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INDUSTRY INSIGHTS
with Helbraun Levey Insiders
Investors Woke Up
Andrew Fine, Partner & Chair of the Corporate Group
During the height of the pandemic, many capital raises and venture capital opportunities were put on ice as investors waited to see how Covid would play out. Their attitude changed drastically in 2022 as they concluded that the worst of the pandemic had passed. This attitude adjustment got people off the sidelines and now, many frozen corporate deals have thawed and the new deal flow current is strong. Things on the investor front look almost as they did before the pandemic but your average investor has changed the way they assess opportunities in the hospitality industry.
Today’s investors tend to ask more questions before opening their checkbooks. They want financial forecasts and operational contingency plans. Is the menu adaptable? Is the restaurant conducive to take-out and delivery? Does the concept have what it takes to survive in a precarious economic and regulatory climate? Ultimately, today’s investor wants to see a business that is at least one of the following: (1) packed with reputable talent; and/or (2) scalable.
A well-known, experienced chef or operator attached to a business adds security to any investment. And talent can attract additional revenue streams that wouldn’t be available to an inexperienced operator. For example: many of our clients are now reporting record sales when it comes to private events. If you have big names attached to your concept you’re more likely to secure upscale events and parties. Similarly, reputable talent can help attract licensing and management deals and investors want to see these diverse revenue streams because they create predictability in an industry that is not particularly well known for it.
You should also consider growing your concept to attract investors. Investors appreciate brand recognition and the best way to attain brand recognition is to open more shops. If you can prove that your concept is well known, well-liked, and has a history of success in multiple locations, investors will be impressed.
We predict that 2023 will see a high volume of corporate deals within the industry, particularly for those concepts which are scaling. We expect that many of you will create holding companies to fuel your growth and that those who already have the infrastructure in place will blow it out in 2023.
As always, we’re here to help you find ways to gain an edge in investor negotiations. If you have an idea or want to run a proposal by us, just give us a ring.
Developer Deals are Flowing
Mayan Bouskila, Partner & Chair of the Real Estate Group
Based on our deal flow, it appears that downtown Manhattan and Brooklyn are rebounding faster than Midtown when it comes to new restaurant leases. No big surprise about Brooklyn, but we are pleasantly surprised that Downtown has picked up. Even all the way down here in the Financial District, clients are finding lease deals to their liking and that is a great sign. We expect to see the same thing happening in Midtown in 2023 thanks to the attention garnered by Rock Center and all the cool restaurants opening there.
We are seeing a lot more management deals with developers offering to cover build-out and other costs for “trendy” restaurateurs with a following. Developers are also adding F&B amenities for mixed-use buildings, and we have seen a huge uptick in these types of deals.
Despite the Nimby lawsuits and the media’s obsession with rats, we expect outdoor dining to remain an important component of our clients’ operations moving forward. As such, we will continue to push for “outdoor dining” provisions to be included in our leases.
In 2022 landlords became less willing to accept any pandemic protection language in their leases. This was a change from the prior few years where they might agree to some kind of abatement if another pandemic related closure occurred. Going forward, we envision a more challenging negotiation environment in relation to pandemic provisions including rent abatement and force majeure. Ah, Landy, always a challenge.
Fewer Trials, More Mediation, Endless ADA Lawsuits
Hamutal Lieberman, Partner & Chair of the Litigation Group
Generally
Overall, throughout 2022, litigation activity slowed down due to the tremendous delays in the court system in large part due to the backup created by the pandemic as well as the rise of inflation. Given the uncertain financial and political climate, paired with no substantial changes in the speed with which cases are being litigated, we predict that 2023 litigations will be primarily replaced with out-of-court settlements and mediations. This benefits our clients as it keeps attorney fees lower and drives quicker resolution of disputes. In fact, HL is considering opening a mediation center for hospitality industry disputes. Stay tuned.
Outdoor Dining Structures
Starting in the summer of 2022, we saw a tremendous uptick in DOT’s enforcement of the Open Restaurants Program which has, in some cases, resulted in the DOT tearing down outdoor structures. Enforcement has been uncoordinated, arbitrary and unannounced.
We anticipate that the DOT will release new regulations relating to the Open Restaurants Program which may require some significant changes to existing structures and may make compliance in some cases impossible. We also anticipate that the DOT will start charging some type of fee or tax relating to the existence of the outdoor structure.
