Lease Proposals in Retail Property Today

fruit and flower stand in a retail shopping centre
Lease proposals and letters of offer to lease, should be unique to the tenant type and the shopping center.

With commercial premises, the leasing process should involve ‘Agreements to Lease’ or ‘Letters of Offer’ between the tenant and the landlord. This enables you to negotiate the final terms and conditions of the lease quite effectively.

When the final ‘Agreement to Lease’ has been achieved between the parties, then that document can be sent to the landlord’s solicitor to prepare the final and original lease documentation. The whole process is clean and straightforward.

It is always desirable to let the landlord solicitor prepare the lease and arrange for the signature of both parties. Invariably solicitors come across smaller matters of dispute which still need to be resolved between the landlord and the tenant. The solicitors are the best ones to do that for the landlord.

Whilst all premises are unique and special, the following is a checklist around which the ‘Agreement to Lease’ could be structured. Simply then add other elements special to the property as appropriate.

  1. The name of the landlord together with contact detail
  2. The name of the tenant together with contact detail
  3. Description of the premises including the reference to any plans or drawings
  4. The area of the premises
  5. The term of lease
  6. The lease commencement date and the end date
  7. Option for a further term if applicable and how that option should be exercised with due regard to timeframes prior to lease expiry
  8. Details of contributions to outgoings expected from the tenant
  9. Details of recoverable outgoings that are normally considered as every day consumables in the premises and how they are to be recovered from the tenant. This would be cleaning, electricity, communications, and energy.
  10. Permitted use of the premises
  11. Details of any incentive to be provided by the landlord
  12. Details of the make good expected from the tenant at the end of the lease term
  13. Car parking detail
  14. Signage detail and approvals
  15. Air-conditioning supply and hours of operation
  16. Access details to the premises including a statement of how the tenant will access the premises at different times
  17. Details of works to be undertaken by the landlord prior to occupancy by the tenant
  18. Details of approval processes that need to be observed by the tenant in any fit-out works
  19. Rent review structure and frequency
  20. Details of the initial starting rental
  21. Details of the guarantees expected to be provided by the tenant as part of the agreement to occupancy
  22. Insurance obligations of the tenant
  23. Confidentiality agreement between the parties
  24. Any other obligations of the tenant to be undertaken during the lease term
  25. Any other obligations of the landlord to be undertaken during the lease term
  26. Special terms and conditions that need to be incorporated into the lease document by the solicitor prior to the signature an agreement of the parties
  27. Obligations of the lease with regard to legislation current in your location or the property type.

This list should not be regarded as finite given that every property is unique and special when it comes to lease negotiations. The list will however give you the main things to look for in the first instance of lease negotiation, and to which you can add the other special terms and conditions of the negotiation in the ‘Agreement to Lease’.

Any lease or tenancy negotiation should include evidence of the condition of the current premises before they are handed to the tenant. At the end of the lease term, you will then know to what condition you expect the premises to be returned to. ‘Agreements to Lease’ are standard procedures used by experienced landlords and real estate brokers.

When you have structured a document that works well for you in your location with your property types, it pays to create a number of templates which simplify the task of leasing and negotiating. Generally speaking, the ‘Agreement to Lease’ is not legally binding but it will facilitate the negotiation and move you towards the creation of a real lease where the solicitor takes over.

Retail Rental Tips

man pushing a shopping cart
Consider your retail rental carefully as part of your tenant mix.

The idea of lowering rents in a tenant mix strategy may not be a popular topic among shopping centre or shopping mall owners, but cash flow is still cash flow.

There is great value in communicating with your tenants and understanding their reality, as well as your own. Again, deal with each rental renegotiation on the specific circumstances of that lease. Know too, however, that a rental reduction, if necessary, may be recaptured in the following ways:

  • Percentage rent increase. If the tenant’s sales are off during a bad economy, presumably they will go up when times get better. The landlord can then recapture from a lower base rent via increased overage rent.
  • Deferred rent. If the tenant is having trouble, consider lowering the rent, with a deferred lump-sum payment at a specified date or on a stair-stepped basis to ultimately bring the rent back up to an acceptable level.
  • Term extension. As a trade-off for a reduced rent for a quality tenant, ask for a lease extension with gradual escalations. This will help assure long-term occupancy and profitability.
  • Advertising. Require that the tenant agree to spend a substantial percentage of any rental reduction toward advertising and promotion, in an attempt to increase sales.

