jtr school 2014 basics of leasing and specialty leasing

Amy Jo Hall, SLCS, SLD

Sr. Director, Local Leasing

GK Development, Inc.

Basics of Leasing &Specialty Leasing

Leasing & Specialty Leasing Objectives

After attending this course attendees will be able to:

• Understand terms and concepts of basic leasing and specialty leasing.

• Identify leasing opportunities for a shopping center based on goals and merchandising plans.

• Understand the leasing process, making the deal, follow through to completion, and temp to perm conversions.

LEASING FUNDAMENTALS

Terms & Provisions

Show Me the Money

Let’s talk…

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Rent

• Rent – is charge for the use of property and defined as consideration for the execution of a lease, is the most material covenant in a lease – meaning it is the only covenant whose breach allows termination in a straightforward manner, is a product of land cost/building cost/soft costs and return to the owner.

It is also a function of

SALES

Rent

• BMR: Base Minimum Rent – fixed amount of rent, paid by tenant, and is not based on sales. Is calculated by taking the desired annual amount divided by the square footage of the space. Does not include any other fees or assessments typically charged in a shopping center

• FMR: Fixed Minimum Rent – also known as base rent

Rent

• Market Rent –The rate at which retail space would be leased if offered in a current competitive market based on similar sales and performance; sometimes used interchangeably with budgeted rent or appraisal rent.  This is other than what is necessary to produce a desired return on investment or to cover development costs.

– The market will always set final rental rates by what it will bear. Developers must be competitive with market otherwise property performance may suffer.

Rent

• Percentage Rent: rental rate based on a percentage of sales

• Overage Rent: another form of percentage rent; based on exceeding a threshold of sales called a breakpoint. To calculate you divide the rental amount by the desired percentage rental rate.

• Artificial/Negotiated Breakpoint: a negotiated sales volume for the payment of percentage rent other than the traditional calculation above.

Natural breakpoint threshold formula

Divide base minimum rent by the percent rent factor

$24,000/6% = $400,000

Rent

• Gross Rent: All in number including base minimum rent, CAM (Common Area Maintenance), taxes, insurance, and marketing

• Total Rent: income received from tenants as rent for the leased space, including the minimum guaranteed yearly rent, straight percentage rent (where there is no guaranteed rent amount) and overage rent for the year.  Total rent should include amounts collected from all tenants, including specialty leasing, temporary tenants, kiosks and carts, if applicable.   

WHAT DOES IT TAKETO RUN THIS PLACE?

The Extras

• CAM: Charges shared among tenant for the property owner’s maintenance and operation of the common area.

• Net CAM: Based on the tenant’s pro-rata share

• Fixed CAM: Fixed amount with fixed annual increases (typically follows CPI (Consumer Price Index))

The Extras• Real Estate Taxes: Taxes imposed on the real estate by government for

services rendered, based on property valuation. Normally non-negotiable.

• Insurance: Property Insurance for common areas, not business or goods

• Marketing or Promotion Fund: common alternative to merchant’s association, established fee paid by tenant, has a tenant advisory board but landlords are totally responsible for fund, is used for the overall promotion of the property.

• Media Fund: specific for media placement – tv, radio, newspaper

• HVAC/Sprinkler

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Restrictive Clauses

• Use Clauses: provision found in both a lease and a license agreement, defines/restricts what merchandise, items (or services) a retailer or tenant is allowed to sell within the space.

• Exclusives: a lease stipulation that states only one store or certain type of store will be permitted in the center.

• Co-Tenancy: identifies minimum requirements for center occupancy (GLA), anchor occupancy or specifically named tenants to be present, defines remedies if co-tenancy is violated such a percent in lieu rent, termination, etc.

Restrictive Clauses

• Kick Outs: clause giving tenant or landlord the right, if certain conditions are not met by a certain time, to walk away from a lease prior to the natural expiration date of the lease, commonly associated with sales performance.

• Kiosks Restriction: restricted from being placed within a certain proximity of a store front, store entrance, being over a certain height (specific uses, total height and counter height)

WHO’S GOINGTO PAY FOR ALL THIS?

Tenant Allowance/Investment (TA/TI/TIA)

• Definition: Money advanced to the tenant by the landlord for the construction of the space.

• A point of negotiation• Can also be known as Construction Allowance• Determined based on cost to build out Premises• Cannot be used toward FF&E (furniture, furnishings and

equipment)

TA/TI/TIA Cont.

