Why doesn't the word "rent" appear in here anywhere? If the landlord becomes aware that the restaurant pays way above industry norms, it will raise the rents at the earliest opportunity to squeeze that money back out of the business. Either they own the building or have an existing long-term lease.
That is generally not how things work. Your same argument could be made if they realized the restaurant was very popular/profitable (with low empoloyee wages). Rents have to be somewhat in line with market. They can't just increase rents ignoring the rest of the market. If you are arguing that switch costs are high, so they can. That may be somewhat true, but I know of multiple restaurants in my area that have moved. It's not that high and commercial real estate is not in the best place, so landlords aren't looking forward to vacant property
This is like the contemporary example of rent seeking and during my years of experience in the industry was absolutely a key factor in the long term success or failure of many restaurants.
When you hear of a popular, well-reviewed, by all accounts successful place closing after 5+ years with no whiff of professional scandal or business partner discord, this is usually the reason.
> That is generally not how things work. Your same argument could be made if they realized the restaurant was very popular/profitable (with low empoloyee wages). Rents have to be somewhat in line with market. They can't just increase rents ignoring the rest of the market.
No, that is actually pretty much exactly how things work. Successful restaurants get higher rents on lease renewal which is why they're incentivized to sign longer lease terms. The restaurant is usually paying for all the necessary renovations to kit a property out with their equipment, decor, and branding, so the switching costs are very high, and the landlord is heavily incentivized to squeeze them. It's one of the largest, most common, and most existential issues for restaurants as a business, and a major reason why the largest and most successful chains usually operate on a franchise lease-back model where the corporate entity owns the free-standing building, preventing mis-aligned landlords from making the business unsustainable and eating into their profit-margins. Have you ever wondered why an Applebee's or similar is a free-standing building even on a mall property, even though it doesn't need a drive-through? Because Darden Restaurant Group, just like McDonald's, is as much a real-estate investment company as it is a restaurant company, and it understands that both the franchisee/operator and their primary corporate entity benefit from cutting out landlords that are incentivized to be a rent-seeking as possible.
Your comment is deeply misinformed and it's clear you've never been involved in running a restaurant as a business. Rent is often the #1 factor that can drive a restaurant out of business, because it's the thing you have the least control over. You can often structure your menu to help manage food/ingredient and staffing cost, but you cannot do the same about rent. Restaurants are somewhat unique in that for single-location entities, too /much/ success can actually kill you because of asshole landlords.
The Applebee's location is also leased by Dardens (or McDonalds) from the mall...the difference is that they are leasing the plot of land and not a building, so they get to build the restaurant to their own specifications. (For franchised locations, Dardens/McDonalds then leases the completed restaurant to a franchisee. Sources differ on the %, but McDonalds only owns about 40-60% of the land, and about 66-75% of the buildings, for its restaurant locations.)
Successful restaurants usually get higher rents because the value of the location increases with the success of a restaurant. This generally means higher costs for the property owner. This is also why most successful restaurants have long term leases, meaning 10 years or more, and major chains like McDonalds can have even longer leases; it's not unusual for an Applebee's location to have a 30 or 50-year lease.
To be more exact, individual owners may not be able to sign longer lease terms, especially when starting out. The franchise-based restaurants generally arrange things so that the corporate entity (let's say McDonald's) owns or long-term leases the /land/, and then builds and owns the building, which they then lease-back on shorter terms to the franchisee so they can afford to start/operate the business.
So sure, McDonald's might have a 50-year lease w/ the mall property owner, but the actual franchisee/operator likely has a 1-5 year lease w/ McDonald's for the building + land that's tied to their franchise license.
I allude to this very thing in my prior comment, by pointing out that landlord's incentive to rent-seek in turn incentivizes restaurants to look for longer lease terms.
How does the landlord know how much money the restaurant is making? All they would know is that the rent is paid on time and the restaurant "looks busy," which really isn't an accurate picture of income at all.
> How does the landlord know how much money the restaurant is making?
