Soundtrack to a Financial Advisor's Life – Durham-based CPA Chris Arena focuses his practice on entrepreneurs
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Durham-based CPA Chris Arena discusses why he focuses his practice on entrepreneurs, the power of Roth accounts in financial planning and the economics of restaurants
Trevor Chambers:
Hello everybody. This is Trevor Chambers. I’m the host of Meet the Masters. I don’t know, man. That may be a little pretentious. We’re going to have change this name.
Anyway, I’m from Old Raleigh Financial Group here in lovely Raleigh, North Carolina. Here at Meet at the Masters, it’s a collection of interviews with a wide range of thought leaders in various disciplines, including but not limited to financial area, financials.
Today, I’m super excited. We’re going to kick off. It’s the opening volley. It’s the shot heard round the world. It’s the first edition of Inside the Arena with Chris Arena. Let me say that again. It’s Inside the Arena with Chris Arena, a Durham, North Carolina based CPA who loves working with warriors, otherwise known as entrepreneurs. Is that a correct characterization of one Chris Arena?
Chris:
I think that sounds good. I love working with entrepreneurs and warriors, wherever that Venn diagram overlaps, which you decide.
Trevor:
Yeah, man. How you doing today? I should note that it is overcast and has been overcast for several days. How you doing, man? How’s your vitamin D levels out there?
Chris:
Yeah, struggling. It’s been raining nonstop it feels like, what, a week.
Trevor:
Yeah.
Chris:
The quarantine, I’ve got two young kids … They’re three and five, so I’m exhausted every day no matter what. Then you add in the fact that I’ve been shut in with them for going on four days now, mentally I’m… We’ll just put it that way.
Trevor:
Yeah. You got the easy job because you’re not the mom. Come on. Let’s just call a spade a spade. Right?
Chris:
Excuse me. I’m a 21st century dad. Very active and involved. My wife is a 21st century mom. She works full-time just like I do. We’re both completely up to our neck and childcare and losing our minds. Jointly.
Trevor:
All right. All right. I’m just saying, she’s still the boss.
Chris:
She’s definitely still the boss, does way more than I do. I’m just trying to pretend that’s not the case, but yeah. Absolutely.
Trevor:
Strike whatever you just said a couple seconds ago. Anyway, moving on.
Chris:
Yeah, yeah.
Trevor:
No, no, no. No, no, no. That’s not true. It’s fun being a dad. It’s incredible. It’s awesome to have a good partner in the whole thing. All right, man. You’re based out of Durham. What’s up with Durham? How did you end up in the arms of the Durhams?
Chris:
Durham is one of the best places to live in the country, definitely the best place to live in North Carolina, so that’s why Durham. You can give me your Raleigh focused speil, but what I’ll tell you is Durham is a town of entrepreneurs. It’s a town of warriors. I love Durham because we are a town that takes a lot of pride in who we are. We don’t apologize for it. I’ve always loved that about Durham. I’ve been here for 15 years about, since 2006 or ’07. I guess that’s a little less than 15 years, but [inaudible 00:03:11] math. From the early days, it was kind of a town that people would say is a little dangerous, a little dirty, a little lock your car when you’re there. I never saw it that way. I always had a great time in Durham. I loved living in Durham. People seemed to agree. The town has grown astronomically since then. We’ve grown in what I think is the right way. We’re trying to limit development a little bit, although that’s gotten a little [inaudible 00:03:40] lately. We are very entrepreneurial, a lot of small business, not a lot of franchises. We’re not a town that likes big corporate franchises. There’s no Starbucks in our downtown. That’s a rarity and I think it’s kind of a point of pride for us.
Being a business owner here is the best place to be a business owner because you’re surrounded by like-minded people who really get it, who have fought the same fight, struggled the same struggle. When I’m advising a small business owner, they really appreciate that I’ve been through it and can commiserate with them. I love that.
Trevor:
Awesome. Knowing you as I do, I’m not surprised that you live where you do because of that. Also, people have to appreciate that Durham is historically an entrepreneurial city. That’s, I think, seeded in there is why it attracts, I think, a really eclectic group of entrepreneurs.
Chris:
Yeah. I think that’s exactly right. We’re adapters. We were built on tobacco, which obviously is not the business it once was and thought of quite as fondly, let’s put it that way, as it used to be. We’ve got a lot of infrastructure that was built around that. We’ve destroyed some of it, but we have kept some of it as well. I’m a member of Preservation Durham. I love preserving our past and doing it the right way. Adapt and reuse is what Durham is all about. Whether it’s [inaudible 00:05:12] an old warehouse and creating American Tobacco Campus like the Goodmans and Capital Broadcasting have done, or just taking old ideas and making them work in the current environment, Durham is all about that.
We’re kind of keeping the cool, keeping what was cool in the past, reusing it for today, being more… with it, and making it work for a larger population and being inclusive and being a town that supports small business. The town supports small business. The small business supports the town. It kind of just helps to grow the town that way.