• Exhibit C: part of the lease which defines how Landlord will deliver the Premises (also referred to as the condition of the space or space condition – the shell is the unfinished tenant space that can come in many forms; grey shell, vanilla shell, warm dark shell, turn-key, etc. – the basic shell consists of little more than walls, a roof, basic plumbing and electric capacity)

TA/TI/TIA Cont.

• Method of Payment

– Cash vs. Free Rent

– Disbursement/Reimbursement

• What are the terms?

– Landlord work versus Tenant work

– Recapture from minimum rent

• Amortized over a period of time

• What happens if they leave or kick?

– Do they pay back the unamortized amount?

IDENTIFY THE GOAL

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WHAT IS THE OBJECTIVE?Occupancy vs. Income

Esplanade in Bangkok

• Inventory of Vacancies and Expirations– What’s available – not only in your center but the

competition– Who’s expiring – again, your tenants and competitor’s– Who is expanding within the market

• Condition of Spaces (also goes back to who will pay for what)– Raw (concrete, no wall, not sprinkled, not stubbed in)– Grey shell– Vanilla shell– 2nd generation

NOI Objectives• NOI: Net Operating Income – the income received by the property owner after

vacancy expenses, operating expenses, management fees, and non-reimbursable costs have been deducted from gross income

• Cover the Project Cost– Hard costs are the major upfront costs of creating or expanding a property

• Acquisition costs, Land costs, Construction costs• On and Off-site improvements

– Soft costs are the other costs incurred by the Developer (mainly a variety of fees)

• Real Estate taxes and insurance• Architectural and engineering• Legal fees• Leasing commissions• Marketing fees

• Generate ROI (Return on Investment) – a measure of annual return that shows what percentage of return the property owner is receiving on the project. Calculated by dividing the NOI by the project cost.

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Let’s Make a Deal The Owner’s Criteria

• What are the thresholds for deal approval?– Required deal points– Standard form LOI– Points of non-negotiation within the lease

• Rents to achieve pro forma and business plans:– A pro forma is a developer’s estimate of all costs of planning,

developing, building, and operating a shopping center; estimates of revenues and expenses allow the developer to compute anticipated net income and projected value

– A business plan serves as a road map to reaching desired goals– Projecting appropriate rents:

• By use• By space• History of other deals• Market comps – network and do your research!!! The retailers do!

The Real Value of a Deal

• IRR (Internal Rate of Return)

• CAP RATE – The factor that establishes the value of the income for financing purposes. Can vary from lender to lender. Calculated by dividing the NOI by the CAP percentage rate.

• Do you know them?

• Can you calculate them?

• Do you know how the deals you bring in truly increase the value of the center?

Occupancy Goals

• To what percentage is the center leased– Are there any co-tenancy clauses that are in, or close to

being, in effect• When is it right to fill space vs holding for long-term play

– Short term occupancy (temporary merchants)– Long term occupancy (permanent tenants)

DEVELOPING A MERCHANDISING PLAN

Why is it Important?• Merchant Voids

– What is missing? Evaluate areas that are under served

• Sales Analysis/Research

– Detailed monthly reports by merchandise category listing sales performance for each tenant – to include year-over-year comparison for current month and year to date

– Sales Capture Rates – the proportion of the total sales in a center that falls into a particular category – used to compare relative sales performances of merchandise categories or different areas within the shopping center.

– Demographics/Psychographics/Trade Area

• Merchandise/Price Points

– Synergy between merchants

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• Merchandise/Price Point

• What categories will drive sales in the center’s primary trade area (look at ethnicity, socioeconomic and psychographic info from market research)

• What will the market bear? Market value, the price an informed consumer will pay in the open market, is a factor in setting price points

• Underutilized Space

– Can you combine spaces

– Opportunity to look at new uses for the center

– Service/Medical/Municipal

• Problem Tenants

– Evaluate level of risk

• Kick Outs/Co-Tenancy

– Dept store vacancies affecting small shop GLA

– Can a longer term temp merchant help to meet occupancy thresholds?

IDENTIFY THE TENANT

You know where to put them, now how to find them…

• Know your market!• Where is the leakage from you

market going?– Knowing this provides you with a

pool of merchants who may have a built in customer base from your market.

• What type of center do you lease?– Are you the upsell or an opportunity

for merchant to have a larger piece of smaller pie?

– Are you looking in the right place? If not, it can be like going to the hardware store for a loaf of bread.

