Tenants and landlords speak out in Strolling the Agora on the advantages and disadvantages of this leasing concept in the April 19, 2010 issue of the twice-monthly newsletter, SHOPPING CENTER DIGEST.
While discussing overages with a developer of a new regional mall in the New York Metro area some years ago, I remember clearly his attitude and comment: “If a tenant goes into overages,” he said, “it means the rent was too low.”
That company has been out of business for two decades, and the dealmaker quoted has also become only a memory in the shopping center/retail chain industry.
And in today’s market, that “take it or leave it” attitude has also disappeared from this industry.
To many, overages—where a lease is based on a low minimum rent tied to a retail sales figure, and the landlord shares in the upside of sales over that figure—had been a mainstay of this industry, primarily in malls; tenant and landlord, in essence, became “partners” and participated in the risk of opening stores in new and unproved shopping centers, or was used as an inducement to attract retailers to lagging projects.
Peter Morris, CEO of Greenstead Group, noted that this was a form of percentage rent which is “actually the cheapest form of rent.”…“Over the years, however, both sides of the table changed the concept to eliminate sales rent and build it into the base rent. That was great for the tenant in an expanding market as it fixed their costs. However, as sales have decreased tenants are seeking concessions in order to bring down their cost of occupancy.”
There are two main areas for sales rent to return on a wider basis, he continued. These are “tied to rent relief to accelerate the recapture of the deferred rent” and “as part of a creative rent structure to spur on leasing. Think of it as deferred rent at the onset of the lease.”
Good Source Of Profit
“Overage,” said Karen Scott, president at Centerworks Retail, “can be a good source of additional profit but the Landlord has to be very good at assisting tenants in making the break even points through effective marketing programs. Also, when marketing, don’t spend time on the underperformers which is what people tend to do; instead concentrate on the ones who look like they can make the break even and help push them over. So if you are going to do this (and basically partner with your tenants) hire an experienced marketing person….and require a minimum amount of participation in marketing programs-yes, for those of you [who] have been around awhile, this is beginning to sound familiar, right?”
Gail Nichols, vice chair and co-founder of The Now Mall, took off on the subject of marketing and pointed to national averages for mall sales tied to consumer purchases, and said that the impact of full multi-channel marketing using Rapid Online Order Fulfillment (ROOF) could “bring back lost sales and generate new traffic into the mall…not to mention happier customers.” She said the internet is “stealing away mall sales at the rate of 12% now, but growing rapidly to 35%-53% in 2014…”
A national retailer stressed that “just because sales have jumped in a specific store, does not mean that profits have matched that rise. More sales does not necessarily mean more profit. In the current economy, retailers have drastically discounted their merchandise to boost sales and move inventory. Though a reduced rent can be an inducement to make a deal, providing the landlord with a piece of this upside of store sales can eliminate much of the profit.”
Forensic Accountant
One leading consultant was not a strong advocate of this form of leasing. “A major concern for an owner-developer is to audit their tenant’s books to determine a true ‘overage.’ Most landlords would rather give away more concessions than play a forensic accountant.”
The whole issue, according to Jeff Davenport, principal of Davenport Consulting, gets into base points. “It depends on the level of overage rent a tenant will be paying. Are they paying 8% or 18% over a breakpoint? What is the breakpoint and how was it derived?…Yes, the low base rent/overage rent concept should help attract new tenants
because it shifts risk from the tenant to the landlord. Of course, this assumes reasonable overage rent and breakpoint terms are offered by the landlord.”
Another landlord stressed the importance of negotiating fair and reasonable terms.
Rohit Bakshi, CEO of CCPL Developers Pvt Ltd, “As a center head, in order to fill vacant space at non prime areas, even taking up brands on franchise mode is also lucrative. I strongly feel that any investor should look into the possibility of fixing a minimum guarantee amount and percentage share, this way the risk is being shared between the retailer and the investor.”
