Tag: restaurant

Food for Thought: Serving Up Unique Concerns for Restaurant Leases

Many aspects of commercial leasing are complex, but restaurant leases are a unique species of lease. Counsel to restaurants must be cognizant of operational and logistical issues posed by these hospitality businesses, and be prepared to address these key issues to protect the restaurant. Here are some of the most distinctive issues to be aware of when representing a restaurant tenant:

CONSTRUCTION ISSUES

Restaurant construction is different from other tenants’ fit-out work. It involves several moving parts, all of which come together to facilitate the restaurant’s successful operation. These include utilities, heating, ventilation, and air conditioning, managing odors, grease traps, hot water, and fire suppression systems. While counsel need not have the knowledge of a contractor or architect, one must understand the importance of the size of HVAC systems, design of fire suppression and sprinkler systems, the capacity and location of electrical conduit and electrical service, and sanitary and sewer lines and gas lines. For example, grease traps are imperative for restaurants, and it is important to determine (i) whether a grease trap is separate and external, or shared with other tenants, (ii) if shared, how maintenance responsibility and cost will be allocated among the shared users; and (iii) whether the grease trap’s location is convenient for operations.

Mitigation of cooking odors is another key issue, especially in a mixed-use development, shopping center, or an urban residential neighborhood. Some landlords and municipalities require expensive odor control systems, and negotiation is important in determining the size and scope of such measures, especially given the subjective perception of odors generally. It may also be helpful to include an objective standard of negative pressure for odor control. Noise mitigation is likewise an issue as to which landlords may be sensitive. Restaurants draw crowds of people who are out to enjoy themselves, which leads to loud voices, music, and other noise that emanates from the restaurant in a way that may affect other abutters and neighbors, especially residences or hotels.

OPERATIONAL ISSUES

  1. Hours of Operation: All businesses are sensitive to their hours or operation, but it is particularly important for restaurants to understand the impacts that may come with later hours, which often cause landlords concern (especially if the restaurant serves alcohol). If the restaurant has outdoor seating or a patio area, are those hours the same as for the interior space? Some liquor licenses or municipal regulations may also restrict operations, so it is important to understand and comply with the requirements and rules of governing bodies.
  2. Deliveries: Restaurants receive multiple deliveries daily, often greater than other types of businesses. The logistics of delivering food to the restaurant are critically important. Sometimes landlords desire to limit the hours during which deliveries may be made or the loading docks (if any) that may be used. Counsel should know how deliveries will be made and determine whether any restrictions on same will be troublesome to the restaurant’s operations.
  3. Trash: Restaurants generate a substantial amount of trash, both wet and dry, food and nonfood. The location and adequacy of trash storage as well as the frequency of removal are key issues to specify in the lease. Some landlords also require a cold storage area for food waste; and of course care should be taken to avoid vermin infestations. Where will the tenant need to take its trash? If the common trash room is far from the kitchen, that may pose problems for restaurant staff.
  4. Parking: Vehicle parking is an issue for all tenants, but it is often magnified for restaurants. Counsel should understand where the restaurant’s patrons are expected to park, and if desired seek to negotiate designated takeout parking spaces for the restaurant. If there is to be valet parking, or if a development designates certain areas as approved for ride share drop-off and pick-up and not others, counsel should understand whether those services and areas pose a business risk for the client.

EXCLUSIVE ISSUES

Many types of retail businesses seek exclusives in leases, but restaurants are particularly invested in ensuring that landlords do not lease other space to a competitor restaurant. If the development contains a hotel, the restaurant lease should contain an exclusive which prevents the hotel from operating a similar restaurant.

TIMING ISSUES

If the restaurant is located in a mixed-use project or shopping center, or otherwise not on its own parcel, the restaurant will want to negotiate the ability to determine when construction occurs and when it is obligated to open for business. Timing of construction can be a big risk, as delays and interruptions are expensive and set back the opening. Aside from construction timing, opening requirements may be important, especially in light of whether other tenants in the project are open and operating. Restaurant counsel may seek an opening co-tenancy requirement such that the restaurant will not be obligated to open until the major tenant or a substantial portion of the development is also open.

In summary, restaurant leases are more complicated than other retail leasing; and restaurant counsel should be aware of these unique business issues and strive to fully understand the details of its client’s business in order to set the restaurant on a successful path.

© 2024 SHERIN AND LODGEN LLP
For more information on Restaurant Leasing Issues, visit the NLR Real Estate section.