Trevor:
Yep. No. Yeah, in general, I think [inaudible 00:05:49] is just an awesome place to live. We love Raleigh and certainly love the weather. I came from the Northeast and it’s just in general. I love Durham, man. I walked around one day with my daughters and we went to record shops. You know what I mean? Then we came to Raleigh and hit one here too. You know what I mean?
Chris:
Yeah, yeah. Raleigh is an awesome town. I joke, my I love Raleigh also and head in there for food at least once or twice a month.
Trevor:
Nice.
Chris:
Couple great parks and things out there.
Trevor:
Yeah. That’s for sure. Hey, get me that shout out to … I use that phrase shout out because I just want to be young. Preservation … What was that?
Chris:
Yeah, Preservation Durham. We are the Durham contingent of the state Preservation Society. We are very separate from it, but we really just work to get people to be aware of their surroundings and be aware of what it is they love.
I think when you talk about Durham, I talked about small business and the mindset, but I think also what people love about Durham is what it looks like and how unique it is and the sense of place that it has. It’s not Cary. It’s not Raleigh either. Raleigh is different and Cary is different than Durham. They have their own unique feel. Cary has that feel of a very modern town. Everything was built in the last 15 years, a lot of glass, a lot of homogeneity, just kind of similarity in buildings, and all that kind of stuff. You come to Durham and things just have a really specific feel. A lot of brick, a lot of old tobacco buildings, very cool old architecture. Architecture in the time when people were willing to spend money just for aesthetics. You know? Whereas now everything is just what’s the cheapest you can build it. I love that. I want people to be aware that they love it too even if they don’t realize it. In order to keep enjoying it, you have to be aware of it. You have to fight for it and you have to be willing to make tough decisions or some economically not the best decisions because aesthetically and culturally and all these other intangible things matter.
Trevor:
Yeah, they do. Well said, my friend. All right. We can pontificate on that for sure.
Chris:
Yeah.
Trevor:
There’s no doubt. I do want to get to the meat of things. I appreciate that background because it’s important to know.
All right, man. Let’s get into it. This is the called, the section we call The Weeds, getting into it. I think you and I both in, our firm, and I think you and your firm agree that on a relative basis [inaudible 00:08:34] as a low tax environment. Can you talk about that in terms of tax deferral and planning and all that? Tax planning, which is so important.
Chris:
Yeah.
Trevor:
For preservation and growth of wealth. Can you talk about that?
Chris:
Yeah, absolutely. Nice segue.
Trevor:
Thanks, I appreciate it.
Chris:
Preservation of Durham to preservation of wealth. Well done.
Trevor:
Weeds. Okay? We’re in a section called The Weeds. We’re getting into the weeds. Okay, go.
Chris:
Yeah. It’s a great point. People hate paying tax. That’s kind of general across the aisle. No matter how you feel about how taxes are used or if they should higher on certain people or others or whatever, no one likes to pay tax. I think that’s a universal feeling. What happens is people get so caught up in just that distaste for paying taxes that they can’t step back and really review the current tax situation for what it is, which is a very low tax environment.
We have some of the lowest taxes we’ve ever had in this country. They are not likely to get lower in the future. Given what we’re dealing with with corona virus, they’re actually incredibly unlikely to get lower probably in I would say our lifetime honestly, is my best guess. They’re extremely likely to get significantly higher in the next five to ten years. What does that mean for you and me and everyone else that’s a wage earning, profit earning, taxpaying citizen? I think it means let’s keep a big picture perspective and think about the best way to save for retirement and what [inaudible 00:10:15] to utilize and how to take advantage of the low taxes that we have right now that might be going away.
One of the things I advise clients to keep in mind is the difference between a Roth IRA and a traditional or a 401k and kind of reimagining the tax benefit of a saving today versus savings over the course of that account all the way into retirement. CPAs have a reputation, I think, for kind of over advising clients to take the tax deduction now, take the 401k, make that IRA contribution, let’s reduce your taxes. We have some self-bias in doing that. It makes me look good when I can immediately show a client a couple thousand dollars back on their tax return. But is that going to help them longterm? The answer is usually no. Usually a Roth IRA is going to be a better outcome.
Now, you might be limited in your ability to contribute to a Roth. That’s the thing a lot of people come up against, which is the income limits to being able to contribute to a Roth IRA. There are ways around that. There’s what’s called a back door Roth and then there’s just regular old Roth conversions that you can make out of a traditional IRA account and convert that money into a Roth. I think that’s something that your firm likes to do. Is that right, Trevor?
Trevor:
Yes, for sure.
Chris:
Yeah. I think a Roth is kind of [inaudible 00:11:41] in today’s rate and letting in there grow tax free forever. It’s never going to be taxed again. Earnings aren’t going to be taxed. When you take it out, it’s to going to be taxed. You’re basically going to be taxed today and whatever the rate is today and that’s the end of it. The longer it stays in that account, the more it earns, the better off you’re going to be.