ADA
2022 saw Americans with Disabilities Act (“ADA”) litigation continue to plague the hospitality industry in a seemingly disproportionate way. These cases can get dangerously costly, as some attorneys and plaintiffs are increasing the costs for settlement and demands for compliance. And the restaurants never win these cases.
While we do not expect ADA cases to disappear, we are seeing courts address some of these “shakedown” complaints and we do predict that courts will continue to crack down on these generic complaints and break the cycle of these unsupported lawsuits.
But the wheels of justice turn slowly so we always strongly encourage ADA checks to ensure that compliance is done to the best of your ability.
Landlord/Tenant
Things settled down and we saw a fairly quiet year from landlords and litigation. Most of our clients have settled into deals they made post-pandemic and have been able to stay amicable with Landy.
As a reminder, the City of New York passed Local Law 1932-A which sought to limit the personal liability of a guarantor to a commercial lease under certain circumstances. Shortly after the law was enacted, litigation ensued in Federal Court, challenging its constitutionality. On November 25, 2020, a Federal District Judge determined that 1932-A was constitutional. However, the decision was appealed and we are all waiting to see whether it is upheld.
If the decision is not upheld and the law is found to be unconstitutional, it could have devastating effects for personal guarantors that walked away from the rent owed from March 7, 2020 to March 7, 2021. This will likely cause increased commercial landlord/tenant litigation in 2023 and we are keeping our fingers crossed that the judges uphold the earlier decision.
Delivery App Case
In June 2021, Helbraun Levey filed a class action lawsuit against Grubhub, Seamless, DoorDash, Uber Eats and Postmates, claiming they violated New York City’s 20% cap on delivery service fees. The case is now in arbitration and we are fighting hard to win relief for our clients.
Recently, the City of Chicago settled with Uber Eats and Postmates for $10M following an investigation relating to alleged misconduct related to the delivery platforms. We anticipate that this will cause a ripple effect and may get things moving towards settlement.
CPG’s, Logos and Slogans
Hamutal Lieberman, Partner & Chair of the Trademark Group
In 2022, we saw a lot of businesses develop their brands holistically and beyond the restaurant space. They jumped into CPG’s, online retail, hosting events and just about anything to increase revenue beyond menu sales.
From a Trademark perspective, this resulted in registering logos and slogans beyond the name of the restaurant (the word mark) to try to preserve, build out and protect their brand. We also saw more clients looking to start new companies or launch new products in the US and globally, and therefore we saw clients carefully choosing names which not only were available from a Trademark Office perspective, but also in the form of domain names.
2023 will also bring more cannabis brands into the forefront in states that have legalized cannabis (like New York) which will result in increased State and Federal trademark applications.
Licensing in Review: Staying Ahead of the Curve
Joseph Levey, Founding Partner & Heather Kirk, Director of Licensing
This year, we have seen an increase in concepts that have an interactive and hands-on component, such as theaters, immersive installations, art studios, cooking class venues, flower school venues, dance studios, bowling alleys, and so forth as people are looking for opportunities to connect with one another and to create memorable experiences. We have also seen concepts that pair “grab-and-go” with specialty retail goods, rather than traditional eat-in dining options. Chefs opening bakeries/provision shops/sandwich shops instead of dine-in cafes; Hotels opting for a food and beverage “pantry” instead of a proper restaurant etc.
There was impactful legislative change in 2022 from a liquor license perspective, that for the first time permitted many applicants to obtain temporary permits while their full license applications were under review with the State Liquor Authority. We are seeing many new businesses take advantage of this change as the temporary permit option can get you open and operating within a couple of months compared to the current 6-8 month timeline for the application review process.
As a result of the tragically slow timelines to get new liquor licenses these days, many new businesses have had to get creative. Seeking out locations where you can buy an existing business and transfer the existing liquor license is ideal strategy number one. Not all locations are eligible for a temporary permit though, so please reach out to us to advise on the spaces that you are looking at.
Another strategy to start serving alcohol sooner is to apply for a beer and wine license first and then upgrade later to full liquor. You would obtain a temporary permit for beer and wine and then once you are open and operating for a while (about 6-12 months), you can seek an upgrade to full liquor. An understanding of these rules and how to work them to their advantage has helped our clients to strategize and develop concepts accordingly.
