Webinar recap: 2016 Restaurant Remodel Analysis

Last week, BDO professionals participated in Hedgeye’s speaker series webinar on restaurant remodel management, Wall Street Meets Main Street, featuring several industry leaders including Phil Mangieri and Wally Butkus of Restaurant Research, LLC, among others.

The speakers kicked off the webinar by discussing the aging franchise business model. “When we look at the billion-dollar range, the average founding date for quick service restaurants (QSR) is 1967 and the average founding date for fast casual restaurants is 1975,” said Butkus.

The prevalence of older systems and slowing development of new units since the 2008 Recession sets the stage for healthy store closings and remodeling activity over the coming years. Some restaurants partake in more frequent, less expensive “refreshers,” but most chains follow a regular seven-year cycle with a more formal program in place, consisting of less frequent, more extensive remodels, despite the higher price tag.
A number of factors are contributing to an uptick in remodel activity, including a trend among QSRs to incorporate more fast casual-inspired elements in stores, such as more comfortable eat-in dining areas, upgraded technology and bathroom updates.

If a restaurant completely changes locations and must build from the ground up, they can face an entirely new set of costs, in addition to existing ones. Thus, restaurants should be careful when considering investing in a site that may not be feasible as a long-term location.
Speakers stressed that it is not enough to rebuild for the sake of having a “shiny and new” location. It’s important that restaurants have a plan in place and an overall return on investment strategy that leverages the remodel. They also noted that franchisees might consider reserving funds annually for remodeling to ensure all necessary renovations can be completed in a timely manner. To illustrate this point, Butkus points to Panera’s recommendation that franchisees set aside $25,000 per year for maintenance and $200,000 in years 6, 11 and 16 for remodel programs.

With regard to return on investment and the costs and benefits of remodeling, Phil Hofmann weighed in on the tax implications. According to Hofmann, the IRS is helping franchisors and franchisees pay for these remodels under Rev. Proc. 2015-56, which was introduced approximately six months ago.

Under the new procedure, qualifying remodel costs will receive an immediate deduction of 75 percent. The new procedure stipulates certain projects, buildings and costs that qualify for the deduction. For example, the remodel must be on a retail or restaurant facility; a headquarters renovation does not qualify. Activities such as painting, replacing floors and ceilings and moving walls can qualify, but property depreciated over five-years is an excluded cost.

Rev. Proc. 2015-56 is effective immediately for tax years beginning in 2014. This new procedure is financially favorable for restaurants, and many have elected to take advantage of it on their 2015 tax returns by making a change in accounting method, though the procedure can also be elected later.

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