
What Happens When a Restaurant Dies - bjterry
http://www.seriouseats.com/2015/02/what-happens-when-a-restaurant-dies.html
======
speeder
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.

~~~
sokoloff
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.

~~~
yourapostasy
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.

~~~
sokoloff
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.)

------
js2
_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...](http://www.npr.org/blogs/thesalt/2014/12/08/369359855/dont-
let-the-kasha-vanish-diners-band-together-to-save-caf-edison)

 _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...](http://ny.eater.com/2015/1/5/7493575/weeks-after-closing-times-square-
classic-cafe-edison-has-already-been)

------
keithpeter
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](http://en.wikipedia.org/wiki/Kitchen_Confidential_%28book%29)

------
viame
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.

~~~
sumedh
> we had snitches coming in an out

How did you figure out that they were snitches?

------
flyinghamster
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).

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

~~~
kryptiskt
It happens:
[http://www.slate.com/articles/business/continuously_operatin...](http://www.slate.com/articles/business/continuously_operating/2014/10/katz_s_delicatessen_how_the_iconic_deli_stays_in_business_against_the_odds.html)

------
arbuge
>> 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.

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

~~~
ufmace
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.

~~~
emodendroket
> 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?

~~~
arjunnarayan
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.

------
jccooper
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.

~~~
emodendroket
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.

~~~
ChuckMcM
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.

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

------
SocialMusker
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 !

------
michaelochurch
_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.

~~~
arjunnarayan
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.

~~~
llamataboot
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.

~~~
colechristensen
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.

~~~
jpatokal
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...](http://blog.sfgate.com/cityinsider/2011/05/26/big-government-
wants-your-ice-cream-cones/)

Also: [http://www.grubstreet.com/2014/03/per-se-health-
department-i...](http://www.grubstreet.com/2014/03/per-se-health-department-
inspection.html)

------
grandalf
Just logged into Yelp today to discover that some of my favorite restaurants
in SF have closed!

~~~
spiritplumber
Yeah, SF is really changing face. Not sure it's a good thing.

------
marincounty
The selfishness that fuels Capitalism I find sad. I know the other systems
didn't pan out(yet), but the level of abject greed seems, in the long run,
counterproductive? I understand making a profit; I don't understand greed.
Yea--"Greed is good!" It was a movie quote. Why do I feel some people actually
think it's cool now?

I'm not commenting on this particular resturant, but business--even personal
financial transactions seem to have gotten too cut throat? Maybe I never
noticed just how greedy some entities and people are, but it seems to have
gotten worse? I can't blame it on the Internet. I saw the change in the 80's.

I'll give one example I see going on in this county. A person buys a house.
They rent out a room. They become friends with the tenant. The tenant helps
the landlord on a personal level--like taking them to doctor's appointments,
they socially interact, they are kind of like family. But the Landlord
continually raises rent to market rates. Well, eventually the tenant loses
respect and moves out. Who won?

The Doctor who drags in patients for unnesarry office visits?

The Veterinarian who jacks up their prices when an "animal lover walks in".
(Yea, I had a girlfriend who worked at a veterinarian hospital and they had a
code they threw around the office when they thought they could "financially
milk" a pet's owner.)

I mortgage broker who knows the deal is horrid, but smiles right through the
bankruptcy.

I'm not a religious person, but I was brought to a Lutheran Church as a kid
for years. I sat there thinking how can I incorporate this selflessness that
guy up there is talking about into the real world. I never found a fool proof
plan, but I was never greedy. I will die knowing I tried to do the right
thing, and it was not about the money. The problem is I might die Homeless,
and I know that's no way to live a life.

I just wish the people who call the shots--would show a little bit of
compassion. A little bit? Enough so when you do die--the people at your
funeral are there because they truly loved, and respected you.

I'm not preaching. I just don't think maximizing profits in every situation is
copacetic! And just because it's legal, doesn't make it right, at least in my
little world. I'm feeling nauseous. It's this post I'm writing, or something
is wrong with my liver? If there is a God please give me a few more years, or
take me out without the pain my father went through.

