By LEGAL VIEWS AND NEWS By David Pisarra
I was talking with a friend the other day and we were discussing the situation on the Promenade with rents being so high, and the limitation imposed by the City Council and its desire to promote restaurants. I was trying to explain why so many restaurants are hesitant to open on the Promenade.
I turned to one of the participants in the conversation, a man who owns a restaurant on the Promenade and asked what he is paying for his 1,500-square-foot restaurant. His monthly rent is $18 a foot, which means he pays $27,000. That is before taxes, utilities, waitrons, cooks, dishwashers, hosts, equipment, business licenses, furnishings, the cost of the actual food itself, computer systems, bookkeepers, managers, laundry, printing, advertising, security, bank fees, accountants, public relations people, pest control, waste disposal, spoilage, pilferage and supplies.
My conversational cohort didn’t seem to think that was a huge sum of money, so I tried to explain from a business perspective why that is a huge amount of money.
Take for example an Italian restaurant. A bowl of pasta probably averages between $10 and $12 on the Promenade. Now, if the restaurant is being properly run, this product should have a cost of between 15-25 percent of the menu price. Obviously, the basic “spaghetti in marinara” is cheaper to produce than the handmade raviolis, but in general it should be around 20 percent of the menu price. So off the top of that $12 bowl of pasta, about $2.40 goes to food cost.
Ultimately, your $12 bowl of pasta brings in $9.60 to the owner. That sounds good, until you look at all the expenses you have to cover to be able to provide that bowl of pasta. The cooks, the dishwasher, the waitrons, the gas bill, the electric bill, the water bill, the trash bill, the laundry, staff, capital expenditures like a computer and credit card machine, banking fees, advertising, security, accountants, pest control, spoilage, hosts, business licenses and the cost of the pots and pans. Assume another 60 percent goes to those expenses and that’s $7.20 that disappears. Now you’re left with $2.40 for the owner to pay the rent.
That means that he must sell seven and a half bowls of pasta, per square foot, each month, just to make the rent. That is equivalent to 11,250 bowls of pasta each month just to break even and keep the doors open.
Oh, and he hasn’t made any money for himself yet.
The first 11,250 people are just to keep the doors open and the lights on. Only after that does he get to make any money, and then, he is only making between $8 and $9 for a bowl of pasta.
This is why the restaurant business is so difficult on the Promenade. Now I realize that I am not including the sales of beverages and liquor, which is where most places make their profits. But all that does is reduce the number of bowls of pasta from 11,250 to something a bit more manageable. It is for these reasons that McDonalds and the Starbucks will survive, but the other restaurants will suffer. They also have the high rents, but they don’t have the costs of running a fine dining establishment. No dishwashers, no laundry, no waitrons, their cooks make minimum wage and they do a higher volume in a smaller space.
It would be easy to say that the landlords are these evil horrible people who are driving the restaurants out of business. But that would be wrong. They have huge amounts of money tied up in their properties and those properties come with their own costs — real estate taxes, income taxes, property management fees, mortgages, utilities, insurance, costs to get a tenant in, and costs to get a tenant out, capital improvements, legal fees, accounting fees and the cost of purchasing the building.
One of the things to consider is that if a landlord has $1 million tied up in a property, they have a right to expect that investment to provide current income. $1 million should return $80,000 after tax dollars per year, which is only an 8 percent return on your money. The landlords are just taking advantage of the current climate that allows them to seek a premium for their space. Right now, there is a huge push by the City Council to preserve the demographic on the Promenade. Quite, frankly they missed the boat. The Promenade is likely set for a downhill slide, but that is more because of the cyclical nature of malls, rather than any one thing that the landlords or the City Council have done.
Rents are up because there is a limited amount of space on the Promenade and it has been a popular destination spot for many people. It remains to be seen if that continues. Personally, I don’t see many shopping bags in the hands of people on the Promenade. Lots of shoppers, but not many buyers.
The big box retailers like Apple, Restoration Hardware, Sephora, etc. are the ones that can afford to pay the high rents that the landlords deserve. It’s not good news for the small business owner.
It takes a lot of hard work to sell 11,250 bowls of pasta and not many are up to the challenge. The City Council’s attempt to limit the size and type of businesses on Promenade is admirable, if a bit quixotic. But hey, what would Santa Monica be if we didn’t have a quixotic City Council? (David Pisarra is a partner in the Santa Monica law firm of Pisarra & Grist, he welcomes questions, and (310) 664-9969 or e-mailed at DPISAR-)
Originally published in the Santa Monica Daily Press print edition on September 30, 2003. Read the original PDF.