Although launching a restaurant in a food mecca like New York City might seem a very attractive business endeavor, there are multiple obstacles to overcome. Of course, several hospitality groups are very profitable, but at the same time, the risks of going belly-up for new entrepreneurs in this industry are significant. Based on our experience as business attorneys and assisting hospitality players on their transactional matters, here are some of the most important elements to keep in mind in connection with opening a new restaurant in New York City.
Financial and Legal Due-Diligence
New York City is a melting pot of different cultures and populations. Each neighborhood is a little town with its own uses, secrets, benefits, issues, and regulations. A savvy businessman will spend months in the pre-selected area to understand specific factors such as the streets with the highest traffic, how comparable restaurants are performing, demographics, and the preferences of residents and workers. From a legal standpoint, thorough due diligence is quintessential: the NYC Real Estate industry is a jungle – each building has its own peculiarities and often hidden issues that need to be uncovered and analyzed. For instance, existing violations and uncompleted jobs hinder the obtainment of permits and/or liquor licenses. Although there is always a considerable risk of losing a lucrative deal, the new restaurateur will want his attorney to conduct extensive research with the NYC Department of Buildings (DOB) and work with expeditors to freely enjoy the new restaurant premises.
Corporate Structure and Commercial Lease
Among the most significant legal decisions to take at outset of the new venture, the business and RE attorney will provide advice regarding the legal entity and will negotiate the commercial lease with the landlord. There is no one-size-fits-all solution, but rather bespoke determinations will be necessary. A corporation might be the best option in cases where the founder is raising capital from multiple investors and/or is starting the venture to multiply the stores and eventually sell the group to a venture capital firm. A Limited Liability Company (LLC) is perfect for families or otherwise very privately-run restaurants, as its legal flexibility allows profits and voting rights to be allocated as the members please. Also, an LLC is often chosen where one or more “silent” investors fund the start-up of the restaurant, while others manage the operations, as LLCs allow some members to receive a preferred return on distributions and liquidations, which is a result that can be achieved only by creating two classes of shares with different rights.
A strong and well-negotiated restaurant lease is a vital component in the success of a restaurant. Experienced hospitality players have seen several issues caused by poorly drafted leases and give their attorneys time and resources to draft a bulletproof lease. Some of the most heavily negotiated clauses are:
a) Free Rent: Typically, a restaurant undergoes renovations before opening. During this time, while not generating revenue, the tenant should seek rent concessions from the landlord.
b) Real Estate Taxes: RE taxes and operating expenses (landlord’s expenses in connection with managing and operating the building) can often be a source of hidden or unexpected fees. It is important that before signing the lease, the tenant understands how the real estate taxes and operating expenses are calculated, what their share in those expenses is, what their rights are in contesting real estate tax increases, and other similar issues.
c) Exclusivity: This clause is relevant in the context of tenancy in food halls because it prohibits the landlord from bringing in competitors of the tenant.
d) Good Guy Guarantee Clause: For extra assurance, landlords require a personal guarantee from an individual or individuals that own the corporate tenant to ensure that the corporate tenant will respect its contractual obligations. The tenant should negotiate and limit the extent and duration of this guarantee to avoid unlimited or overly broad personal liability of the individual owners of the tenant.
e) Demolition Clause: If a demolition clause is included in the lease, the landlord will have an opportunity to forcibly evict the tenant to demolish and/or redevelop the premises. In such a case, the tenant should try to secure a long advance notice requirement and to have the costs to relocate the business covered by the landlord.
Licenses
Even before opening to the public, a restaurant will need a certificate of occupancy and several construction permits to complete the buildout. To begin operations, the restaurant will need to obtain a food service establishment permit, which is granted upon completion of a mandatory course to be attended by the restaurant managers and supervisors. At least one of those that attended the course will always be on-site during restaurant operations.
Undoubtedly, the most important and often challenging license to get is the one in connection with serving alcoholic beverages, which is often a decisive feature of the profitability of the business. Depending on its business model, concept, and financial strength, a restaurant might seek either a full liquor license to be allowed to sell all types of alcoholic beverages, or simply a beer and wine license. Factors harshly evaluated by the New York State Liquor Authority are criminal convictions of the partners, the presence of other establishments with liquor licenses in the proximity, the proposed hours of operations, the intention to play loud music, and the presence of schools and/or churches nearby.
Other sought-after licenses allow restaurants to expand their activities via sidewalk café permits and the open restaurant program.
To obtain the former, the restaurant will have to show to the Department of Consumer Affairs that the enclosed or unenclosed café will not obstruct pedestrians, fire hydrants, and trees. New restaurateurs should be aware that there are “blackout” sections in NYC where these permits are not allowed. The second one, administered by the Department of Transportation, allows restaurants to build outside structures on the sidewalk and adjacent roads and has been developed to help restaurants cope with the limitations imposed following the recent pandemic outbreak.
Immigration
You can get acquainted with many different cultures without leaving New York City. This is especially true thanks to the incredible number of restaurants from all over the world that operate in the “Big Apple”. To maintain a high level of quality and authenticity, restaurant owners need to bring to NYC talented chefs, front-of-the-house managers, and sommeliers from abroad. Business immigration law is very strict in the United States, and immigration officers are extraordinarily harsh with hospitality industry applicants because of a well-known inclination to overstay. The options are limited:
a) J1 Visa as a trainee/intern, which can be granted for up to 18 months for those that do not have previous work experience in the U.S., who come to learn new skills and apply them in their countries of origin.
b) E-2 for the principal investor or manager/executive of an investing company. This visa can be granted for up to 5 years and can be renewed indefinitely. It is a great option, but it requires the sponsoring entity to be majority-owned by citizens of the same country as the visa applicant.
c) O-1 extraordina
ry ability for those that distinguish themselves in their field as via extensive press coverage, prestigious awards, and/or recommendation letters.
d) H-2B, allowing sponsorship of foreigners in anticipation of a domestic worker shortage. This program is sometimes used by restaurants to fulfill a seasonal or peak-load need.
NFT and the Metaverse
Although any conversation on blockchain-related topics is inevitably primordial, pioneer restaurants are already implementing NFT and Metaverse strategies in their sales and marketing efforts, and many other businesses in the industry will ensue.
NFTs (non-fungible tokens) are unique digital tokens that are immutably registered on a blockchain, which is a public and accessible database operated by its peers in a decentralized manner. One of the simplest ways that restaurants can use to leverage this revolutionary technology is by issuing NFTs as gift cards and coupons, thus rewarding clients, building loyalty, and possibly getting some free “passive” marketing – especially when the digital art associated with the NFT gains popularity. Additionally, since ownership of an NFT cannot be contested, restaurants can offer NFT holders future perks in connection to special events, new openings, strategic partnerships with other brands, and so on.
The metaverse is an environment characterized by the interconnection of the digital and the physical world. Metaverse platforms are booming, the audience is growing steadfastly, and other industries such as fashion are organizing major events in the metaverse. Accordingly, these digital environments are increasingly attractive for restaurants to market their brands. From a legal standpoint, established hospitality companies should immediately pursue trademark protection in the metaverse to avoid misappropriations by other companies. More broadly speaking, restaurants can and should build their virtual equivalents in the metaverse, to engage existing customers and attract new ones by offering promotions, delivery options, and temporary experiences.