They don't. But when the local newspaper food reviewer gives you a glowing review and there's lines out the door waiting for a table when you have full covers for the night, and they happen to drive by /their/ building and see this, it doesn't take a rocket scientist to figure out you're doing well. The unfortunate reality of restaurant economics means you could have booming business and still making little or no excess profits though, depending on how adept you are at controlling other business costs, but since the landlord can't see your books they use these other indicators to decide to fuck with you instead.
There is neither a legal nor inherent natural requirement that a landlord choose a reasonable or accurate metric to decide to raise your rent. In fact, in most parts of the country (world?) raising your rent is an entirely arbitrary decision in their full discretion. You seem to be under the impression that the just world fallacy is a truth, when in fact it's not only untrue, most landlords are scum who will happily do as much financial harm as possible to you to the very edge of the limit for what it takes for you to go out of business. The landlord doesn't want you to go out of business or move, which is the only incentive tempering their greed at all.
This is why Adam Smith hated rent seeking behaviour and I think its the biggest flaw in how we do capitalism: the wealthy create wealth by controlling stuff - especially natural monopolies like land, not by doing any actual work. It's parasitic.
That's literally the capital in capitalism. There's not some other way to do capitalism that's not like that: it's inherent to the model and what you want is some other system.
Commercial leases tend to be much longer to prevent the landlords from raising the rent. Which of course, also makes commercial landlords picky about who they rent to.
Land value tax would solve this. (We have property taxes, but they're not as good, and in California they're capped.)
Over the last 3-4 years, I've spent a lot of time around RE folks. I can't speak for places like malls, but I have encountered quite a few that own your typical plaza/strip mall, and this is not at all how they think. Most are relatively simple folks, who make less than your typical SV SW engineer. Their goal is not to maximize profit, but rather to not work. That's why they really like triple net lease[1] - so they don't even have to think about it.
Once they've covered all their expenses so they can "retire" from their regular job, they put all the extra income into other RE efforts (namely buying other such strip malls). For lease renewals, they'll usually charge just the market rates. They are very unlikely to hyperfocus on one particular business they rent out to - they have better uses of their time, and don't want volatile income. They want something steady and reliable. They know restaurants have thin margins and may fail.
There's an Indian restaurant in one of the top food streets in my city that people love - a lot of folks consider it amongst the best in the city. I once jokingly told the owner "What will it take for you to open in my suburb?" She said that before she opened where she did, she tried to open at a plaza close to my house, but the rent was too high. I was shocked - that plaza is a graveyard of restaurants and businesses, and is not at all a happening location. Yet a top food street in the city charges less?
Why would that be different in a worker-owned business compared to any other business? Wouldn't a landlord be equally likely to jack up the rent on a company that posts high profits?
I'm not an expert on commercial leasing, but I suspect a landlord who tried to do that would quickly find themselves with no tenants.
That's the exactly the same reason why basic income can't work if it's introduced on its own. This money will immediately land in the hands of landlords who'll just increase rent.
Doesn't any landlord who defects from colluding stand to gain though? Like how Georgists argue that their land tax won't get passed directly on to renters because if it's applied to the whole market at once then absent perfect and universal collusion on behalf of the landlords renters will arb out those with the highest rent spikes.
Considering a handful of companies already control most rental pricing, and already extract "maximum value" from those properties, I'm not sure it would be any different in any direction.
I don't get why there isn't some level of Trust Busting going on regarding the rental property pricing management at all.
Because it's not true. People only think this because of an innumerate article from ProPublica.
Almost all landlords are small time, only own one or two buildings, and can't organize a cartel. Except there's one way they can - by changing the law to favor them by banning new construction.
They don't need to collude explicitly. They just watch posted prices in their region and match that. Since the posted prices are always above average (you start higher than the old rent and keep lowering it until somebody takes it), rent keeps going up for everyone.
Rents don't always go up even nominally; you've just listed the upward pressures without the downwards ones. I believe they're still down in SF compared to last year.
Posted prices can be misleading because they prefer to give discounts (X months free) rather than lower the sticker price, so it also depends how you count.