Spectacular Results
Chuck Devers, owner, SOM, LLC, said overage contracts “can be very useful tools in helping a prospective future tenant, or even an existing tenant to take responsible business risks to either up-grade, enlarge or otherwise improve the selling environment…”
He cited an example of one tenant who was at the crossroads, continue doing what he had been successful at, or “implement a new marketing concept that would require a total re-build [and] introduce a new product line in an enlarged store…We joined together as landlord and tenant and negotiated a new lease that controlled rent increase to a very modest level while increasing their selling space by 50%.”
The results, said Devers, were “spectacular for both of us…” Sales increased more than 50%, lease income increased over 50%, and the store’s profitability increased greatly in excess of 50%. “The concept worked so well, in fact, that the company determined to replicate the model on close to 800 of their existing retail clothing stores.”
Caution should be taken in the use of overage deals, cautioned Morris. The landlord’s come-on rent structure needs to be short term and carefully planned. The landlord “may get some more deals done… [but] as my father used to tell me it is false economy to make each sale at a loss but expect to make it up in volume.”
More information on SHOPPING CENTER DIGEST, Expanding Retailers, the weekly tipsheet, SCD Eflash, the Directory of Major Malls, and our other products may be obtained from our website, www.shoppingcenters.com .
Monday, April 19, 2010
Sunday, April 4, 2010
What Are Some Suggestions Proposed To Stimulate Dealmaking?
This the subject of the Strolling the Agora column in the April 5, 2010 issue of Shopping Center Digest.
Though leasing and development is far from “frozen while landlords await a spring thaw,” it definitely has slowed over the last few years, with the more aggressive and hungry operators working overtime to find new ways to stimulate dealmaking in this very deep recession. Thus far, most landlords and tenants are using old and reliable techniques that have done well for them in the past; as we discussed in the last issue, retailers are taking advantage of conditions within the shopping center industry to negotiate short-term leases at agreeable rental rates for pop-up stores, and are using the latest technology to measure data testing numerous new concepts and demographics.
Going forward, the main obstacle to complete that deal today—after preliminary negotiations have been undertaken—is still the rent required by the owner-developer. After talk of short-term leases, numerous concessions on such standard “perks and allowances” covering CAM, fees, fixturing, and clauses related to kickouts, co-tenancies and the like, some landlords finally admit that “free” does not cause nausea or an allergic reaction.
One Florida-based strip operator conceded a while back—not for publication then-- that he was offering free rent in extreme instances, depending on the center and the Mom and Pop operator. Another Midwest landlord admitted that free rents are being offered now for “several months” just to get a tenant into a troubled property to avoid an even steeper slide in property values.
One Mom and Pop in San Diego noted he was not considering opening a second store because of the cost and risk. Then Westfield offered him “a deal he couldn’t refuse” and he took units in three local shopping malls in the area.
At times, a major source of leads could be existing tenants. “They have close relationships with other retailers and their recommendation can be a foot in the door to start negotiations,” said one broker.
Referral Program
As an example, Janine Landolina, a leasing agent at Treasure Coast Commercial Real Estate, said “I’ve recommended Landlords create a Tenant Referral Program for their existing tenants, giving them something (month free rent) for any referral tenant that signs a lease. This is something new we are about to implement with several different Landlords of different property types. By the end of August 2010, we will [be] able to determine if this program is generating results.”
Philip Stewart of Stewart Realty has placed a sign at one of his centers offering three months free rent to entice retailers and/or office tenants on the top floor of his project; he added that some are downsizing from 10,000 sq. ft. to 5-6,000 sq. ft. to cut operating costs and get rid of excess space, or re-locating from A space to B space and take advantage of lower occupancy costs.
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy improves; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be prepared and the improvement done on an on-going basis as economy improves.”
And there’s Leighton Hunziker, president-asset & property management at Savills: “We’re doing deals here that effectively put the tenant on % of sales in the first year, and in the second year locks in a portion (85%) of that as the base rent with a Natural Break Point applied to the rent. Not ideal from a purely investment perspective but it’s a tenant with the lights on paying rent! It stimulates the Landlord to target marketing to grow sales, and the tenant is incentivised to work hard to generate sales.”