Outdoor dining is always a hot-button issue. In 2023 the NYC DOT is expected to release the new and improved program for permitting sidewalk and roadway areas. When this rolls out, your outdoor areas may no longer be compliant and you may have to redo some things. We expect there to be additional costs for the permits and filing fees as well.
Just when we thought food hall concepts were winding down, we saw a huge spike in new ones emerging in 2022 – multiple new Urbanspace locations, the Tin Building, and the Urban Hawker, to name a few. And we anticipate seeing even more of these concepts pop up in 2023, as some operators are looking for a baby-step before their own brick-and-mortar, and landlords and developers are looking to fill spaces.
The End of the Shift Drink
Lee Jacobs, Partner and Chair of the Employment Practices Group
No one gets into the hospitality business with a plan to poison their customers or exploit their employees. It is with this understanding that we provide for you a brief recap of what occurred in 2022 and what we can expect for next year. In short, continued exploitation of the industry by plaintiff’s attorneys.
By now, much of our industry has come into compliance with most rules. Meaning, that employees are now being paid proper minimum wage, overtime, spread of hours (and no more shift or weekly pay!) and most comply with the rules concerning reasonable accommodation requests and ensure a safe workplace free from harassment and discrimination.
But, – and here is the rub- plaintiff’s lawyers (and the government too) continued to exploit our industry, even if our intentions are good and even if we have the right result. Sadly, even if the outcome is the right one—like paying your employees exactly what they are owed, or immediately terminating a confirmed sexual harasser—If you do not follow the mandated process regarding both areas, you leave yourself open and exposed! Compliant employment practices include not just paying your employees the right amount each week, it now includes how you pay them, when you pay them, and how you conduct investigations of complaints and the reasonableness of accommodation requests.
So for 2023, it’s really no different. It’s the same message—with a twist—they are still coming for you it seems, so it is best to ensure that you are not exposed. Which brings us to the shift drink – and why I think it must end.
Look, I am not trying to be a party-pooper or affect your staff’s morale, but the shift drink crystalizes the big trend that I see for the future and for next year—your employees must be free from sexual harassment, discrimination, and assault BOTH in and out of the workplace. Each week we receive at least one call relating to discrimination, harassment and/or assault. Nine times out of ten, the factual scenario involves alcohol (or drug) use that is condoned by ownership or management.
Take this for example. One shift drink between a server and a bartender, leads to two. Those two drinks lead to three. Other employees join in. They are having a good old time, on your dime, in your workplace. Those drinks lead to a night of drinking and drug use at another bar or at a co-worker’s apartment. That server wakes up the next morning with no memory of what happened but something bad occurred between them. Are you responsible for this conduct? No. Can you force your employees to make safe and reasonable choices? No. Can you be sued or face an investigation because of this series of events? Yes. Absolutely. That first drink set off a chain of events that leads back to you and your business. Will you be held responsible in the end? Most likely not, but what is certain, you will become enmeshed in a costly investigation and potential lawsuit.
As employees become more and more empowered and demanding of a safe and compliant workplace, it is your legal obligation to ensure that one exists. To that end, you must make sure that all of your employees are trained upon hiring (and every year thereafter) on sexual harassment identification and prevention, that your managers enforce these rules equally and with compassion, and to not pour that first drink.
Franchising Your Cool Concept
Harold Kestenbaum, Partner at Spadea Law and Of Counsel to Helbraun Levey
This past year was a very active year in the franchising world. Franchise sales were brisk and many deals were closed during 2022.
Notwithstanding the prediction of a forthcoming recession, we expect a robust year for franchising in 2023. The reason franchising does better during a recession is because during economic downturns, more unemployed people choose to control their destiny by owning a business rather than looking for a job and working for someone else. And they look to purchase franchises because it’s a less risky route to becoming an owner. Franchises are proven models after all.
HL clients are some of the coolest and hippest hospitality concepts around so I would like to dispel the myth that in order to have a successful franchise chain, you have to be like McDonald’s or Subway. This is so far from the truth. There are many highly successful franchise chains that have less than 100 units. Having fewer stores is much more manageable than trying to oversee thousands of units. If you are a potential franchisor, think quality and not quantity and go for it if you think your concept will play in other areas.
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