Lease Types in Retail Property

blur of people in a shopping mall
Understand the right leases in your tenant mix and shopping centre.

When you list a property to sell or to lease you need to understand the type of lease that you are dealing with. There are definite differences in leases at all levels and hence a lease must be read fully before proceeding.

The better and more fully that you interpret a lease, the more professional you are and you appear to the people that you work with or serve. You can and should add strategic value in the client in every lease that you negotiate. A lease is not just a document to allow a tenant to occupy premises; it is a tactical cash flow that can attract or detract from the property.

The way that leases work will solidly impact on the property and its performance for the duration of the lease. As you deal with tenants or buyers for the property, the type of lease that applies will also impact on the negotiations. Let’s look at the main lease types and expand on the issues for you.

Gross Lease:

Under a gross lease the tenant pays a rent and the building owner will pay all building operating costs (also known as outgoings). This means that the lease itself will have rent review provisions that escalate the gross rent only.

In a lease of this type the landlord needs to know that they can maintain the building outgoings to predictable levels over the lease term. The levels of rent review escalations in the lease must be expected to cover or exceed the escalations in the level of outgoings over future years otherwise the landlord will loose money.

Gross leases are common in retail and office property. Your choice in using this rent and lease type should be balanced against the predicted levels of outgoings costs and future changes for the subject property. Obviously an older building will have steady escalations in outgoings above that of a building that is younger. As a building ages and deteriorates, the gross lease method becomes less attractive and more risky for the landlord.

Semi Gross Lease:

In this type of lease the landlord is setting a gross rent which is paid by the tenant and is reviewed over the term of the lease however the landlord also gets paid some regular money for outgoings under a specific calculation.

The landlord specifically recovers the escalation in outgoings above a nominated base year. This base year is selected at the start of the lease and is usually the last reconciled outgoings year prior to lease commencement, which is usually the previous financial year to the start of the lease (because it is fully reconciled and known as a set value).

As the new semi gross lease proceeds, the tenant has to pay the escalation of the outgoings above the nominated base year. For example, if in a lease the base year for outgoings purposes was set as the financial year 08/09 and the known level of outgoings for that year was $85m2 pa, then in the financial year 09/10 when the outgoings escalate to $97m2, the tenant will have to pay outgoings of $12m2pa. As the lease ages and in the financial year 12/13, the outgoings could be $108m2, and in that case the tenant will need to pay $23m2.

In this type of lease the base year is set and the outgoings ‘gap’ will likely increase significantly as the lease gets older. This type of lease is good for the landlord in that it protects the landlord against the escalation of the outgoings above the base year.

It is common in this type of lease for the base year of outgoings to be updated at the time of any market rent review. Market reviews in this type of lease would be done if the lease was lengthy (say over 3 or 4 years) and the landlord was concerned that they would be out of parity with the rent in the surrounding other properties of similar type. It is not necessary to do a market rent review at any particular time in a lease as the matter is negotiable at lease commencement, however be aware of the fact of re-setting the base for outgoings and the impact it will have on the landlord.

As a further interpretation of this type of lease you should look at the type of outgoings that are recovered in the calculation. It is not unusual for ‘lease savvy tenants’ such as the government to nominate the outgoings to which the base year escalations will apply. Naturally it is better for the landlord to recover the escalation in all outgoings in a building above the base year, however the government tenants are well known for limiting the calculation to rates and taxes escalations.

Clearly a lease is a product of a negotiation, but you need to understand what can be done and then get the best deal possible for your client.

Net leases:

The term net lease is firstly generic; hence you should be aware that there are 3 types of net leases within the category. So let’s look at them.

  • Net lease: In this lease the tenant pays some or all of the rates and taxes for the property or premises.
  • Net-Net lease: In this lease the tenant pays the rates and taxes as nominated in the ‘net lease’ method but they then also pay for insurance premiums for the property and premises.
  • Net-Net-Net lease: In this lease the tenant will pay for the rates and taxes, the insurance of the premises, and they will then also pay for repair and maintenance costs associated with the premises.

So what lease type is the best for the landlord? In most cases the Net-Net-Net Lease is the way to go, however it is a matter of if the tenant will accept and sign that type of lease. As a point of negotiation it would be wise in any Net Lease, or a Net-Net Lease to have a higher start rent for the landlord and better rent review provisions that offset the lesser outgoings recovery for the landlord.

