Lease Renegotiations Reduces Occupancy Costs for Restaurant Company

June 10, 2009
| Share | Print

When Buffets, Inc., the buffet-style restaurant company, had to renegotiate and restructure the leases for 177 of its restaurant sites, the company called in real estate and financial restructuring firm Huntley, Mullaney, Spargo & Sullivan, LLC (HMS). The results yielded immediate savings of $7 million and ongoing savings of $17 million for Buffets, which has nearly 650 locations in 40 states.

“Together with Buffets’ corporate management, we quickly categorized the sites, and launched into negotiations,” said HMS engagement partner Bill Sullivan. “We focused on keeping viable restaurant locations open through the process, so that cash flow continued and employees retained their jobs.”

HMS negotiated two types of concessions:

  • Monetary concessions, such as rent reductions.
  • Non-monetary concessions, such as restructuring several long-term leases to shorter terms.

How can tenants, especially those with multiple sites, positions themselves for successful landlord-tenant negotiations, so they wind up on the winning side? Sullivan offers the following tips:

  • When negotiating for more than one site, evaluate each location individually rather than in the aggregate. For Buffets’ negotiations, HMS reviewed the facts and figures for each unit, and then tailored the negotiation strategy for each unit or small clusters of similar units.
  • While there isn’t a one-size-fits-all solution, when negotiating with bigger landlords, a portfolio approach can work. But keep in mind that there’s variety in every portfolio.
  • It’s important to look beyond the real estate aspect of a site and evaluate the site from a financial and operational perspective as well.
  • While there may be several negotiating options, it is important to focus on a win-win strategy that benefits both parties. If the deal doesn’t make sense for the landlord and the tenant, it will never happen.
  • When renegotiating leases in a bankruptcy, look at the short-, mid-, and long-term perspectives. Avoid a band-aid approach. You don’t want to restructure a lease that works now, but puts management back at square one in 18 months.
  • Negotiate a deep enough rent reduction now that will cover the current downturn as well as the longer-term.

Finally, Sullivan recommends taking a zero-based budget approach to arriving at a target negotiating range. “HMS’s team worked with Buffets’ chief restructuring officer, chief executive, cfo, and the senior operations officer and examined the characteristics of each and every site,” he said. “Instead of using an artificial goal, they started with a zero-based budget.”