Re: leasing a strip center - Posted by ray@lcorn
Posted by ray@lcorn on February 22, 2006 at 15:17:42:
That’s not a common line of thought and I like the out-of-the-box approach. Not sure I’ll have the answer for how to construct the offer, but I can easily identify the major concern for national retailers. Locals are another case, but my guess is they have similar concerns.
Worst mistake for a retailer? Top of the list is a location that doesn’t meet the projection. That’s why most have such a heavy emphasis on demographics. The large ones have software that compares their average customer profile to the site demos, and from that they build their operating projection. They’ll have a minimum criteria for gross sales, and that will often be the deciding factor between locations.
The pacifier that most reps try to get is an escape clause in the lease. Unfortunately that’s the bane of center owners. Leases with escapes are seen as unstable income streams, and it hurts valuations worse than any other factor. We just turned down a national credit tenant launching a new concept and wanted a one-year out. Even though they were willing to do the upfit I wasn’t interested in saddling the center with uncertainty in the tenant mix.
Second on the list is the upfit cost. Most owners will do a deal that includes the upfit cost for the tenant in exchange for a longer term lease. The higher the cost, the longer the lease. We add the upfit cost (and a rate of return) to the lease amount and amortize over the term. At some point the rental rate will become prohibitive, so it’s always a balancing act, and always negotiable. We’re in a deal right now that started out with us doing all the upfit for a five year deal, but will wind up being split about 50/50 on a ten year deal.
Third on the list would be co-tenancy with a major tenant. If your center has a national retailer in place, a new tenant may ask for a clause that allows them to exit if the anchor leaves. Those are sharp swords, and I would only give that to a tenant with significant drawing power of it’s own.
Locals usually want short lease terms, easy outs, and everything done for them. They have less room for error, and the owner has to balance having the space the occupied against the risk of uncollectibility. In their case they don’t get fired, they go broke. We always get personal guaranteees, but will sometimes modify the default clause to eliminate the continuous operation requirement.
That’s my stating the concerns. Now let’s hear some solutions!