Net-Net-Net leases are common on properties that are fully occupied by one tenant. This is method of lease structure is widespread in industrial property and office property.

 

Percentage lease:

This type of lease is more commonly seen in retail property as the calculation of rent is linked to the trading figures for the tenant. In most leases of this type the tenant firstly pays a fixed base rent that is geared to some rent review method, and then the tenant also pays additional rent that is calculated from their turnover or sales. As the tenant improves its trading, then the rent escalates.

An essential part of this lease structure is to force the tenant to give you accurate and regular audited turnover figures. The lease has to support and enforce the process for the landlord. Monthly turnover figures are the best way to go with the tenant providing the audited figures to the landlord by say the 7th of the next month. The landlord then charges the turnover rent to the tenant based on the audited figures.

This type of lease is also seen in new shopping centres as new tenants stabilize, in supermarkets for the same reasons, and in hotels or pubs. The basic strategy is to give the landlord some cash flow from the base rent from the start of the lease, and then to collect additional rent as the property and the tenancy becomes more successful in generating sales and customers.

Spell it out

In all leases, the recovery of rent and outgoings must be clearly set out to avoid debate and disagreement with the tenant. As you can now see, the selection of the lease type that you are to use on a property will significantly impact on the future for the landlord. It will also impact on any sales situation. It pays to know what is going on in the market regards lease and rent types so that you do lease deals that are similar to or better than the rest of the market. The right lease deals sell properties at better prices.

Lead Generation in Retail Property Leasing

female figures with shopping bags
Look for the right leads when it comes to new tenants in your retail property.

In retail real estate and investment property your leads for new business come from a number of sources. The more leads that you can generate and optimise, the more successful you will be in getting the best listings.

In this market, the quality of the listings and tenants is so important given that the shopping centre and shopping mall buyers and the tenants can be so selective.

When the market is saturated with owners and businesses that are struggling to keep afloat, it is the quality retail properties that you want to market. These are the ones that will generate the momentum even in difficult times. The banks are also not as reluctant to lend on the higher quality asset with established cash flow.

Does this mean that you turn your back on poor and unattractive retail real estate listings? Perhaps you should for this time given that you want results to your marketing. It’s your choice, but at the very least, be selective as to what you list and how you do it. Your time is your only resource and how you use your time is essential to generating fresh and marketable listings.

What are the Sources of Leads?

We cannot cover all the sources of commercial real estate tenant and property leads here as they are unique to your market in many respects; however it is worthwhile raising the main common ones so that you can have them covered. Importantly you must know what a lead or source of new retail real estate business looks like in its early stages, and then you must know how to convert it to fresh momentum and a deal.

There is one main rule on the topic of leads; when you see a lead, you must react to it in a professional and timely fashion before someone else does.

Leads in retail real estate are not just for the things that happen today; they can be for things that are potential deals in months or even years. The more clearly you see this, the further business you will generate for yourself.

So here is the most obvious leads generation list that you must have covered in one form or another. See how you score on these items and make sure that these foundational matters are under control.