There’s another… that I think people discount, which is there’s a time value… component to every retirement account. Whether you’re deferring tax … It’s powerful to defer tax. A traditional IRA and a 401k, they have value. I’m not saying they don’t have value. They have big value.
Trevor:
Yeah.
Chris:
Even if tax rates stay the same forever, not paying tax for 30 years is a real powerful tool to use.
Trevor:
Absolutely.
Chris:
The second part of it though, is the expectation of a lower rate in retirement, gets sold a lot by a lot of people, and correctly. You’re supposed to pay less tax in retirement. You’re going to be earning less, so you should pay less. I think today what we might be looking at is the possibility that our tax rates in retirement might be about the same as what they are now. That is something I don’t think any generation has seen before us and it’s probably unlikely to come up again. Right now, we’re looking at your highest tax rate of 37%. Maybe add a few percent points on it depending on what your income will look like, but that’s about what you’re looking at. That is an incredibly low rate. Who knows what’s it’s going to look like in 30, 40 years. Is it still likely lower than that? Yes. But is it going to be ten percent? I have my doubts about that. I have my doubts that retirement rates are going to be as low as they can be today.
Are capital gains rates going to exist the way that they do now as preferential rates? Are the tax brackets going to be the same? Are the lowest brackets going to have as low income tax rates as they do today? These are all questions we don’t know. I try not to predict the future, but I do try to think about it critically and advise clients that way. I think the one thing we do know is today’s rates are very low and locking that in is probably a good idea. Taking a Roth, paying that rate, which is again … Paying it hurts. No one wants to pay tax. But locking in 35% is not a high rate and you’re trading that for 20, 30, 40 years of tax free growth. That’s pretty amazing trade-off.
Trevor:
Yeah. Let’s be clear. You’ve got to have the right financial situation to consider. Because there may be some years where cash flow is tight and you just are like, “I just can’t do it that way right now.” There are years maybe in surplus where you can do it. It’s an individual situation for sure.
Chris:
Yeah. Also, let’s say you contribute to a traditional or a 401k. If you’re putting money into a traditional, you can make a conversion from that traditional IRA into a Roth at any point.
Trevor:
Yeah, talk about that. Talk about that.
Chris:
Yeah. Roth IRA conversions are always available. People, though not everyone seems to know about and hear about it, the back door Roth, which is just a yearly contribution from a traditional into a Roth. It’s a way to get money into a Roth when you’ve actually phased out of the income limit to be able to make that contribution. That’s one way. It’s just a Roth conversion with a fancy name, but it’s just a Roth conversion.
You don’t pay tax on that conversion for whatever amount you’ve contributed into the traditional IRA. Let me see if I can make sense of that, because that’s a complicated thing to say. Let’s say you put $6,000 into a traditional IRA. If you have a deductible IRA, then you have not paid tax on that 6,000 and you make a Roth conversion, you would pay tax because you didn’t pay tax on that money going in. A back door Roth, you do not pay tax because the back door Roth comes from non-deductible traditional IRA. The whole point of the back door or the whole reason for the back door is that you phased out of the income limit to make the contribution, which means that you’ve also phased out of being able to make a deductible traditional IRA contribution. That means the best you can do is a non-deductible traditional IRA contribution. Non-deductible is exactly what it sounds like. There’s no immediate tax benefit to that. That means that conversion to Roth is not taxed because you did not get the deduction going in.
The back door Roth is very clean and that’s why it gets advised a lot, because it’s pretty easy to do. You do it every year. There’s no additional tax [inaudible 00:16:20]. There’s just a better outcome. You’re just shifting money from a non-deductible traditional IRA, which is still taxable when it comes out later, to a Roth IRA, which is not taxable when it comes out later. It’s kind of just putting a retirement account on steroids for free, is the way to kind of look at that.
Trevor:
Yeah, which is one of the advantages of being an entrepreneur. You can do stuff like this.
Chris:
Yeah.
Trevor:
You know what I mean? Yeah. Yeah.
Chris:
Yeah. I think what people forget is that Roth conversion is available for regular old traditional IRA funds. You do not have to make a back door Roth. You don’t have to do it through the non-deductible. If you spent years making traditional IRA contributions and because of our chat today or something else you’ve read, and you decide you want that money in a Roth, you can take money from a traditional IRA and convert it to a Roth. You’re going to pay tax on that, so there is tax on that conversion if it came from regular deductible traditional IRA funds. But that’s okay because, again, you’re just paying tax today, putting it into a Roth, and then getting years and years of tax re-earnings.
Trevor:
Yeah.
Chris:
Another thing to consider is the market, as you might have heard, Trev, because you’re in the financial advising community, has been a little rocky and on a downward swing for the last couple months because of this little virus going around. If you’ve put money into a traditional IRA and that money has dropped by 10, 20, 30% in the last two months, it’s actually a great time to do a Roth because you’re reducing the amount that’s going to be taxable on that conversion.
Trevor:
Mm-hmm (affirmative).
