Both partner Andrea Gendel, co-chair of Pryor Cashman's Leasing practice and a member of the Real Estate Group, and John Rothman, a member of the Real Estate Group co-authored a publication for Law360 titled 'Key Legal Considerations For NYC Ghost Kitchen Leases.' An excerpt of the expert analysis can be found below.
As traditional brick-and-mortar restaurants have been forced to grapple with strict government-mandated shutdowns brought on by the COVID-19 pandemic, restaurateurs and their landlords alike have been forced to shift toward increasingly flexible business models to remain viable.
By ditching the in-house kitchen, seating and dining experience, the so-called ghost kitchen model — also known as a cloud, virtual or dark kitchen — has found room to grow amid an otherwise chaotic real estate market and increasing consumer demand for restaurant meals without the dine-in experience.
A ghost kitchen is a professional food preparation and cooking facility set up for the preparation of take-out, delivery and catering-only meals. It may produce multiple brands for the same tenant or serve as a commissary kitchen used by multiple third-party operators simultaneously in a shared facility.
The space contains all of the kitchen equipment and facilities required for the preparation of restaurant and catered meals, without a dining or client-facing pickup area, although in some cases, a ghost kitchen may have a very limited area for walk-in customers.
Without diners, a ghost kitchen is heavily reliant on its own or third-party delivery apps like DoorDash and UberEats for customers and orders. Still, it also means that the restaurateur can avoid paying rent on the square footage that would otherwise be devoted to dining space.
Ghost kitchen leases can offer lower risk than leases for a traditional dine-in restaurant model by reducing initial startup costs and ongoing operating expenses.
The elimination of waitstaff, reduction of buildout costs such as dine-in fixtures and furniture, shared use of kitchen and other cooking equipment, thereby reducing the share of the rent, and, potentially, without seating, fewer New York City Department of Buildings and state Department of Health requirements, have given new and existing restaurants newfound possibilities.
With the reduced risk and costs, and today's pandemic-related reduced rents, new restaurateurs, or those looking to move from an online-only presence to brick and mortar, are looking to take advantage of this lower barrier of entry into the competitive and costly foodservice field, while exiting restaurants are able to move to less expensive space, cut operating costs and thereby, remain viable.
At the same time, property owners with vacant premises in this market can benefit from leasing space to ghost kitchens and collecting rent, rather than seeking new traditional restaurant or retail tenants who, these days, are few and far between.
Not only are ghost kitchen tenants taking over and converting defunct restaurant premises, but they are also leasing storage and warehouse space, portions of parking garages and even dine-in food hall space that has been rendered unprofitable due to the pandemic.
While there is tremendous benefit in ghost kitchen models for landlords, tenants and the licensees that operate in such kitchens, such parties must consider certain legal issues pertinent to this type of use.
The full publication can be accessed via the below link.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.