Restaurant Businesses Entitled to Favorable Employee Retention Credit Treatment

Restaurant businesses have a new opportunity to take advantage of the employee retention tax credit under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, even though Congress terminated the credit Sept. 30, 2021, three months earlier than scheduled. Certain restaurant businesses that thought they were ineligible for this tax credit may be entitled to take advantage of it for wages paid up until this COVID-19 economic incentive ended. Such potential opportunity is a result of IRS guidance that was published in August 2021, the month before the credit ended.

The employee retention credit initially allowed a 50% credit for wages paid for the second through fourth quarters of 2020, and then a 70% credit for wages paid for the first through third quarters of 2021, if the business either had its operations suspended due to COVID-19-related government orders or had a significant decline in gross receipts. Wages paid with a loan under the Paycheck Protection Program were not eligible for the credit. The credit was limited to a maximum of $5,000 per employee for 2020, but this cap was increased to $7,000 per employee per quarter for the first through third quarters of 2021 (total maximum credit of $21,000 per employee for 2021). The credit is applied against the employer’s share of payroll taxes, and to the extent the credit exceeded the employer’s share of payroll taxes, the IRS refunds the difference to the employer.

Impact of PPP Loans and Restaurant Revitalization Grants on Gross Receipts

For 2020, a business satisfied the significant decline in gross receipts requirement for credit eligibility if it experienced a greater than 50% reduction in gross receipts compared to the same quarter in 2019. This test was eased for 2021 quarters to include reductions in gross receipts greater than 20%. When the IRS published its initial guidance, it said gross receipts included tax-exempt income. The assumption was that a PPP loan forgiven or a grant under the Restaurant Revitalization Fund (RRF), both treated as tax-exempt revenue, would nevertheless be treated as gross receipts for determining whether a restaurant business had a significant decline in gross receipts for credit eligibility. Therefore, it would have been understandable if a restaurant owner who had a PPP loan forgiven or received an RRF grant assumed that the amount of the forgiven loan or grant needed to be included in the restaurant’s gross receipts calculation, which may have resulted in not satisfying the decline in gross receipts test. However, the IRS published Revenue Procedure 2021-33 in August 2021, which provides that for purposes of determining whether a business has had a significant decline in gross receipts for a quarter, the business may exclude forgiven PPP loans and RRF grants from its gross receipts. This will increase the likelihood that a restaurant business can pass the decline in gross receipts test to allow the business to claim the credit. Even though this credit ended in September 2021, a company can still claim the credit for prior quarters by filing an amended payroll tax return.

Part-Time Employees

Another important factor in claiming the credit deals with the number of average full-time employees a company had in 2019. The critical thresholds to qualify as a “Small Employer” are 100 or fewer average full-time employees in 2019 for determining the credit for 2020 quarters, and 500 or fewer average full-time employees for 2021 quarters. If the conditions to claim the credit are satisfied – either because business operations were suspended by a government order or the company had a decline in gross receipts – a Small Employer gets the credit for wages paid even though the business is open and the employees are working. On the other hand, larger businesses that surpassed these 100- or 500-employee thresholds could take the credit only if it paid its employees even though they were not working. Note that these 100/500 employee thresholds are determined on a company-wide basis, not on a per-location basis that tested eligibility for PPP loan rules.

In August 2021, the IRS published Notice 2021-49, which states full-time equivalents in 2019 are not counted in determining this 100/500 employee threshold. Some restaurant businesses may have thought they were not eligible to claim the credit because their part-time workers, when aggregated into full-time equivalents, caused the businesses to exceed the 100/500 average full-time employee threshold. However, as a result of this IRS notice, they now may be eligible to file an amended quarterly payroll tax returns to claim the credit.

Better yet, Notice 2021-49 states that wages paid to part-time employees are eligible for the credit – even though part-time employees are not counted toward the 100/500 employee threshold. Some restaurant businesses may have assumed the wages paid to part-time workers were not eligible for the credit, and may be able to file amended payroll tax returns to claim the credit for part-time worker wages.

Cash Tips

Finally, Notice 2021-49 also states that an employee’s cash tips of more than $20 per month are wages eligible for the credit. Some restaurant businesses may have assumed that tips paid by customers were not eligible for the credit, and did not include tips in their claim for the credit. If so, they could file amended payroll tax returns to claim the credit. Of course, to claim the credit for cash tips received by employees, a restaurant business must report the tips as income on the employee’s Form W-2.

In summary, restaurant businesses should revisit their employee retention credit analysis with their legal and tax advisors in light of Notice 2021-49. The benefits could be substantial.

This article was written by Riley Lagesen, Landes Taylor and Marvin Kirsner of Greenberg Traurig law firm. For more articles about employee retention credits, please click here.