Sea of debt could sink struggling restaurants
Unpaid bills from pandemic threaten even more closures
You You Xue, the owner of Wonderful in Millbrae and Foster City, owes close to $200,000 in back rent at his two Hunan restaurants.
He also owes more than $20,000 to PG&E, the water bill to the city of Millbrae and deferred sales tax payments. His dining rooms are starting to fill again, but sales are still down 25%. These pandemicrelated debts continue to hang over his business.
“As much as landlords are entitled to receive a return on their property, we (shouldn’t) forget that there are a lot of people who are struggling,” Xue said.
Xue is far from alone. Despite the optimism of this moment, with Bay Area restaurants able to return to full capacity, the financial pressures of the shutdown linger. Many restaurant owners say their recovery is far from certain: At least one restaurateur who spoke with The Chronicle faced eviction proceedings even though protections are in place to prevent that. Others worry whether ongoing debt will bring another raft of closures in the com
ing months.
A recent survey of more than 100 restaurants found that 60% of the restaurants have amassed debt during the pandemic, compared to 34% in March 2020, according to smallbusiness nonprofit SF New Deal, which conducted the study. On average, restaurants’ debt has nearly doubled, up from $62,000 to $114,000, according to the survey.
“It’s an existential crisis,” Namu Stonepot coowner Dennis Lee said of back rent. “All of our businesses are in jeopardy.”
In San Francisco, unpaid rent for retail properties like restaurants and bars is much higher than for other businesses — 89% to 98% of money owed, even though they make up only about a quarter of the rented commercial rental spaces in the city, according to a March report from the Budget and Legislative Analyst’s Office . This could be due in part to the fact that San Francisco restaurants and bars experienced the sharpest drop in sales in 2020 of any business sector and were mandated to close, except for takeout, for much of the year, according to the report. Statewide, nearly a third of restaurants permanently closed during the coronavirus pandemic, according to a report presented to the state Senate in May.
Temporary eviction moratoriums in Bay Area cities aren’t always clearcut solutions, either. Xue’s Wonderful restaurants are located in San Mateo County, where the moratorium requires businesses to show they can’t pay rent due to decreased net business income as a direct result of the pandemic. So in November, Xue said he was shocked to receive a threeday notice asking him to pay $39,000 worth of rent for his Millbrae location or move out. The landlord, Xue said, argued that the restaurant had lost revenue, not profits.
A judge ultimately ruled in Xue’s favor, but not before Xue incurred $20,000 in attorney’s fees; he’s now engaged in legal action to get his landlord to cover that. Neither Xue’s landlord nor his landlord’s attorneys responded to The Chronicle’s requests for comment.
“Our first priority is to keep the doors open and prepare for any contingencies,” Xue said. “It isn’t to pay back our landlord.”
Other restaurateurs have struck deals with their landlords to pay back rent and said the process has felt largely cooperative and supportive. Still, reopening doesn’t mean they’re in the clear with their debts.
The landlords for San Francisco restaurants Nopalito and Liholiho Yacht Club, for example, adjusted the rents to a percentage based on sales with a base minimum, said partner Jeff Hanak. But this month, that minimum will be back to its full, prepandemic amount. And if the restaurants have higher sales than anticipated, they’ll have to start paying back an additional percentage of the deferred rent, Hanak said. He and other owners remain hopeful but on edge about whether demand will pick up enough to help them pay off their debts.
“I’m hesitant. I’m a little nervous about our sales volume as we start to ramp up,” Hanak said. “We’ve been taking small steps and have been very cautious of not pushing it.”
Anamika Khanna, owner of the fastcasual Kasa Indian Eatery in San Francisco and Redwood City, has agreed to pay back rent over the next five years at two of her three restaurants. But her lease recently expired at Kasa’s Polk Street location, so she’s paying monthtomonth while she negotiates a new lease.
This has proved challenging: Khanna and the landlord “have different ideas of what market rate is,” and it might be untenable to commit to paying a higher rent when her business has not yet bounced back, she said. Corporate catering, which made up a third of Kasa’s business before the coronavirus pandemic, has been slow to return.
She’s still running her restaurants with a skeleton staff while expenses like food costs and insurance are increasing. The Chronicle was not able to immediately reach her landlord for comment.