Chris:
I think you and I both agree that the market is going to bounce back. If that bounce back happens while you’re in a Roth instead of in a traditional, you’re going to have a fantastic financial outcome from that, way more beneficial to you than if it was just kept in the traditional.
Trevor:
Yep. Also, just one thing. Tax brackets. Fill up your tax bracket. Right? You could fill up, if there’s a delta in your tax bracket that you know about, maybe you can fill the tax bracket up. Let’s say you make 150 and that tax bracket goes to 199 or 200.
Chris:
Yeah.
Trevor:
Do you advise them, on that delta of 50, do you advise doing a Roth conversion on that?
Chris:
Yeah. What I advise is talk to someone like me, talk to a professional. There are definitely more and less advantageous times to make a conversion and it’s complicated. Working around tax brackets is kind of like the easy step one thing to look at, but then there’s a step two and step three and sometimes four and five and six. Sometimes you can lose a preferential capital gain rate by creating more income. Sometimes you can trigger certain cliffs or phase outs of credits and other benefits. Some of these benefits, we call them a cliff because literally once you reach a certain number they just go away completely. Going over a cliff like that can be a really harmful thing to do for your tax outcome. Those are the things we want to help you plan around. We don’t want you to only look at brackets and then lose sight of these other things that can harm you at the end.
Certainly, what you said makes a lot of sense. If you’re thinking that way, you’re above and beyond 80% of the population.
Trevor:
There you go.
Chris:
We want to take you above and beyond the next 19%, get you into the one percent, as far as thinking about taxes goes.
Trevor:
Ladies and gentlemen, welcome to the arena. Right there. That was what we call a smarty pants topic right there. I like it. Well said.
All right. Now, can we talk about … We did maybe cover some of this, but talk about allocation of assets in terms of tax, taxable, with Roth and deferred, and ordinary … This is the part that I think is really … Ordinary income versus capital income. Can you talk about that? Because I’m just thrilled to talk about this. I really am at the edge of my seat to talk about this.
Chris:
It excites me, too, man. I love this stuff.
Trevor:
I know! Let’s get back into the arena. Go.
Chris:
I think what I like talking about are the things that people tend to not think about. We’ve talked about some of that. We’ve talked about the time value of money, looking at big picture, rate differences between today and just historic norms and then what it might be in retirement. Another thing to think about is how your income is taxed, your money is taxed. What a lot of people lose sight of is once money going into a traditional IRA or a 401k, there’s only one way out of that and that is through a retirement distribution. You can earn money in that account. You can get dividends and reinvest them. You can sell stock and create gains. None of that is creating tax until it actually comes out of that account because it’s in a tax deferred account. When it comes out, it is ordinary income no matter what you do. A retirement distribution, you get a 1099-R, you’re going to pay ordinary rates at whatever your ordinary rate is, whatever it happens to be at the date that you take that out.
What you can do in that account is turn a lot of capital gain into ordinary gain if you’re not careful. Sometimes that’s okay. We’re not advising that you don’t seek gains and increases in your capital and that sort of thing. What you want to do is make sure you’ve got the right assets in the right accounts while accounting for the different ways that they’re taxed. A tax deferred account is turning everything into ordinary. What we want to do is make sure we don’t have assets in there that would normally take advantage of preferential capital gain rates more so than your typical asset. Things that are creating very large yearly dividends, you want that in a taxable brokerage account more than you want that in your traditional IRA, the reason being a taxable brokerage account is going to pass that income onto you as an individual and it’s going to show up as either short term capital, longterm capital, [inaudible 00:22:33], things that come with lower tax rates than ordinary income.
Roth IRAs pay no tax. Roth IRAs, no matter what you do, you’ll never be taxed on whatever is in that account. Putting something like a muni bond into a Roth IRA is just a completely effing disaster. That’s something that old Raleigh would never do that. That’s something that some do it yourself investor might accidentally do because they’re not thinking through how things work.
Trevor:
Yeah.
Chris:
Just kind of keeping in mind how accounts work, where things should be, and the implicit tax cost of that asset. A muni bond has the tax value of that bond built into it, so it’s going to trade at that sort of tax adjusted value. If you’re putting it into an account that doesn’t take advantage of that tax adjusted value, then you are overpaying for that muni bond. Don’t buy it. Don’t buy it in a Roth account. Don’t buy it in an IRA. Buy that in a brokerage account.
Look for muni bonds that are in your state, depending on if you live in a high tax state. North Carolina is sort of a low to medium tax state. The last thing you want to do is have New York muni bonds in your North Carolina taxable brokerage account. What I see, sometimes people move and then don’t reinvest or diversify their portfolio, and if you’re going from whatever state to North Carolina and you’ve got a bunch of muni bonds from the other state, you probably don’t want to hold those anymore. You probably want to switch into North Carolina muni’s. That’s something that your financial advisor, your accountant, whoever your professional you’re working with is should be looking at and advising you on.