  • Business Acquaintances locally – these are most particularly those people that you have known for some time and who are likely to cooperate as an extra set of eyes in the market place. Choose of these people with care and remain in contact with them constantly.
  • Professional Business People – in your marketplace, there are a number of categories of business people to whom you must remain connected. The highest on the list are solicitors, accountants, town planners, financiers, architects, local politicians, and engineers. All of these people have significant involvement with the retail property industry and the property owners. They will likely hear about a retail property or lease transaction before you do. In many cases these people need the assistance of a good retail real estate broker to help their clients in a variety of ways.
  • Local businesses – local businesses produce change and flux in the marketplace. As time progresses, you should constantly encourage ongoing contact with all the major businesses in your precinct. They are the ones that regularly need to buy, sell, and lease retail premises; this means all the local managers and business proprietors who are involved in property decisions and creating commerce generally in the community. Recognise that they do not normally know much about commercial real estate. You can bring them updates on rental and property prices regularly to assist them with a future property need.
  • Colleagues within your office – many real estate offices are cooperative business environments with salespeople working productively with each other. This means that they share retail property leads and opportunities in sales and leasing. Sharing part of your commission with other colleagues in your office is far better than giving the commission to another outside competitor an agent in the same region.
  • Building tenancy schedules – from time to time, you will see or obtain tenancy schedules or inventories that relate to major retail buildings and shopping centers in your area. Whilst they should be regarded as confidential documents, they will give you a wealth of opportunity if used correctly. Any lease that is to expire inside the next three years is a target for future contact. The relative tenant will need to do something to preserve the function and occupation of their business. It is surprising how many tenants leave such matters to the last minute. The ongoing contact with retail tenants of this type is highly productive. Your main focus with these people is to establish trust so that they come to you when they need you.
  • Competition agents and brokers – normally speaking, the competitor agencies in your area will cooperate on conjunction transactions with their exclusives. The retail real estate industry is relatively specialised and such cooperation is common in sales and leasing of retail property. Importantly, any conjunction arrangement involving other agent’s listings must have a completely signed and documented conjunction agreement before you proceed. Cooperate with other agents, but do so with care and professionalism.
  • Satisfied clients – your agency business, if it’s been operating for a number of years, will have a significant list of established happy clients from previous retail property and lease transactions. It pays to keep in contact with these people given that most transactions in commercial real estate happen every 4 to 10 years. The satisfied clients are going to need your services again.
  • Old campaigns – any retail real estate campaign and marketing event will have created leads and people that ‘changed their mind’. All of these people should be on your constant contact register or data base. Feeding them regular market updates is essential.
  • Other Agents old deals – as a further extension of this item above, you can also monitor the transactions of other competing agents in your area. Any transactions that occurred through other agencies over the last 4 to 10 years should be monitored for future re-activity. It is interesting to note that many real estate agents and brokers are lax when it comes to keeping in contact with others.
  • Industry publications – any newspaper or retail industry publication in your area should be reviewed daily for information involving businesses relocating, expanding, contracting, or merging. It is surprising how so many agents overlook this obvious source of listing. These publications will also frequently name the key people in a business such as the CEO, President, or CFO. In all cases these business leaders go on your contact list and get a letter on a regular basis. Note that I said a ‘letter’ and not an ‘email’. In this high tech world you want your correspondence to be seen and read; an email will not achieve this in most circumstances.
  • Other agent’s signboards –when another agent puts a signboard on a retail property, it is imperative that you contact the other adjacent and nearby owners of commercial property in that street. These people are likely to have an interest in competing with the retail property that’s just come on the market. They are also more likely to use you as a competing agent whilst the other agent’s property moves through its promotional period.
  • Financiers and bank managers – these people need property transactions for their business to survive. They are also receptive to working with professional real estate agents who understand retail real estate and act professionally. If you can supply them with the source of a new large mortgage or retail property development, they are likely to offer you the opportunity for a retail listing or a sale with their clients in the future.
  • Planning approvals – keep close to the local council or office of the planning committee in your region, as they constantly consider new planning matters. Some of these offices have minutes of planning approvals that are available for public scrutiny. Check out these minutes and follow through on the opportunities that you can see. The historic planning approvals over the last few years are also great sources of retail leads and listings.

The inventory above comprises the most obvious categories of leads and opportunities in retail shopping centre sales and leasing. You will be able to add to this as time progresses in your marketplace. Importantly make sure that you have these items well under control as the essential foundations of your business.

Retail Property Tenancy Schedule

woman reading a file
Go through the tenancy schedule in great detail and check it against the leases.

The tenancy schedule is the tool of choice for a property manager or leasing manager in a commercial or retail property investment. It is the tenancy schedule that will keep the property manager up to task on forthcoming events and dates.

Often you find that the tenancy schedule is not up to date, so if anyone gives you such a document, treat it with the caution it deserves, and check it out completely before you act on the information contained therein.

So let’s say that you have a great tenancy schedule that you know is totally accurate. I get many questions about what I would want to see in a tenancy schedule. Here are my main priorities:

  • Details of the tenant name, lease, and full contact detail for emergencies
  • Tenancy identifier or suite reference that comes from the plan for the property
  • The area of the tenancy in m2 or ft2 (depending on your unit of measurement)
  • The % of the tenant area to the building net lettable area
  • The rent $’s per annum, per month, and per unit of measurement (m2 or ft2)
  • Lease start date
  • Rent start date
  • Lease end date
  • Term of lease
  • Option term of lease
  • Anniversary dates and reminders for rent reviews, options, expires, renewals, renovations, and make good obligations
  • Outgoings charges for each tenant on the basis of area and monthly charge
  • Outgoings budget for the building
  • Total outgoings recoveries for the property on a currency and % basis
  • Types of outgoings to be charged to the tenants
  • Insurance obligations of the tenant
  • Rental guarantee details or bonds held
  • Provision for critical dates relating to any important lease term or condition
  • Maintenance obligation details of the tenants

 

This list is not finite and you can add your own extra priorities, I would however make sure that it is totally correct and maintain it to the highest level of accuracy.