“It’s really hard to say that I’m completely confident, but at the same time I’m not sure how else to proceed,” Khanna said of paying back her debts.
As the Bay Area reopens, landlords are looking to recoup their losses from the pandemic. Landlords rely on rent to pay mortgages, property taxes and other expenses, said Charley Gross of the San Francisco Apartment Association, which represents residential and commercial landlords.
“It’s been difficult on both sides,” Gross said of landlords and tenants.
Along with rent, many restaurateurs deferred payments on everything from sales tax to electric bills. Some took out more loans to keep their businesses afloat during the shutdown. Joe Hargrave, coowner of Tacolicious, is up to date on all his rent payments. But he took out a $2 million loan to keep his string of Mexican restaurants alive last year. A large, onetime payment at the end of the loan term will be due in about three years with a “pretty good amount of interest.”
“It’s suffocating,” he said. “I kinda did what most people did, (which was), if I can push this off for three years, that will give me time to figure it out.”
Lingering uncertainty is making the prospect of paying off deep debt even more daunting. Restaurant owners say sales are starting to pick up and stabilize, but they’re not yet back to preshutdown levels. Many feel stuck in a catch22: They have to ramp up operations to increase sales and get their businesses out of the red, but worry about the potential return of restrictions and incurring even more expenses with the addition of parklets and more seats.
“We have no choice but to go for it 100%,” said Namu Stonepot’s Lee.
There is some help, though. Many credit the combination of federal and local grants with helping them stay afloat and to partially defray costs like rent and utility bills. SF New Deal recently launched a $1 million fund to provide grants of up to $2,500 to small businesses across the city. More than 900 have applied. (The application is open through Friday.)
Commercial eviction moratoriums in some Bay Area cities also have been crucial for small businesses. San Francisco’s moratorium has been extended through Sept. 30, meaning landlords can’t evict tenants before giving a written notice and an opportunity to catch up on their payments. It also provides tenants with additional time after the moratorium expires to pay back any unpaid rent.
Dennis Faoro, a San Mateo attorney who represents commercial landlords and tenants on the Peninsula (he represented Xue in his case), said helping tenants pay off any pandemic debts is mutually beneficial. The alternative for landlords could be a building that sits vacant and is more susceptible to vandalism and thus higher insurance costs.
Bay Area cities have offered support in other ways, too, such as temporarily closing streets to traffic to allow for more outdoor dining, imposing caps on thirdparty delivery fees and waiving license fee renewals.
But the eviction moratorium and grants may have provided a false sense of security for some owners. William OrtizCartagena, a commissioner with the San Francisco Office of Small Business, said many local Latino restaurateurs used Paycheck Protection Program and Restaurant Revitalization Fund monies to pay back rent so they didn’t try to renegotiate their leases, and they’re not yet getting pressure from their landlords because of the moratorium. Most are sole proprietors and may have a harder time accessing financial and legal resources due to a language barrier, he said.
“This is going to have a lasting effect. Specifically in the Latino community, come September, we’re going to see a tremendous flood of commercial evictions,” OrtizCartagena said.
His nonprofit Clecha, which provides support to Latino entrepreneurs, is trying to stem this tide by offering real estate attorneys on retainer and reaching out to Latinoowned restaurants.
San Francisco Supervisor Ahsha Safaí, who represents District 11, which includes the Excelsior, Outer Mission and Visitacion Valley, also sees this as a critical juncture in the survival of local businesses. He’s pushing the city to budget up to $50 million in rent relief for small businesses, and said he’s worried that without further support, the city will see another “extreme” wave of closures. Supervisor Dean Preston also recently introduced legislation that would excuse businesses from paying rent when required to shut down under pandemic health orders.
“They’re at a crisis point,” Safaí said. “If we don’t find a way to get them additional help to pay down some of their back rent, a lot of these businesses will be faced with filing for bankruptcy.”
Whether the grants and temporary protections will be enough to keep businesses open remains to be seen. Yuka Ioroi of San Francisco’s Cassava said the federal Paycheck Protection Program, Restaurant Revitalization Fund and local grants helped defray some of her halfmillion dollars in debt. Still, the restaurant continues to operate at a loss, she said.
“We’re definitely not relaxing,” she said.