Trevor:
Right. Well said. Interesting. Okay, cool. Match up the correct assets in the correct accounts in terms of their tax treatment, very important that you do that. Again, this is thrilling. Hey. I want to switch gears. Can you talk to us … You worked with a lot of restaurants. This is interesting times for restaurants. Just to review, it is the 21st of May, 2020, so we’re in the middle of COVID. Obviously huge implications. Can you take me through what you’re seeing on your end and your thoughts on this? I think you have some interesting insights from your angle on this.
Chris:
Yeah. I work with a lot of restaurants. Durham is a big foodie town. I love to eat, so I work …
Trevor:
Yeah, of course.
Chris:
… with a lot of restaurants. Restaurant owners, they’re up against it right now. Quite frankly, they’re up against it kind of all the time, even if the best of times. It’s an industry that operates on razor thin margins with a lot of compliance issues kind of built into it. I talk to my restaurants clients and it’s like, man, you are running a business that is in the top one percent of difficult to manage. You’ve got a whole bunch of different taxes to pay, a whole bunch of licenses and commissions and things to satisfy, a lot of liability. You’ve got a lot of customers in at any given time. They’re eating food. You’ve got health inspections. You’ve got sanitary issues, all kinds of stuff. You’ve got a bunch of employees. You’re in a business that has a high number of employees that are earning a low wage. Profit tends to be low.
While a restaurant might have high revenue, a lot of my restaurants are my highest revenue businesses, but on the lower end of profit, which means that they’re dealing with a lot of cash. They are a trustee for a lot of that cash because sales tax and payroll taxes, the business acts as a trust. They collect that tax and then they have an obligation or at least an ability to pay it. Right? That is very tricky for someone who typically is not someone from a financial background. A restaurant owner has to budget not just to run their restaurant but to receive tens of thousands of dollars in cash per month that isn’t actually theirs and set it aside and earmark it and pay it on time every month to a bunch of different places.
That’s much more difficult than what it takes to run my business. I run a CPA practice. My revenue is way, way, way smaller than most of my restaurants, but my profit is higher than most of my restaurants. I don’t have a lot of those obligations. I only have a few employees. I’ve got three employees. I’ve got two CPA employees, one non-CPA. The only thing we have to do is renew our CPA licenses each year. We’re not getting a health inspection. We’re not getting audited by the ABC board. There’s no sales tax. [inaudible 00:27:29] is not subject to sales tax. It’s much easier, which is kind of counterintuitive, to run my business, which a lot of people rightfully think of as complicated. I like to think what I do is complicated. We charge a pretty high hourly fee compared to what most people are charging outside of professional services. But I don’t have that level of complexity in actually operating my business.
Our restaurants kind of got, I don’t want to say the worst of all words, because that just sounds pretty negative, but they’ve got … It’s kind of like an uphill both ways kind of situation. You know? It’s difficult to run from an operation standpoint and it’s difficult to run from a compliance standpoint. The reward at the end of the day is typically low to medium profit, not a ton of upside to very, very high profit. Although some do. I don’t want to paint an overly bleak picture. I have a few restaurants that do very, very well for themselves. The old adage of 80% of restaurants fail within the first two years or 80% of business, I think for restaurants that’s definitely true. I think what’s more true is that the ones that don’t fail also sometimes don’t succeed, they just kind of exist and maybe make a profit of 30, 40, 50 grand for the owner. It becomes kind of a vicious cycle where it’s a livelihood, but it’s not a great livelihood. They’re working very difficult hours with a lot of stress, a lot of complicating factors and financial obligations and things that are outside of their normal area of expertise. I really feel for them. That is a really difficult spot to be in.
The corona virus has obviously only made it worse. I really do feel for me.
Trevor:
One thing that … You and I had talked offline on this before. First of all, based on what you just said, why would somebody do, why would somebody go into it? There’s, even with this, I know people, I know a guy, an acquaintance of mine, I follow him on Facebook, he’s starting up a restaurant. He’s moving forward. There’s always going to be that desire. What’s that desire? I want to make stuff for you. One of the things that people have to understand is that these things, these things called restaurants that reside in these neighborhoods around us are manufacturing facilities. Some of them are straight up just manufacturing facilities. They don’t have a lot of retail space. They’re sitting … Sitting is not the point. It’s I’m coming in, I’m quickly eating a lunch, or I’m taking it home. A lot of restaurants, ones that we like to go to relax and take our families and go out with friends, those are manufacturing facilities with a relatively large footprint of retail. The whole economics is kind of out of whack right there because you’re still a factory running on thin margins.
I would bet right now, I don’t mean to take over this section, but I would bet right now that the people that are just doing strictly to-go that have lower retial, meaning table side imprint for their rental, what their space looks like or how their space is allocated, are probably doing pretty good. You know what I mean? Man, if you’ve got an empty dining room where all the magic happens of being in a restaurant, it’s hard. It’s a hard slog. It’s going to be a place where we’re going to have innovation. Would you not agree with that?
Chris:
Yeah, completely. I-
Trevor:
Am I off … By the way, am I off in thinking [inaudible 00:31:17] clarify what I’m trying to say? I just went off right there into a total riff.
