Restaurant in a bit of a Pickle

June 1, 2009
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                              PickleIndianapolis didn't exactly warm to Spicy Pickle. The Denver-based restaurant chain shut down both of its Indianapolis-area locations shortly after opening them last year. But the chain hasn't rid itself of the market yet. Simon Property Group Inc. has filed suit against franchisee AJ Enterprises LLC, seeking more than $977,000 in unpaid rent for a prime space at Castleton Square Mall. Spicy Pickle took 1,860 square feet in the mall's new lifestyle component several months after it announced plans to open 10 local stores. Its other location was along 116th Street in Fishers. The Castleton lease called for the franchisee Alicja Jaworski to pay $40 per square foot, or $74,400, per year, along with 8 percent of sales (above a certain threshold). The franchisee has not yet responded to the suit and could not be reached. Shares in Spicy Pickle Franchising Inc. were trading at 19 cents today. Earlier post is here.
  • Sounds like they rushed into that lease. That doesn't sound like a favorable lease for any entity to me.

    $40/sf PLUS 8%???

    PLUS the kickback fees to the franchisor???? (6% - 8%)

  • Yeah, with those types of liabilities, no wonder they closed shop.
  • No restaurant can afford to pay more tha 8%-10% of sales for rent. I bet the franchisor knows this, and I'm pretty sure the folks at Simon know this. That only leaves the poor schmuck franchisee owing hundreds of thousands in franchise fees and rent. If I were the franchisee, I'd sue the franchisor for not providing appropriate guidance during the site selection process.
  • Esta is exactly right about the ratios.

    And the general rule of thumb is you should make your rent in about a day no more than two, if you have ANY hope of having something left at the end of the month for yourself. For 90% of restaurants this is impossible.
  • Economics and lease arrangements aside, you can't discount the product.

    Two visits to the Castleton location were two many. It was highly mediocre, yet another nnumber in an area, that for the most part, is filled with chain-dining pablum.
  • Esta is only partially right, in my opinion... I don't agree with a lawsuit. If you're going to become a business owner (rather if it's on your own or buy starting a franchise), you should do your homework first. Just like any other major investment, you need to do your research and realize that not everyone in the world is here to look out for your interests... nor is it their responsibility. I just love that our society is now becoming the let me blame all of my own mistakes on someone else because I failed to do my own homework types. But, if this deal is as bad (and easily identifiable by some people on here)... then shame on the owner for not researching this more... not Simon or Spicy Pickle.
  • The article misstated the percent rent. It is (was) 8% of sales > ~$1.00M. Needless to say, they didn't even sniff $1M in sales.
  • Indy Guy, I agree with you. I believe we are far too litigious of a society. The point I was trying to make (poorly I guess) is that part of the franchise fee someone pays is supposed to buy a certain degree of expertise from the franchisor. Now, based on rock's post, perhaps the lease isn't a egregious as first reported, but if it were, I think there is a certain fiduciary duty the franchisor owed the franchisee during the lease negotiation period.
  • Has anyone seen renderings of the recent proposal for the market square arena project the city is partnering on? Do we know if either of the proposals from a couple of years ago are still involved?
  • Those are some harsh lease terms. In all fairness, I was signing forty dollar foots to small shop restaurants in other states (mostly Florida) for a landlord at that time and we thought it was crazy then that tenants were biting. I had no idea Simon was doing it right here.

    I tried to dine at the Castleton Spicy Pickle so many times, only to be turned away by the parking nightmare. I don't mind walking a few blocks downtown to get to a good restaurant, but walking through a Simon sea of asphalt was too much. It sounds like I didn't miss much.
  • rockemsockem: Thanks for the heads up. I clarified in the post.
  • What a shame. I love mom & pop shops but this place had great food. It has some special memories. Oh well, what a good story to tell about the place where my girlfriend and I had our first date!
  • MDB, you did not miss much at Spicy Pickle. I paid $9.47 for a plain grilled cheese, a soda, and of course a small pickle on the side. Seriously, $9? I was appalled. As you can tell, I'm a fan of spending my money on local businesses, preferably, and you can get a tastier more substantial grilled cheese from Bourbon Street bar/grill downtown.

    $9. jesus, i'm still peeved.
  • I tried to get this account from a tenant representation standpoint. I can't remember the broker who got it (individual not a company) and they didn't do a good job advising either. The Fishers location was located just down from McAlister's Deli. Did they think they could sponge off of the overflow to McAlister's who already has a stellar reputation in the indy market? There really isn't a huge lunch market in downtown Fishers. People from Roche, Sallie Mae are going to 96th Street to dine and that's the majority of your lunch crowd by sheer number of employees only. Castleton was suicide from the beginning...A new untested concept in supposedly the prime location at Castleton Square Mall. $40/sq.ft., plus percentage rent, plus probably $10 in FIXED NNN charges. I agree the prices were outrageous for what you received when you can go to any fast casual/quick service type of restaurant for much cheaper. As far as the lawsuit it's rediculous. SIMON will find another tenant to take the space and may have to eat it for a while. Funny how they jump to a lawsuit to recover funds, but you have to almost offer your first born to get them to pay you a commission from the tenant rep side.
  • Question for Superbroker..

    Is this customary for landlord's 8% on top of 1mm (or whatever number) in a mall -type setting? why does he need to be in my pocket? Is 1mm the magic number? Why or why not? Do you mean the owner actually had someone represent them for this kind of a deal?
  • Another question for Superbroker.

    Why should Simon pay a broker anything when they already have all of the national contacts to begin with?? Broker's are over paid and typically get in the way of getting a deal done because all they worry about is their commission.
  • If I may answer the questions posed to superbroker:

    Yes, it is customary to have to pay additional percent rent over a certain sales breakpoint on retail deals, unless you can negotiate out of it.

    Simon wouldn't use a broker because they have experienced leasing reps, but the tenant definitely should. Would you sign a 10 year lease without consulting someone with real estate knowledge? Any good broker knows you have to get the deal done to get paid anyway. :-)

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