Carey Webb
Retail commercial leases define the landlord/tenant union and govern all aspects of your tenancy. While it both protects and binds you to a location for an extended period, none are perfect nor provide for every contingency. The fact that a lease is a landlord-generated document is, in itself, sufficient cause for any tenant to enter into it with both caution and sound guidance.
Knowing what to ask doesn’t guarantee landlord acquiescence, but not knowing can cost you tens of thousands of dollars and potentially impact your business’ success. Awareness of potential pitfalls forearms a tenant with solid decision-making criteria.
It is always recommended that any business without an in-house real estate staff avail themselves of the services of a licensed real estate broker specializing in real estate representation. Fees are almost always paid by the landlord in the form of commissions.
Common belief is that once a tenant signs a lease and opens for business, the vast majority of the lease will never come into play. As long as the tenant remains open and pays the rent on time, all seems in order. In reality, many things can intervene over the course of a lease triggering unexpected costs and/or circumstances that jeopardize your business’ vitality and even survival.
Most tenants looking for space in a retail setting are disproportionately concerned with “how much for how long.” While planning conservatively and within a reasonable budget is always prudent, there are five things to consider that are just as essential.
Shop Around — It’s not just about the rent
First, focus on where you can do the most business when considering locations. How much rent you can afford to pay is a function of the sales revenue you generate. Just as when buying a widget or a castle, there is a colossal difference between a bargain and a value. In the current competitive leasing climate, tenants have an abundance of choices and landlords are willing to be relatively aggressive with tenants they deem desirable.
The asking rent is rarely where the landlord is willing to end up. It pays handsomely to know the current market and to have several qualified choices readily available. Competition breeds success — yours.
Quantify the extras
No matter what they are called, extras called “nets,” or “fringe charges” are the additional occupancy charges that are paid monthly and still come right off your bottom line. These include Common Area Maintenance (CAM), real estate taxes, property insurance, merchants association dues, and advertising funds, to name a few.
Tenants often assume these are not negotiable and sometimes this is the case. However, prudent landlords understand there is a limit any given tenant can pay to occupy a space. So, trade-offs between minimum rent and the “extras” should always be taken to the negotiating table. Just as importantly, limiting how much these extra charges can increase over the term of the lease should be quantified in the agreement.
Co-tenancy
Knowing your customer is the genesis of your search. Every business benefits from potential new customers walking by its door so traffic generating neighbors that provide cross shopping is the essence of a shopping center. So, find the birds of your same feather where your customers are already flocking. Anchor tenants establish the basic customer profile, but the line-up of small tenants is as important. Keep in mind, the major draw for a location may also be a neighboring center or anchor store known as a “shadow anchor.”
It is also valuable to know how financially solid the center’s anchor(s) is or if, for example, they have a history of leaving a center only to relocate into a nearby competing center. Small store vacancy is also a form of co-tenancy — or lack thereof. Tenants rarely go into shopping centers experiencing serious vacancies, but you can sure find yourself in one during the term of your lease.
One cannot always predict these things so ensure that your lease protects you by providing choices and practical remedies.
All shopping centers are not created equal
Demographics, visibility, access, and traffic counts are the benchmarks of location selection in a retail environment. However, it is not uncommon to see shopping centers on opposite street corners that share these same basics and appear comparable on paper, but vary significantly in their success as well as asking rents and occupancy costs.
Balance is key. A wise approach is implementing a grading scale for your business where the locations you are considering measure up to a minimum acceptable score that meets your basic criteria. Keep in mind, too, being in the weak location in a strong center can spell doom just as surely as locating in an inferior or troubled center.
All landlords are not equal
Speaking of equality, neither are landlords equal. It is essential to know who owns and who operates the shopping center. Researching the track record of a center’s ownership and management company is a prudent element in deciding where your business will be committed to operate for several years. How many properties are owned and how well they are maintained, efficiently run and leased is ample proof beyond any sales pitch.
If the shopping center is operated by a management company, investigate their reputation as well and learn if there has any issue with turnover in management. A great place to start is with their existing tenants. We find them to be very candid and typically eager to share their opinions on the center, the owner/management, as well as how their business is performing in this location. We sometimes find out valuable information from former management companies as well.
Admittedly, this is a lot to consider but your business deserves it, and depends on it.
— Carey Webb, SCLS, is managing partner of Prime Meridian Real Estate Services in Dallas. Prime Meridian is a full-service firm that specializes in real estate representation for tenants and buyers in-and-around shopping centers. You can reach Carey at 972-899-0294 or through the company's website at www.myprimemeridian.com.