When you do this you can stay on top of important upcoming events that will impact the occupancy or rental of the property. Whilst you can buy ‘off the shelf’ software programs that display this above information, that can be quite expensive for those commercial and retail property managers that are first entering this type of property.

The alternative is to create some simple spread sheet that contains the data; in saying that, it is essential that great care is taken to maintain the spread sheet that you create. Any errors in the tenancy schedule can destroy your landlord, your business, your tenant, your reputation, and the property. Accuracy is paramount.

Financial Assessment of a Retail Property

Financial calculator
Check the income and expenditure for your retail shopping centre.

When assessing retail property tenancy mix, it is necessary to understand the financial factors that the property creates. In doing this, it is not only the financial factors today that you need to look at, but also those that have formulated the history of the property over recent time.  In this case, the definition of ‘recent time’ is the last three or five years.

It is surprising how property owners try to manipulate the building income and expenditure at the time of sale; they cannot however easily change the property history and this is where you can uncover many property secrets. Once the history and current performance of the property is fully understood, you can then relate to the accuracy of the current operating costs budget. 

All investment property should operate to a budget which is administered monthly and monitored quarterly.  The quarterly monitoring process allows for adjustments to the budget when unusual items of income and expenditure are evident. There is no point continuing with the property budget which is increasingly out of balance to the actual property performance.

Fund managers in complex properties would normally undertake budget adjustment on a quarterly basis. The same principle can and should apply to private investors.

So let’s now look at the main issues of financial analysis on which you can focus in your property tenancy mix evaluation:

