CA Net Lease Minimum Wage Increase
California is a prime destination for lucrative net lease investments due to its expansive size, robust demographics, substantial consumer spending, and a thriving economy valued at $3.1 trillion. The state boasts over 37,000 quick service restaurants (QSRs), providing employment opportunities for a substantial workforce of 384,890 individuals. California’s evolving business landscape has given rise to uncertainties that will directly impact drive-thru properties and the sustainability of their cash flow. In an attempt to redefine the landscape of labor standards in the fast-food industry, California has enacted AB 257, also known as the Fast Recovery Act.
The Fast Act Recovery Bill
AB 257 establishes a unique council comprising workers, corporate representatives, franchisees, and state officials, intending to set basic industry standards such as minimum wages, working hours, and other employment conditions for fast food workers throughout the state.
This bill has officially passed, and at the beginning of April 2024, fast food workers working in California will receive a minimum wage of $20 per hour, a significant increase from the previous average salary of $15. The Fast Food Council, authorized by the new legislation, will ensure the establishment of minimum standards for working conditions, including health and safety standards and training. The law applies to chains of limited-service restaurants with more than 60 establishments sharing common branding, marketing, and products.
Minimum Wage Impact on Operators & Franchisees
The enactment of this legislation can potentially disturb the profitability and capability of commercial tenants to fulfill their rental commitments. This apprehension is heightened by the increasing costs associated with property insurance and the state’s labor and payroll taxes.
AB 257 has garnered opposition from several restaurant lobbying groups, most prominently McDonald’s USA president Joe Erlinger. Joe Erlinger stated, “California’s approach targets some workplaces and not others. This lopsided, hypocritical, and ill-considered legislation hurts everyone.”
Some important factors to consider when this is in effect:
- Increased Labor Costs
The most direct impact would be on labor costs for fast food operators and franchisees. When the minimum wage increases, businesses need to allocate more funds to pay their employees, affecting overall operating expenses.
- Impact on Profit Margins
Increasing labor costs will impact profit margins for fast food businesses, especially if they cannot offset these increases through higher prices or increased productivity
- Potential for Price Increases
In order to offset increased labor costs, businesses might choose to raise menu prices. However, this decision could have consequences on customer demand, as higher prices may lead to decreased sales.
- Operational Adjustments
Businesses may also explore operational adjustments to mitigate the impact of increased labor costs. This could include changes in staffing levels, increased automation, or adjustments to employee hours.
- Franchise Agreement Considerations
Franchisees, in particular, may need to carefully review their franchise agreements to understand how changes in minimum wage laws might affect their relationship with the franchisor. Some agreements may provide flexibility for dealing with such regulatory changes, while others may not.
- Real Estate Considerations
Private owners of real estate leased by fast-food operators may be indirectly affected. If operators face financial challenges due to increased labor costs, it could impact their ability to pay rent, potentially leading to renegotiations or adjustments in lease terms. It is important to understand your store’s performance.
Questions an Owner Should Keep in Mind
- What are the store sales?
- Is the rent received aligned with the market rent?
- Do I have a strong guarantor of the lease?
How many locations does the franchisee operate?
Per the lease, am I able to receive the guarantor’s financials? - Did my tenant need a rent concession or abatement during COVID-19, and will I receive them again once this new law is in effect?
It’s crucial to note that the specific impact can vary depending on the size of the business, its financial health, and the strategies adopted by operators and owners in response to the changes in minimum wage laws. Additionally, local economic conditions and consumer behavior play a role in determining how businesses navigate such changes. For the most accurate and up-to-date information, it’s recommended to consult with legal and financial professionals or industry associations familiar with the latest developments in labor laws and their implications.