Chris:
No. I think you’re right. I think what people don’t picture … When you’re presented with a menu and you see the prices, people are very judgemental on even one dollar differences between what they expect. If you think a sandwich should be $11 dollars and it’s $12 dollars, that’s more off-putting than my fee being off by $20 to a client. Restaurants are, again, uphill battle.
What people don’t see in restaurants is the amount of money that went into just making that space usable. Like you said, kind of this retail space. Restaurants need table space, they need kitchen space, they need to improve the place to work for them. When you move into a space, first of all, you don’t own it. Almost no restaurants own their own space. They’re lessees. They have to improve the space, so they’re putting a bunch of money into that space. Oftentimes, they don’t own what they’re actually spending money on. They might spend 100 grand on interior renovations and drywall and piping and making a bathroom handicap accessible and putting in a bunch of heavy kitchen equipment. They might own their heavy mixer and their oven, but they don’t own the drywall. That’s going to stay there.
It’s a huge sunk cost to start a restaurant. It should be paid with profit. That’s the whole part of making an investment like that is you expect the profit to pay for it. But people have this expectation of very, very low prices on restaurant food. They don’t look at it as a luxury good. They almost look at it like an entitlement, like we should be able to go out and eat lunch and dinner everyday and have a reasonable budgeted cost, reasonable on our end, not on the business owner’s end. I think that is what’s going to be under the microscope. I think that restaurant owners, they’ve been feeling it for a long time, but I think now it’s hit this critical point where people are starting to realize, okay, if I want to be able to enjoy this food and I do … I’m saying I. I do mean me, but I mean the proverbial I. I mean everyone. We love food. People, human beings love food, love good food. We like the experience of good food. We want that to exist. If we want that to exist, we need to support it. We need to pay higher prices because restaurants are operating in way too thin of a margin.
I don’t know about you, but I get really depressed when I think about a restaurant I love going out of business. It’s just really sad. That entrée that you love just kind of disappears. It’s just gone for good once it’s gone. It’s a sad thing. There are some restaurants that I really love out there that it would really, really make me sad if I could never go there and experience that food again. I have a lot of memories around food and being there with my wife, my wife and kids, and family. I’m willing to pay a little bit more to keep that experience up. I think what we’re going to see is probably restaurants shift more into kind of what you described, the manufacturing kind of area where it is more quick serve. I think there is a good purpose for that kind of a restaurant.
I think right now the problem is we see restaurants trying to play both roles. They’re trying to do gourmet and they’re trying to do it at quick serve manufacturing low margin type pricing. That is just … It’s impossible. I think you’re asking these restaurant owners to walk a tightrope that just can’t be done.
Trevor:
Yeah. Interesting times. A food truck thing happened the past, let’s say, what, ten, 15 years ahead of this thing. I would say if you run a food truck, it might be a good time for you relatively speaking. Because you think-
Chris:
Yeah, I think you’re … Go ahead, Trev.
Trevor:
Yeah, because you have that manufacturing facility but on a relative scale. You have low cap ex. You know what I mean?
Chris:
I’ll tell you the other huge benefit.
Trevor:
The other thing … I just want to say … Also, your line of people, they’re outside. That’s a huge advantage in something like this.
Chris:
Yeah. Yeah. I think it’s a lot easier to space people out. Everything you said is true. I think one of the underrated things, too, is that you don’t have a lease. You don’t have a obligation to someone else to keep you in business. That’s another thing. People think of restaurants, location is everything with restaurants. The restaurant is where it is and that’s just kind of … That’s where you go to eat, that’s where they cook, that’s where all the money is that they’ve sunk in to, again, do those things I described. What if you got five years in and your lease is up and your landlord says, “Actually I want to double your rent”? You’re the owner and maybe you know that that price is completely predatory and unfair and you shouldn’t pay it, but what do you do? Do you say no and attempt to move your restaurant and start a new lease somewhere else and invest another 100 grand in improvements and hope your clientele find you and stay loyal and all that stuff? Or do you pay it because you sunk so much money into that space because you can’t bear the thought of leaving it?
Trevor:
Yeah.
Chris:
That’s a situation that a lot of restaurant owners face. It’s horribly unfair. I can’t think of any other business where an owner is so reliant on their landlord almost for just permission to stay in business and just hoping that in their good graces they’re going to be predatory when their lease comes due. Yeah. It’s really, really tough.
Trevor:
I think what you … We can get into this another time, but I think flexibility on rent agreements, I think is something that might be coming down the pipeline. Who knows? I don’t know.
Chris:
I think that’s something with corona virus. When you think of corona virus and how it’s affected people and kind of what has to change, what I always come back to is occupancy. Right? That to me is the number one thing, that if you can fix that for people and for a business owner, then I think the rest of life can kind of take care of itself to some extent.
Trevor:
What do you mean? What do you mean?