Peter D. Morris, CEO at Greenstead Group, noted that “tenants will continue to ‘trade up’. As the evolution continues those at the bottom will die out. To stimulate leasing, each property owner needs to refine [his] message…be a conduit for reaching a desirable market [and] a defined market. Therefore, it is important that each shopping center completely knows its market niche and builds a brand around that.
“Geography alone and filling a center with any warm body won’t cut it as we move well into a mature phase in the industry,” he said.
Understand What Retailers Need
“Retailers are looking for the best markets for their buck,” Morris pointed out. “Individual landlords can stimulate their leasing by understanding what each retailer really needs in a market and matching their efforts to the highest prospects.” He touched on multi-channel merchandising and “how the unique E-commerce landscape is going through the most radical shakeup of any retail strategy of all times…Government statistics are trending to 35% of all core retail sales to be online in 10 years.”
Gail Nichols of The Now Mall Corp said she’s negotiating with “several of the Top 100shopping center developers to implement our Rapid Online Order Fulfillment (ROOF) program to redirect lost online sales back to the stores and improve customer loyalty. In turn, this will retain and attract tenants, improve profits and market cap.”
Many retailers are closing lower-producing stores when leases expire, she continued, while they focus on growing online sales. Among these: “William-Sonoma@36.5%; Urban Outfitters@35.9%; Staples@31.7% ($7.7 billion)…As online sales continue to rise at the expense of in-store sales, their 20% to 30% return is also growing because consumers are not happy with the current 3 to 10 day shipping and the high shipping costs. And ship-to-store for pickup is no faster or less hassle.
“When shopping centers implement [ROOF with in-store shopping and delivery],” said Nichols, “these lost sales will return quickly. And they also gain new customers they never really had before…seniors; people with disabilities; busy families & offices.”
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy imporives; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be repared and the improvement done on an on-going basis as economy improves.”
In the Houston market, the luxury-oriented Highland Village took excess space and used it to improve the overall shopping experience. It created a Farmers Market for local farmers and producers to market fresh fruits and vegetables, and also an Adoption Center for a non-profit organization to operate a weekend aimal adoption center which has placed over 1,650 dogs and cats in private homes over the last three years.
The center also runs complimentary valet service, 24-hour security, live holiday music and a trolley transportation service that takes shoppers around to the stores and to their homes in neary neighborhoods.
Generating New Life
And there’s also the push by leading retailers to go offshore. Some point to Canada as a primary target: “It’s in a nearby market,” said one consultant, “that is not as foreign as Europe or Asia or the Mid-East, with the potential much greater.” He pointed to 14 sq. ft. of shopping center space per capita there, as compared with about 23 in the US, and consumers in Canada are already aware of US brands; “some are producing 2.5 times the sales per sq. ft. as their US stores.”
This is where J. Crew is scouting its first non-US locations, and the focus directed there by others as Gap, Limited, and its various divisions: Bath & Body Works, Victoria’s Secret, and its acquisition in 2007 of lingerie retailer La Senza...”giving it something to build on.”
Established names still have great marketability, even for a failed enterprise. Recent examples, of course are such once-proud operators as CompuUSA and Circuit City.
These brands were acquired last year by Systemax Inc, parent company of TigerDirect.com, and re-born as online retailers. Traditional brick and mortar stores were first tested cautiously in the US and Canada, and now there are plans to increase this presence—there are now 34 CompuUSA units; among markets being considered for new and expanding units are Houston, Chicago and Florida, and Canada.
“Recession hurts, but it also creates opportunities that would not have existed otherwise,” said CEO Richard Leeds.
As above, some of the suggestions as ways to stimulate more dealmaking may tie-in directly to the focus of those servicing specific areas of the shopping center/retail chain industry. For example, Michael Morelli of Tampa Bay Signs: “This is where I think by establishing a relationship to be able to offer the potential tenant their exterior signage at a discounted rate by working with one company can benefit the agent, leasee, and sign company.”
