When you run a retail real estate agency specialising in retail leasing and property management, you really need a top agent that knows what retail property is all about. The leasing of retail is very special; far more so than office or industrial property. The selection of tenants will be made with due regard to the tenancy mix and the customer profiles that access the property.
It can take a leasing agent some years to fully understand the complexity of shopping centre performance and how tenants should be selected for a current or pending vacancy in the property. The correct tenant selection will help boost the customer attraction of the property, and eventually the turnover or trade.
So what would you expect a retail leasing specialist to know or bring to you and your agency? Here are some tips to help you:
Rents will vary from property to property. This change requires knowledge and experience when it comes to gross and net rents, together with the incentives that are available to lease premises to new retail tenants in your local area.
Lease types together with the terms and conditions for a particular tenant will require negotiation based on the local leasing laws relating to retail property. In many respects, retail leasing is more complex and the documentation behind the process is more rigid and
Tenant enquiry will change from location to location, however in retail property it is very much the case that the leasing agent has to get out into the business community and the other local shopping centres to talk to the existing tenants. In this way they will find tenants that want to relocate, expand, or contract. It is important to choose tenants that are at the top of their product or service offering.
New shopping centre projects and development timing will have impact on your current shopping centre and its future performance. Always watch the supply and demand for retail space locally. Any new leasing specialist should track these changes and the availability of retail space coming into the property market over the coming 2 years.
Property owners and new tenants that are looking for retail property are a unique breed unto themselves. They require understanding and a leasing expert that can talk ‘retail’ from many different angles.
Franchise groups will require retail space to locate new businesses into. That being said, franchises are a business model that has particular requirements of location and customer base. It pays to have a leasing expert that understands how the franchises think and what they are looking for.
Outgoings costs will have a major impact on rental (gross and net) as well as a tenants occupancy costs. Every retail property will have outgoings of a level that allows the property to operate efficiently and safely. The important factor here is that the outgoings for a particular property should be of a level that is comparable to other properties locally of similar size and type.
Tenant mix and clustering are knowledge skills needed by a retail leasing expert. When the tenant mix is correctly structured it builds a better market rental for the landlord and helps reduce the vacancy factor in the property.
Document knowledge and negotiation skills in retail property are quite unique when it comes to handling and working with small businesses. A leasing expert should understand what variables can be used in a good lease negotiation for a shopping centre or retail property.
So, all of these things would indicate that a retail leasing expert is a special type of person. Over time these skills can be learned; importantly the person chosen for the role has the right skill mix to take the role to the top of the industry locally.
Retail property performance is a fine balance of a number of relationships between the tenants, the landlord, and the community. When the balance is correctly established and maintained you can see the retail property and the tenants thrive.
In pressured times like that of today where retail trade is impacted by the internet and economic sentiment, the retail property manager has to be very close to a number of key issues in their managed property. In that way they can stave off many of the problems that can occur with the property over time.
Here are some factors to monitor and address:
Tenants with lower levels of stock should be observed and questioned. The lower levels of stock may be the result of a recent stocktake sale, or they can be the result of a shift in sales results. You are looking for tenants that are not performing well in sales or that are changing their service or product offering to that which is not permitted under the terms of the lease.
Changes to the staffing of tenancies and businesses will be an indicator. If the employees in the tenancy business are under constant change, it is wise to understand what is going on and why it is happening.
Tenants that need to relocate should be worked with. If their business is under pressure, it is better to achieve a process of cooperation to help them in stabilising. Any alternative is likely to involve a protracted vacancy and that is not going to help anyone.
Tenants that do not maintain presentation of premises or stock will drag down the other tenants in close proximity. Quality lighting and good levels of presentation are really important in retail property.
Clustering advantages or pressures in a property can help you either way when it comes to sales and tenant mix. Look for the tenants that can build sales from each other. Build clusters of tenants that work for you. The results will be a stronger market rent.
Anchor tenant weakness or trade problems should be addressed quickly. Any customer perceived weakness in the anchor tenant will soon reflect in a property decline in sales.
Lower levels of sales in the property or with some tenants will be a concern. The sales in the property should be tracked by tenant and by tenant category; in this way you will see how the property and the tenants are tracking in the local community seasonally.
Shifts in customer demographic will produce a change in sales. Look for those changes and help the tenants to act early. Profile your community at least once per year and ask the customers what they expect from the property and what they like about it.
New property developments to occur in the local area will detract from your customer base. Watch out for new properties coming up for sale or lease that shift the balance of supply and demand.
Higher incentives in getting a new tenant to your property will occur from time to time depending on the supply and demand for local retail space. Be flexible and adaptable when it comes to incentives for new tenants.
Competing properties in the local area can be taking some or all of your trade. Monitor these other properties frequently and watch for changes in the anchor tenant offering or levels of trade. If the anchor tenant changes, it is likely to shift the retail balance in the entire local area, and other retail properties.
Aggressive landlords that attempt to push the rental of the property too high can threaten the tenant mix stability and the viability of a tenants business to operate. Tenants will soon spread the word of any difficulty with the landlord, and that can have an impact on the property overall and any future leasing requirement.
A retail property is a special place for shoppers and tenants. Manage your retail property well and with a base strategy that encourages trade for all concerned.
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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.
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.
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.
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.
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:
Fitout construction rules and costs
Rent review alternatives
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.