Chris:
What I mean … If you’re a business owner, you can control payroll. You can lay people off if you need to or have them work less hours or what have you. You can control your purchases. You can purchase less food if you’re selling less food. If your business goes way down and you’re doing to-go and you’re selling ten percent as much food as you used to, you can buy ten percent as much food and you can employ ten percent as many people. What you have to do is pay 100% of your rent. There’s no changing a rent agreement. It just is what it is. That is what really kills people.
I think there has to be some sort of federal congressional rule change that doesn’t just defer but forgives rent and reimburses landlords for whatever period of time … Hopefully, we’re nearing the end of this, but a couple months now, maybe one more month I think. Because that is something that is really, really hard for a business owner to come back from and for a person. If you’re just a person … Let’s say you’re an employee of one of those restaurants and that restaurant [inaudible 00:38:55] ten percent of payroll and you’re one of the 90% that isn’t working, what do you need to live your life? You need to make rent. That’s the number one cost of most people’s life. If you don’t have to worry about rent, you can probably scrounge together groceries. We have food stamps if it comes to that. We’ve got these stimulus payments. We’ve got unemployment. Rent is really difficult to cover when you don’t have income.
I think, if I was making policy, that’s what I would be targeting. It’s the one thing that has the highest impact across the board no matter who you are and your ability to just live your life and not worry about being out in the street or closing down your business or whatever it is that’s going to be a permanent destructive change in your life. That should be what we try to minimize.
Trevor:
Let’s see how that plays out. That is just interesting. I would like to explore that more for sure.
Chris:
Along that same line, what we are seeing … There’s been a lot of things that have come out over the last few months. The CARES Act and the PPP plan, a lot of people have heard of. Then there’s been a lot of deferrals of payments. For instance, North Carolina has the third … Any tax due by a business they’ve deferred till July, which has helped a lot of my business owners. A lot of sales tax that was due in April has not been paid, a lot of payroll taxes. A lot of all the stuff, even income taxes. Federal income tax, the deadline was moved to July 15th. If you pay estimated taxes, which most [inaudible 00:40:34] people do, those deadlines were all pushed back. That’s all well and good and it gives people breathing room and it lets you live your life for a couple months, but what happens when July 15 comes up? What is going to happen? I think there’s going to be a economic bubble and it’s going to have to be addressed. I think there’s going to have to be some permanent forgiveness of payments. Any business that’s been deferring that much cash out, they’re not going to have some huge barrel of cash that they can dip into to make up those payments.
Trevor:
No. No. Yeah.
Chris:
They’re late already on all of their vendors. They’re late on paying me. I have receivables from a lot of clients. I totally understand why they-
Trevor:
Yeah.
Chris:
I’m not the only person they’re behind on. They’re behind on sales tax and payroll tax and income tax and every tax you can think of. They’re behind on their personal rent and their personal car payment and all this other stuff. They’re not paying employees. It’s like, okay, great, we’ve deferred it. Now it all comes due in July. Where’s that coming from? How are we paying that? What’s the plan here? Even if the economy is open and working, let’s say June everything is normal. Okay, so they’re operating for June. Is one month of normal operations going to create enough cash for them to pay that? No, of course not.
Trevor:
No. Yeah.
Chris:
I don’t know what’s going to happen. I’m not an economist, but I foresee a … It’s going to be impossible for businesses to get back paid up for everything that’s been deferred till July.
Trevor:
That’s going to be a date we need to circle in our minds. I do think, yeah, you’re right. These things tend to create reforms and change, changing how people shop and attitudes about things. We’ll explore this more for sure.
Chris:
Yeah.
Trevor:
It’s just an excellent intellectual romp if nothing else. We can just listen to ourselves, which is great. Anyway.
Chris:
You know me. Intellectual romping, listening to myself talk, it doesn’t get old.
Trevor:
Are you kidding me? I pet the dog. I … I don’t want to make light of it. You and I are really lucky. We’re really …
Chris:
Completely.
Trevor:
… lucky. That’s just … Believe me, we’re laughing at ourselves.
I want to get to who are you shouting out today. We’re going to finish our segment, all our segments with In the Arena with Chris Arena, with a shout out to a restaurant or two that you would like to…
Chris:
Yeah. One I’d like to shout out is a local sandwich shop called East Cut. They are just fantastic.
Trevor:
East Cut?
Chris:
East Cut.
Trevor:
Yeah. Yeah.
Chris:
E-A-S-T C-U-T.
Trevor:
Nice.
Chris:
It’s kind of a New York inspired sandwich shop right by my office here in central Durham. Obviously, I frequent them quite a bit. I work with the owner. Just great, great food. They’re really been agile with shifting to the to-go and delivery options. They’ve made it very safe right from the get-go. They started doing sort of a, almost like a to-go bodega where a lot of grocery and necessity items they’ve accumulated and offered for sale, and at very reasonable prices I should say, too. That’s been great. The few times I can’t get an avocado I go to them. They’ve got for a $1.50 a great, one of the best avocados you’ll find actually. I can’t get them at the grocery store that way.
Trevor:
Really?