  1. A tenancy schedule should be sourced for the property and checked totally. What you are looking for here is an accurate summary of the current lease occupancy and rentals paid. It is interesting to note that tenancy schedules are notoriously incorrect and not up to date in many instances. This is a common industry problem stemming from the lack of diligence on the part of the property owner or the property manager to maintain the tenancy schedule records. For this very reason, the accuracy of the tenancy schedule at time of property sale needs to be carefully checked against the original documentation.
  2. Property documentation reflecting on all types of occupancy should be sourced. This documentation is typically leases, occupancy licences, and side agreements with the tenants. You should expect that some of this documentation will not be registered on the property title. Solicitors are quite familiar with the chasing down all property documentation and will know the correct questions to ask of the previous property owner. When in doubt, do an extensive due diligence process with your solicitor prior to any settlement being completed.
  3. The rental guarantees and bonds of all lease documentation should be sourced and documented. These matters protect the landlord at the time of default on the part of the tenant. They should pass through to the new property owner at the time of property settlement. How this is achieved will be subject to the type of rental guarantee or bond and it may even mean that the guarantee needs to be reissued at the time of sale and settlement to a new property owner. Solicitors for the new property owner(s) will normally check this and offer methods of solution at the time of sale. Importantly, rental guarantee and bonds must be legally collectable by the new property owner under the terms of any existing lease documentation.
  4. Understanding the type of rental charged across the property is essential to property performance. In a single property with multiple tenants it is common for a variety of rentals to be charged across the different leases. This means that net and gross leases can be evident in the same property and have different impact on the outgoings position for the landlord. The only way to fully appreciate and analyse the complete rental situation is to read all leases in detail.
  5. Looking for outstanding charges over the property should be the next part of your analysis. These charges would normally stem from the local council and their rating processes. It could be that special charges have been raised on the property as a Special Levy for the precinct.
  6. Understanding the outgoings charges for the properties in the local area is critical to your own property analysis. What you should do here is compare the outgoings averages for similar properties locally to the subject property in which you are involved. There needs to be parity or similarity between the particular properties in the same category. If any property has significantly higher outgoings for any reason, then that reason has to be identified before any sale process or a property adjustment is considered. Property buyers do not want to purchase something that is a financial burden above the industry outgoings averages.
  7. The depreciation schedule for the property should be maintained annually so that its advantage can be integrated into any property sales strategy when the time comes. The depreciation that is available for the property allows the income to be reduced and hence less tax paid by the landlord. It is normal for the accountant for the property owner to compile the depreciation schedule annually at tax time.
  8. The rates and taxes paid on the property need to be identified and understood. They are closely geared to the property valuation undertaken by the local council. The timing of the council valuation is usually every two or three years and will have significant impact on the rates and taxes that are paid in that valuation year. Property owners should expect reasonable rating escalations in the years where a property valuation is to be undertaken. It pays to check when the next property valuation in the region is to be undertaken by the local council.
  9. The survey assessment of the site and tenancy areas in the property should be checked or undertaken. It is common for discrepancies to be found in this process. You should also be looking for surplus space in the building common area which can be reverted to tenancy space in any new tenancy initiative. This surplus space becomes a strategic advantage when you refurbish or expand the property.
  10. In analysing the historic cash flow, you should look for any impact that arises from rental reduction incentives, and vacancies. It is quite common for rental reduction to occur at the start of the tenancy lease as a rental incentive. When you find this, the documentation that supports the incentive should be sourced and reviewed for accuracy and ongoing impact to the cash flow. You do not want to purchase a property only to find your cash flow reduces annually due to an existing incentive agreement. If these incentive agreements exist, it is desirable to get the existing property owner to discharge or adjust the impact of the incentive at the time of property settlement. In other words, existing property owner should compensate the new property owner for the discomfort that the incentive creates in the future of the property.
  11. The current rentals in the property should be compared to the market rentals in the area. It can be that the property rent is out of balance to the market rentals in the region. If this is the case it pays to understand what impact this will create in leasing any new vacant areas that arise, and also in negotiating new leases with existing tenants.
  12. The threat of market rental falling at time of rent review can be a real problem in this slower market. If the property has upcoming market rent review provisions, then the leases need to be checked to identify if the rental can fall at that market review time. Sometimes the lease has special terms that can prevent the rent going down even if the surrounding rent has done that. We call these clauses ‘ratchet clauses’, inferring that the ‘ratchet’ process stops lower market rents happening. Be careful here though in that some retail and other property legislation can prevent the use or implementation of the ‘ratchet clause’. If in doubt see a good property solicitor.

So these are some of the critical financial elements to look at when assessing a tenancy mix. Take time to analyse both the income and expenditure in the property before you making any final choices regards tenant strategy.

Attracting Tenants to Your Retail Property

man shopping for fruit
Attract the right tenants to your retail property today.

Every property is unique and special. Each property has got a mixture of negative and positive issues emanating from the design and layout. To set up a productive tenant mix you have to do the best with what the property offers design wise.

A successful property requires successful tenants, and not just tenants that pay rent. This is where tenant mix is critical. To do this you need to know:

  • Rents
  • Lease terms
  • Fitout construction rules and costs
  • Incentive alternatives
  • Option structures
  • Rent review alternatives
  • Tenant preferences

Tenants are selective in what they lease. They want the best, and in this market you have to provide it if you are a property manager or a landlord. Your property has to be the best available offering in the property market at the moment.

Consider this question. What are the top 4 reasons why someone should occupy your property as a tenant? If you do not have a solid set of answers then you have a problem.

Your property should provide something that the other properties do not have or find it difficult to offer. Your property has to be the best available. You should be a property magnet to attract the tenants. So where do you start when attracting tenants to your tenant mix?

The features of the property and the design of the property will be the base from which you consider where the tenants are going to be placed. Look at the design and consider where the customers will come from inn and around the property.

What will be the ‘ant track’ by which the customers walk and pass through the property? Any corners or turning points in the ‘ant track’ are likely to be high traffic areas and if handled correctly will be the source of higher rent. At these corners you want smaller tenants with a vibrant retail offering. The successful retail property is totally about the tenants and not much else.

Without the tenants then the property will likely fail. Look around. Details of physical features of properties should be noted so that you can build on opportunities and positive aspects of the property with potential new tenants.  All the information gained should be included on an appropriate and organised listing form and recorded as both hard copy and as part of a computerised listing package.

