How Ghost Kitchens and Pop-ups Can Help with Rent Costs During the Pandemic
When the pandemic hit the restaurant industry, it was an anvil dropped – on a bubble. To run a restaurant is a constant struggle to keep a bubble aloft. Since restaurants operate on razor-thin margins, every day is a negotiation of labor costs, food costs and health inspections while attempting to create a memorable experience that entices customers to keep coming back. One of the biggest obstacles restaurants face – especially during the ongoing pandemic — is their largest fixed cost: rent. To combat decreased revenue and monthly rent payments, restaurant landlords and tenants are starting to embrace one of the industry’s hottest trends to mitigate rent costs: ghost kitchens and pop-ups.
Prior to the pandemic, ghost kitchens were used as a trial run or a “proof of concept” phase, before opening a full brick-and-mortar restaurant. Ghost kitchens are kitchens without dining rooms that exist in a variety of forms. For example, they can be urban warehouses containing multiple small kitchens or commissary kitchens. The space is usually leased by a restaurant operator for delivery only, with orders delivered through third-party aggregators such as DoorDash or Uber Eats. During the pandemic, there has been a sharp rise in the use of ghost kitchens. This new trend is ideal for the restaurant industry’s current situation. By operating inside existing restaurants that have not yet fully reopened or that are only open during certain times of the day (e.g. breakfast diners), ghost kitchens can significantly increase revenue streams.
Similarly, pop-ups are temporary restaurants hosted in various spaces such as existing restaurants, bars, arcades, or even a chef’s home. There are several types of pop-up restaurants from an exclusive one-night takeover of a neighborhood restaurant to a food tent open for a few months at a local outdoor market. Similar to ghost kitchens, and for the same reasons, there has been an uptick in pop-ups operating inside existing restaurants during the pandemic.
Keeping with the new trend and current situation, landlords are allowing their restaurant tenants to “lease” kitchen space to restaurateurs operating ghost kitchens and/or pop-ups. This enables restaurateurs to use the tenant’s space, equipment, and infrastructure in exchange for paying rent to the tenant and/or landlord. This arrangement can benefit everyone involved, as it allows the restaurant tenant to pay some, if not all, of its rent, in a time when revenue is low. Landlords collect additional rent and build a relationship with prospective future tenants. Simultaneously, savvy restaurateurs are able to use existing restaurant space to test the market before opening a full brick-and-mortar restaurant and committing to a long-term lease. It’s a win-win for all.
Ghost kitchens and pop-ups are a creative way to help mitigate risk and rent costs during these uncertain times. However, landlords, restaurant tenants, and ghost kitchen/pop-up operators must remain diligent when selecting the space or parties to any such arrangement. With an in-depth knowledge of the various legal issues related to restaurant operations, Wolfe Pincavage, LLP, can shed light on the appropriate agreements required to lease or operate a ghost kitchen or pop-up and share best practices on the strategies landlords and operators can implement to mitigate risk.