Chris:
They also-
Trevor:
They’ve got a line on the avocados, premium …
Chris:
Yeah. Exactly. A cousin in Mexico or something.
Trevor:
See? That’s why we have restaurants right there.
Chris:
Yeah, I know.
Trevor:
Because everything has to be perfect. If it’s not …
Chris:
Avocados do. For the amount of guacamole we eat in our house, we need some good avocados in high quantity.
Trevor:
I would say that, yeah, there’s a good percentage of your whole being that’s probably an avocado. I would say it’s [crosstalk 00:44:54]. I had one on my breakfast sandwich that I made this morning. Anyway, go. I’m sorry. Go.
Chris:
Yeah, no. I could go on and on about guacamole and avocados, but … They also make the best ranch in the triangle. I’ll put it up there against anybody. Their ranch is so freaking amazing.
Trevor:
Wait, wait, wait. First of all, they make ranch? That’s so cool. Again. Making ranch. Who does that? I love it. Okay, cool.
Chris:
Yeah, yeah. That would be my local Durham shout out. Over in Raleigh, a restaurant I love is called Mofu Shope. M-O-F-U S-H-O-P-E.
Trevor:
Whoa! Look at-
Chris:
It’s kind of got the oldie Raleigh extra E going on that you guys have …
Trevor:
Yeah. Really?
Chris:
Yeah. They are owned by … Yeah, exactly. They are owned by a friend of mine who I actually went to accounting school with. They are [crosstalk 00:45:48].
Trevor:
Oh!
Chris:
She is a longtime out of the accounting industry, but she is definitely a leader in the restaurant industry, always on top of things with the PPP loan and other accounting matters. She’s great and their food is amazing. My wife and I, we hate to drive more than ten minutes. I have a brother that lives in California and he laughs at me because what I consider a long commute to him is like a trip to the grocery store. For me to drive 25 minutes to downtown Raleigh, that’s a big deal. But Mofu Shope is worth it. Absolutely amazing. They’ve been doing some to-go as well. They make amazing dumplings. They used to own a dumpling truck. They actually won the Food Network competition for their dumpling truck. That’s how they started their restaurant. Very cool story. Check them out.
Trevor:
Spell that again. It’s spelled M-O …
Chris:
M-O-F-U S-H-O-P-E.
Trevor:
Okay. All right, cool. Man. You know what, maybe that’s what we’ll get into here for lunch. I’ll have to look it up and see if they’ve got lunch. I’m trying to think if I’ve been there. I don’t know. That’s in downtown Raleigh?
Chris:
Yeah. I think it’s on Blount Street? Blount Street.
Trevor:
Blount?
Chris:
I’m not even sure exactly how you say it.
Trevor:
Okay. I’ll…
Chris:
I’m a Durhamite. I don’t know how to pronounce the fancy Raleigh street names.
Trevor:
How long have they been down there?
Chris:
They’ve been there a few years.
Trevor:
Okay.
Chris:
They were, again, as a food truck. Their first name was actually the Dum Pho King Truck.
Trevor:
Nice.
Chris:
Which you can sound that one out. It was the dumpling, pho, they were the kings of it, blah, blah, blah. Very …
Trevor:
Right, right.
Chris:
When they got on Food Network, that name didn’t fly, so they became the Pho Nomenal Dumpling Truck. People might know them as Pho Nomenal Dumplings. Kind of a purple and black truck. She and her business partner just sold a bunch of dumplings. They’re amazing, had a huge following over that. When they won the Food Network competition, I think they won 50 grand or something. They used that to kind of kickstart their restaurant.
Trevor:
Wow. What a great … See? Again, that’s the classic story right there.
Chris:
Yeah, exactly.
Trevor:
That we want to figure out how to sustain. All right. Maybe one of these times we can get a restaurant person on here and we can talk to them. That might be interesting.
Chris:
Yeah, I think you know …
Trevor:
I know a couple.
Chris:
I can find a couple.
Trevor:
I know a couple.
Chris:
Are you going to Belle Monica or have you done that on prior episodes?
Trevor:
I haven’t, but I’m thinking about it. I’m prepping for this segment of In the Arena. I was thinking maybe it would be cool to … We could do that with my family, but we could certainly do others. That might be an interesting … Geeze, we’re just developing right here. Right here. We’re recording it. Developing content.
Listen, I want to thank you so much for the time here, man. We got some great stuff. This is number one of the series. I just want to thank you for partaking in it. I look forward to talking to you again.
Chris:
Yeah. My pleasure, Trev. Thanks for having me. I look forward to being on again.
Trevor:
Yeah, man. Have a great weekend. Tell your boss/wife that I said hi.
Chris:
I will let her know.
Trevor:
Okay. The kids, too, and the dogs. You know. The whole thing.
Chris:
The whole clan.
Trevor:
Tell them [crosstalk 00:49:17]. Yeah. Whatever. It doesn’t matter.
Chris:
I will definitely share the kind words. You do the same. I’ll talk to you soon.
Trevor:
Okay, thank you.
Chris:
All right. Bye.