Ultimately you will be producing a leasing brochure and information package to present your exceptional property to potential tenants in its best aspect.  All investors and owners of commercial property have differing investment and ownership needs. This then leads to the core decisions that they will make when you locate a tenant or adjust the tenancy mix.

It could be that the client has a preference to hold the property for a short period of time and then undertake a redevelopment or expansion of the property. This will have significant impact on how you would construct the tenancy mix and lease profile for the property.

To handle these facts you interview the client and discuss the investor’s property requirements before proceeding with any part of the professional leasing and tenancy services that comes with commercial real estate. You need to match your leasing and tenancy services to their property holding needs. Your skill is in assessing the potential leasing and tenant balance of the property and then shaping the leases to support the rental income needs is essential.

Choosing the Right Tenant for the Retail Tenant Mix

woman shopping with bags
There are many steps to building a good retail tenant mix.

It is incumbent on any landlord to know his tenant’s business and how it will balance within the overall tenant mix profile. The landlord can then have a sense of how a lease deal can be made to ensure a long-term tenancy. The soundest economic lease agreement most probably will not be the highest rent agreement. Take the following steps when evaluating a prospective tenant:

  • Rent Capability: Question the tenant’s ability to pay the rent being negotiated. Be willing to move the tenant into a smaller or less expensive space if doing so is in both parties’ long-term interest.
  • Profit and Loss history: Ask for the tenant’s other stores’ profit and loss statements for comparative analysis.
  • Sales projections: Ask the tenant for the projected sales at your location. Do the numbers seem high or low in comparison with the per square foot sales of other categories like this in the centre or trade area?
  • Communicate: Establish a trusting rapport going into the tenancy. Handle relationships one to one so you hear of problems before it’s too late to resolve them.
  • Management strategy: Ask about the tenant’s management plan. Is he going to be an absentee owner, or a hands-on operator? Will his management team be able to weather a downturn in the economy or a direct competitor across the street?

Likewise, shopping centre management should continually evaluate existing tenants. Check their sales trends – are they up or down? If they are down, a meeting may be in order to address any existing problems. If your existing tenant has established a strong track record over a number of years, don’t lose him. Communicate. Again, understanding each another’s position will effectively maintain long-term tenancy.

Location Based Retail Anchor Tenants

woman shopping for fruit in a shopping centre
Choose the best tenants to improve your tenant mix.

In larger retail properties today, you need a quality anchor tenant that is location based.  In saying that, they should be closely aligned to the local community and the demographics of the area.  For this reason, leasing managers and property managers should select anchor tenants well and ensure that the anchor tenants will build a customer base into the local area without difficulty.

A strong anchor tenant will encourage more shoppers to a retail property and consequently help the specialty tenants in the property with their trade and sales.  The link between the anchor tenant and the property is therefore high.

To help the anchor tenant with this close alliance with the property, consider the following factors:

  1. The anchor tenant should be encouraged to market their business into the local area.  It is wise to have some guidelines established for that process to occur.  The anchor tenant’s lease can set out some guidelines for that.
  2. The specialty tenants should join with the anchor tenant in a regular marketing effort to promote the property.  The specialty tenants can have a clause in their lease that requires them to pay a percentage of their rent to the marketing fund of the property.  The property manager should administer the marketing effort on behalf of the tenants and the landlord.
  3. The lease for the anchor tenant will need to be a lengthy period of time to give the property some stability over the long term.
  4. Look at how the access to the anchor tenancy is obtained by customers and how that access can incorporate involvement or profiling of the speciality tenants in the property.  Follow the ‘foot traffic’ to see what marketing effort can be established in the ‘corridor’ or pathway to the anchor tenant entry.
  5. The pylon sign on the property will be critical to the image and exposure for all tenants.  The anchor tenant will feature in the signage and then all specialty tenants should be on the same pylon sign.  Look at the pylon sign placement to passing vehicle traffic and pedestrians.
  6. If the local area is serviced by public transport, get some marketing material and posters into the transport systems and drop off points.
  7. Understand just how tenants access the property and how long they stay in the property.  What do they buy when they visit?  These questions will help you understand what the tenant mix requires to strengthen trade for the anchor tenant and the specialty tenants.
  8. Get marketing brochures into the local community and give special attention to seasonal sales or celebrations.  The community will get involved with your property if you create the right atmosphere.

There is a fine balance between the tenants in the property, the community, and the landlord.  The property manager or leasing manager for the property has to bring all of that together.