Some lease terms are peculiar to retail property. They have to be because retail property performs in a different way to office and industrial property; retail property is geared closely to economic cycles and regional demographics.
Most investors in commercial and industrial property desire the security of a long term lease, whereas investors in the retail property market often prefer short leases with no option of renewal; they can then select and gain better tenants if and when possible at the expiry of leases. In this way they get greater control over the property future given the changes to and needs of the shopping community that visits the property.
In retail property the performance equation is:
- Know the shopper and what they want, and then find it for your tenancy mix.
- Know the tenant and what they offer, and then match it to the shopping customer.
- Integrate the property into the community with direct and relevant marketing
- Know the landlord and what they need in property performance, lease stability, and cash flow.
Build a business plan for the property around all and each of these issues.
It is interesting to note that many owner managed properties at the smaller end of property size, say sub 3,000 m2, are on average poorly managed and typically struggle to compete. This is largely due to the landlord manager making decisions without due regard to the other stakeholders to the property performance equation.
You can usually see an owner managed property that is poorly performing by just standing in the car park. The low level experience starts in the car park and follows you into the property. Tenant mix in such property is solely based on the rent that the landlord wants and little else.
A great retail shopping centre is built on the skills of highly experienced leasing and property managers that know what to do and how to do it. These managers are not usually standard real estate agents. If in doubt seek evidence and proof of their skill in retail shopping centre management. Look at what they have done and talk to their other property owners to get that evidence.
Most retail leases assume that tenants will be responsible for all statutory outgoings. These include municipal rates, water rates. In addition, tenants are usually responsible for the standard operating costs of shopping centres which include public lighting, cleaning, heating and air-conditioning. All these costs are in addition to the rent paid by the tenant. There is however now a trend towards gross rentals without the need for outgoings reconciliation each year by the landlord.
Retail shop leasing legislation in many locations imposes strict outgoings reconciliation obligations on the landlord when net rentals and outgoings recoveries are part of the lease structure. These can be avoided if gross rentals are adopted. You should however take the time to fully understand the impact of shop leasing legislation in any retail property over which you have an involvement.
The rental terms for retail property are markedly different to those that apply in the commercial and industrial sectors. In retail property you can also have turnover type rental which is calculated from the levels of sales achieved by the tenant each month in arrears. When turnover rentals are used in retail property, it is important that the turnover percentage used in the rental calculation correctly correlates to the type of tenancy and the averages of occupancy costs and profit relative to that business type.
For example food type tenants have a higher profit margin and can typically pay a higher turnover rental of 10 and up to 18 per cent of turnover. You could not achieve this level of turnover rental with a fashion tenant or newsagent tenant. The rule is that turnover rental should reflect and respect the type of business given their operating costs and profit margin.
Rents paid by large anchor tenants who have bargaining power differ markedly from those paid by small specialty shops in the same shopping centre. The rent of large anchor tenants such as may be 25% to 33% lower than that being paid by small specialty traders in the same building. In exchange for that rent concession you should expect a long term lease from the anchor tenant.