By now, we’ve all realized that rideshare services such as Uber and Lyft have materially impacted a number of industries during their relatively short lifetimes. For this real estate lawyer, 2016 represented the year in which these services worked their way into the restaurant industry and my restaurant leases. Since leases should attempt to contemplate how the world might look and operate 10, 15 or even 20 years into the future, the reality that rideshare services are here to stay should be given consideration in drafting and negotiating a lease for a new restaurant, especially a lease for a high-end restaurant with a significant bar component.
As a transactional attorney in Atlanta, it’s not too often that my job requires me to conduct actual research. That sort of work is typically relegated to our firm’s litigators and regulatory compliance attorneys. So, when the opportunity presented itself for me to go onto the front lines to see how these rideshare services are impacting the retail and restaurant industries, I really couldn’t resist. With my wife in her third trimester of pregnancy this past summer and requiring plenty of time to rest on weekend afternoons, I had a little free time on my hands. As someone prone to stir-craziness, I decided to sign up as an Uber driver to see just how it all works. Since publicly-available rider data is limited, I was curious to know how people are using rideshare services; particularly restaurant and bar patrons. I committed to driving at least 25 segments over the course of a few weekends to gather data in anticipation of writing this article.
What did I find as a result of my “research?” I realized that there are a number of meaningful ways that these services are impacting the business of a landlord or a restaurant tenant, even if they aren’t fully aware of the impact just quite yet.
As relates to restaurant leases, especially here in metro Atlanta where parking is notoriously tight, parking frequently surfaces as a major deal point which requires careful thought and consideration. I always seem to have at least one deal in my file drawer which has stalled while the landlord and the restaurant tenant attempt to create a viable parking plan or work through various parking-related concerns. Based upon my 25 Uber drives, the news is good for those attempting to put together a restaurant or bar deal, as people are riding Uber to restaurants and bars in droves. Perhaps, not surprisingly, about forty percent of my pick-ups and drop-offs involved a restaurant or a bar visit at one end of the trip.
My experience doesn’t seem to be unique, either. According to Federico Castellucci, President of Atlanta’s Castellucci Hospitality Group, Inc. (parent company to The Iberian Pig, Cooks & Soldiers, Sugo, and Double Zero), “approximately ten to twenty percent of our diners are arriving to Cooks & Soldiers by way of a rideshare service.” When I asked him which patrons seem to be using rideshare services most, he noted that “no particular age demographic seems to use these services more than others, and riders from their 20’s through their 50’s appear to use them pretty evenly.”
Because (almost) everyone loves a chatty Uber driver, I, of course, asked a few of my riders heading to or from a restaurant or bar why they were riding Uber on our particular trip. Their answers seemed to fall into two, perhaps predictable, camps. Either they intended to have drinks along with their meals and, responsibly, didn’t want to drive themselves, or the cost of an Uber ride relative to Atlanta’s escalating parking charges actually made taking Uber the more affordable option. With many of my riders coming in groups of two or more, splitting the cost made Uber even more affordable. Some of my passengers also noted that riding Uber eliminates the hassle of finding a parking spot or a potentially long walk to the restaurant, a particularly meaningful perk in rainy conditions.
So how does all of this affect a restaurant and negotiating a restaurant lease? With such a significant percentage of patrons to high-end restaurants arriving via rideshare services, perhaps, in some cases, we need be less concerned with the total number of available parking spaces for that restaurant’s use, and more concerned with whether two or three of those parking spaces could be better utilized to accommodate rideshare services. A number of my restaurant clients are now pushing to have dedicated rideshare pick-up and drop-off spaces. To a landlord or developer, this should be welcome news, as these two or three dedicated spaces could handle the traffic that, if customers drove themselves, might otherwise require dozens of parking spaces to service. Entire dedicated rideshare pick-up and drop-off lanes are also working their way into lease negotiations as a potential option.
While I don’t think that code-required parking ratios will be lowered in the near future to reflect that fewer diners are driving to dinner, it’s undeniable that rideshare services are lessening the burden upon parking fields in urban and metropolitan settings.
With fewer patrons driving to dinner, this also increases the likelihood that patrons will order that second or third drink with their meal. This has the effect of increasing restaurant revenues from traditionally high-margin beverage programs, while also increasing the likelihood that restaurants will exceed percentage rent breakpoints for the benefit of their respective landlords.
And speaking of percentage rent, rideshare and food delivery services are also impacting how percentage rent lease provisions should be negotiated. While not all restaurant leases include a percentage rent component, I find that many high-end restaurants leases do, so as to allow a landlord to participate in the upside if a restaurant becomes a real success. As is typical, however, when negotiating a percentage rent lease on behalf of a restaurant, the lease’s gross sales definition should contain certain carve-outs from the definition of “gross sales.” These exclusions typically pertain to revenues which are collected by the restaurant but which do not benefit the restaurant’s bottom line. These are frequently items such as credit card processing fees, tips and gratuities, and local sales tax. But with services such as Uber Eats, Zifty, and Caviar now serving most major metropolitan areas, special attention should be paid to how these services operate, and how they impact restaurant revenue vis-à-vis percentage rent.
If you’ve used one of these food delivery services, you may have noticed that they are relatively inexpensive. At first blush, it doesn’t seem quite fair that it costs far less for your food to ride in an Uber car than it would cost you to ride in the same Uber along the same route. The reason that your dinner seems to get preferential treatment is that the restaurant actually subsidizes the cost of your food delivery. While the patron is charged the menu price for the items ordered, the Uber Eats service takes a certain negotiated percentage of those collected funds off the top and pays the remainder to the restaurant. Many restaurants are happy to take this deal, as it allows them to increase revenue without requiring additional seats, china, or wait-staff. It can be a real boon to the sales-per-square-foot figures generated by a restaurant when no additional square footage is required to make the additional sale.
Accordingly, in light of this new food-delivery reality, it’s important to note in a restaurant lease’s gross sales carve out provision that gross sales should include only the amount collected by the restaurant from the delivery service, and not the item’s face value on the restaurant’s menu. Moreover, for gross sales reporting purposes, sales should be booked only when the delivery service actually pays the restaurant, and not when the food order is placed and delivered.
And finally, since you’ve read this far, please allow me to present to you my final, and perhaps, most important, finding of my “research.” Though tipping your rideshare driver is not expected, and drivers are prohibited from asking for tips, please know that an extra buck or two to your driver does go a long way. In my experience, especially as a passenger, Uber drivers work hard, are friendly and courteous, and are motivated to ensure that you have the most pleasant ride possible. But they make less than you might think.
When my father heard from a relative that I was driving for Uber on the weekends this past summer, he pulled me aside privately at a family dinner. “Brian,” he said, “if you’re having money trouble, I want you to know that you can always come talk to me about it.” He certainly meant it out of sincere fatherly concern, but I could only chuckle. When I informed him of how little I was making with my “side-job,” he quickly realized that if it were really about the money, I’d be at my desk billing hours instead.
For now, I think I’ll stick with my day job.