: http://www.grubstreet.com/2014/03/per-se-health-department-i...

jpatokal already addressed this with a specific case, but you are presuming that all health code regulations are logical and actually deal with threats to patron health.