Why do unique, indie restaurants flourish in places like Buckhead and Buford Highway? One behind-the-scenes factor is a landlord-tenant deal called “percentage rent,” which lowers the start-up costs for mom-and-pop or chef-owned restaurants. Atlanta, Brookhaven and Dunwoody are among the local cities that allow percentage rent deals, according to Buckhead attorney Kevin Leff, who represents many restaurateurs.
But some other cities—including Sandy Springs—prohibit percentage rent deals if the restaurant serves alcohol, Leff says. The concern is that it could allow a felon to profit from a liquor license he or she couldn’t legally obtain by acting as a restaurant landlord. But the Sandy Springs City Council is now considering changing the law. Councilman Gabriel Sterling said at a recent council meeting that, as restaurant rents rise to $30 or $35 per square foot, “cooler” local restaurants are priced out and only major chain franchises can afford to start up.
The council learned of the percentage-rent problem from local restaurant-owner Jason Sheetz, who ran into it while opening his new business, Under the Cork Tree. Sheetz, along with Chef William Sigley, also runs Sandy Springs’ Hammocks Trading Company restaurant, and he is an active member of the Sandy Springs Restaurant Council, a local trade association. Reporter Newspapers asked Sheetz to explain how percentage rent works and why it matters to local restaurant customers.
Q: What is “percentage rent” in comparison to regular rent?
A: A landlord and a tenant may enter into a lease with a percentage rent clause. It can be structured a number of different ways, but typically means that after the tenant reaches an agreed-upon dollar amount in revenue (“base revenue”), a percentage of the surplus revenue is shared with the landlord. For example, let’s say that percentage rent is 10 percent after a $20,000 base revenue has been achieved. If the actual revenue is $40,000, the tenant will pay an extra $2,000 in rent. This is, in most cases, in addition to a base rent.
Q: What is the benefit to restaurant owners of using a percentage rent structure?
A: For any business, using percentage rent allows for the up-front cost or guaranteed cost to be lower. The landlord is essentially taking on more risk in the short term by taking lower rent while the business gets its footing. As a tenant, the guaranteed base rent would be lower at first while the business is getting developed and higher when the business is more established.
Q: How does the city of Sandy Springs restrict percentage rent? What problems does that cause?
A: The guidelines for applying for a liquor license in Sandy Springs include a section that does not allow for percentage rent to include the sales of alcohol. The reason behind this is to ensure that all owners of a liquor license go through the proper background checks. The definitions of percentage rent and profit-sharing (as a business owner might be entitled to) are very similar. The way the guidelines are written, the city manager may approve an application for a liquor license that includes a percentage rent clause, but that application may be delayed due to the process of review and scheduling of the necessary meetings. This requirement may delay the business from opening, or discourage a business choosing the location based on lesser requirements from another jurisdiction.
Q: If the law was changed, how would it benefit restaurant owners and customers? Could it change the types of restaurants in the area?
A: Percentage rent is a way for small and local chefs and restaurateurs to start their business with less capital needed up-front. With the way rents are increasing, the variety of restaurants may be limited to larger corporate and chain restaurants who can afford those rents from the beginning of the lease. Changing the law would create and foster the notion that Sandy Springs wants to attract these smaller, independent, chef-driven restaurants.