Dealmakers have always prided themselves on finding ways to get the lease signed. “That’s the art of negotiating,” said one seasoned veteran. “If both parties come to the table and sincerely want to make it happen, it will. All that’s required is giving a little here, getting a little there; both may not be completely happy with the final agreement, but that’s one way to gauge that it’s fair in the current market.”
More information on Shopping Center Digest, Expanding Retailers, the weekly SCD Eflash, and the Directory of Major Malls may be obtained from our website at www.shoppingcenters.com .
Though leasing and development is far from “frozen while landlords await a spring thaw,” it definitely has slowed over the last few years, with the more aggressive and hungry operators working overtime to find new ways to stimulate dealmaking in this very deep recession. Thus far, most landlords and tenants are using old and reliable techniques that have done well for them in the past; as we discussed in the last issue, retailers are taking advantage of conditions within the shopping center industry to negotiate short-term leases at agreeable rental rates for pop-up stores, and are using the latest technology to measure data testing numerous new concepts and demographics.
Going forward, the main obstacle to complete that deal today—after preliminary negotiations have been undertaken—is still the rent required by the owner-developer. After talk of short-term leases, numerous concessions on such standard “perks and allowances” covering CAM, fees, fixturing, and clauses related to kickouts, co-tenancies and the like, some landlords finally admit that “free” does not cause nausea or an allergic reaction.
One Florida-based strip operator conceded a while back—not for publication then-- that he was offering free rent in extreme instances, depending on the center and the Mom and Pop operator. Another Midwest landlord admitted that free rents are being offered now for “several months” just to get a tenant into a troubled property to avoid an even steeper slide in property values.
One Mom and Pop in San Diego noted he was not considering opening a second store because of the cost and risk. Then Westfield offered him “a deal he couldn’t refuse” and he took units in three local shopping malls in the area.
At times, a major source of leads could be existing tenants. “They have close relationships with other retailers and their recommendation can be a foot in the door to start negotiations,” said one broker.
Referral Program
As an example, Janine Landolina, a leasing agent at Treasure Coast Commercial Real Estate, said “I’ve recommended Landlords create a Tenant Referral Program for their existing tenants, giving them something (month free rent) for any referral tenant that signs a lease. This is something new we are about to implement with several different Landlords of different property types. By the end of August 2010, we will [be] able to determine if this program is generating results.”
Philip Stewart of Stewart Realty has placed a sign at one of his centers offering three months free rent to entice retailers and/or office tenants on the top floor of his project; he added that some are downsizing from 10,000 sq. ft. to 5-6,000 sq. ft. to cut operating costs and get rid of excess space, or re-locating from A space to B space and take advantage of lower occupancy costs.
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy improves; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be prepared and the improvement done on an on-going basis as economy improves.”
And there’s Leighton Hunziker, president-asset & property management at Savills: “We’re doing deals here that effectively put the tenant on % of sales in the first year, and in the second year locks in a portion (85%) of that as the base rent with a Natural Break Point applied to the rent. Not ideal from a purely investment perspective but it’s a tenant with the lights on paying rent! It stimulates the Landlord to target marketing to grow sales, and the tenant is incentivised to work hard to generate sales.”
Peter D. Morris, CEO at Greenstead Group, noted that “tenants will continue to ‘trade up’. As the evolution continues those at the bottom will die out. To stimulate leasing, each property owner needs to refine [his] message…be a conduit for reaching a desirable market [and] a defined market. Therefore, it is important that each shopping center completely knows its market niche and builds a brand around that.
“Geography alone and filling a center with any warm body won’t cut it as we move well into a mature phase in the industry,” he said.
Understand What Retailers Need
“Retailers are looking for the best markets for their buck,” Morris pointed out. “Individual landlords can stimulate their leasing by understanding what each retailer really needs in a market and matching their efforts to the highest prospects.” He touched on multi-channel merchandising and “how the unique E-commerce landscape is going through the most radical shakeup of any retail strategy of all times…Government statistics are trending to 35% of all core retail sales to be online in 10 years.”
Gail Nichols of The Now Mall Corp said she’s negotiating with “several of the Top 100shopping center developers to implement our Rapid Online Order Fulfillment (ROOF) program to redirect lost online sales back to the stores and improve customer loyalty. In turn, this will retain and attract tenants, improve profits and market cap.”
Many retailers are closing lower-producing stores when leases expire, she continued, while they focus on growing online sales. Among these: “William-Sonoma@36.5%; Urban Outfitters@35.9%; Staples@31.7% ($7.7 billion)…As online sales continue to rise at the expense of in-store sales, their 20% to 30% return is also growing because consumers are not happy with the current 3 to 10 day shipping and the high shipping costs. And ship-to-store for pickup is no faster or less hassle.
“When shopping centers implement [ROOF with in-store shopping and delivery],” said Nichols, “these lost sales will return quickly. And they also gain new customers they never really had before…seniors; people with disabilities; busy families & offices.”
Then there are the possibilities of introducing innovations in agreements, such as suggested by Deepak Vora of DVR Design. “How about exploring a lease with terms similar to a variable rate or a hybrid mortgage? The initial rent could be low and then adjusted upwards as the economy imporives; it could be tied toGDP or some reliable sales data benchmarks. To keep investment manageable a master plan for tenant improvements can be repared and the improvement done on an on-going basis as economy improves.”
In the Houston market, the luxury-oriented Highland Village took excess space and used it to improve the overall shopping experience. It created a Farmers Market for local farmers and producers to market fresh fruits and vegetables, and also an Adoption Center for a non-profit organization to operate a weekend aimal adoption center which has placed over 1,650 dogs and cats in private homes over the last three years.
The center also runs complimentary valet service, 24-hour security, live holiday music and a trolley transportation service that takes shoppers around to the stores and to their homes in neary neighborhoods.
Generating New Life
And there’s also the push by leading retailers to go offshore. Some point to Canada as a primary target: “It’s in a nearby market,” said one consultant, “that is not as foreign as Europe or Asia or the Mid-East, with the potential much greater.” He pointed to 14 sq. ft. of shopping center space per capita there, as compared with about 23 in the US, and consumers in Canada are already aware of US brands; “some are producing 2.5 times the sales per sq. ft. as their US stores.”
This is where J. Crew is scouting its first non-US locations, and the focus directed there by others as Gap, Limited, and its various divisions: Bath & Body Works, Victoria’s Secret, and its acquisition in 2007 of lingerie retailer La Senza...”giving it something to build on.”
Established names still have great marketability, even for a failed enterprise. Recent examples, of course are such once-proud operators as CompuUSA and Circuit City.
These brands were acquired last year by Systemax Inc, parent company of TigerDirect.com, and re-born as online retailers. Traditional brick and mortar stores were first tested cautiously in the US and Canada, and now there are plans to increase this presence—there are now 34 CompuUSA units; among markets being considered for new and expanding units are Houston, Chicago and Florida, and Canada.
“Recession hurts, but it also creates opportunities that would not have existed otherwise,” said CEO Richard Leeds.
As above, some of the suggestions as ways to stimulate more dealmaking may tie-in directly to the focus of those servicing specific areas of the shopping center/retail chain industry. For example, Michael Morelli of Tampa Bay Signs: “This is where I think by establishing a relationship to be able to offer the potential tenant their exterior signage at a discounted rate by working with one company can benefit the agent, leasee, and sign company.”
Dealmakers have always prided themselves on finding ways to get the lease signed. “That’s the art of negotiating,” said one seasoned veteran. “If both parties come to the table and sincerely want to make it happen, it will. All that’s required is giving a little here, getting a little there; both may not be completely happy with the final agreement, but that’s one way to gauge that it’s fair in the current market.”
More information on Shopping Center Digest, Expanding Retailers, the weekly SCD Eflash, and the Directory of Major Malls may be obtained from our website at www.shoppingcenters.com .
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