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Prospecting

• Canvassing – the process of identifying specific shopping centers or other venues to visit personally in search of prospective tenants or trendy product lines– Multiple days per week– Talk to everyone, but ultimately get to the owner– Know your competition – every business with in 5 – 10 miles– When do leases expire, how many locations and sales

volumes• Use of Brokers

– Can be beneficial to know what is going on in the market– They get paid to make deals

• Advertising• Cold Calling

Other forms of Lead Generation

Traditional• Other Malls• Strip Centers• Downtowns• Word of Mouth

– Referral Programs• Expand Existing Merchants• Signage in your own mall• Industry publications

Non-Traditional• Facebook• LinkedIn Groups• Craig’s List• Twitter• QR Codes• Ads in the Paper

Remember – the world is now flat! Technology and globalization expand your boundaries to all parts of the globe!

Chains vs. Independents

• Targeted prospecting• Shot-gun vs. Rifle Approach• Tenant Reps/Brokers

– When do you circumvent a broker and go direct to the merchant?

• Level of sophistication• Credit tenants

Qualifying the Tenant/Merchant• Long Term vs. Short Term

– Is this a filler Tenant to collect rent or someone you want long term?• Size, Location

– Do you have the type of space they need?• Suitability of Merchandise

– Does this fit the center?• Tenant Financials

– Profit/loss statement– 3 years of taxes (both personal and business)– Can they afford operations

• Tenant Improvement Allowance– Towards build out – not toward FFE (Furniture, Furnishings and Equipment)

• Sales Expectations– Sales to rent ratio: can they afford the rent and extras?– Will they bring down your sales/sf denominator?

Showing Space/Making the Proposal

• On Site Visit– Make sure the space is “show” ready– Get them there and get them excited– Have them envision where different components of the store

would be layed out– Pro’s and Con’s of space/deal

• Information Package Components– Your business card– Lease application– Drawing of the space– Property and market demographics

MAKING THE DEAL

Getting to “YES”

What are your “selling”

strengths?

Know you own negotiating and

closing style.

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Negotiating the Deal• Set Deal Parameters

– Ethics• Duty of Care – leasing rep’s responsibility to use information conscientiously when

dealing with tenants– Due Diligence – proper examination of necessary information, to satisfy accuracy

• Win/Win– What makes it or breaks it for the Landlord – why this is beneficial?– What makes it or breaks it for the Retailer – why this is beneficial?

• Deal Breakers– Identify EARLY– Hours/Length of Term/TA/Kick outs/Exclusives

• Deal Makers– Creative Rent Structures– Value-adds

Justifying Tenant Allowance

• Situations– Is the tenant qualified (credit tenant, guarantee on lease)– Do you need the tenant to remerchandise the center

• Future Plans– Paying for one store in order to sign others

• Can sometimes be linked to co-tenancy requirements

• Determining Limits– What is the IRR– Cash vs. free rent– Not including FFE– Can include permits, architectural fees– Payback of unamortized TA if the tenant kicks

The Lease Process

• Draft LOI (Letter of Intent): a non-binding document submitted PRIOR to the formal lease, delineates the intentions of both parties, all basic points of the deal are outlined

• Presentation of Deal– Lease Request Form– Lease Analysis– Tenant Financials– TA/TI clarification/IRR– Major Benefits of the Deal/Any deal-breakers

• Committee Approval• LOI Execution• Lease Draft• Lease Negotiation• Lease Execution/Turn Over

SPECIALTY LEASING

Specialty Leasing, What is it?

• ICSC Definition: The process of increasing shopping center NOI by licensing for a fee, usually one year or less, space within the center.

• Had it’s start in the US in the late 70’s in Boston – Faneuil Hall Marketplace

– Vendors have been renting stalls in Middle Eastern and European marketplaces for centuries.

– First enclosed regional mall to implement a program was in Austin, TX in 1938 – Highland Mall

• What is it now???

– Multi-billion dollar business

– Maturing portion of the industry

Terms & Concepts

• Retail Merchandising Units (RMU): state of the art update of the traditional push cart, can be square/rectangle/round or eliptical, may be moved on rolling casters, incorporate area for merchandise display/storage/high-intensity lighting and security features.

• Kiosk: largest of the common area merchandising units, contains an open interior to house cash register and staff, merchandise wraps around this center space– Can be temporary or permanent

• License Agreement: a short-term space rental contract between a licensor (property owner) and licensee (merhcant/retailer) that defines location, term, charges, and responsibilities of ea. party to the other, does NOT transfer any real estate rights or interest to the licensee, it is ordinarily revocable at will and non-transferable– This is NOT a lease– Licensees are not tenants

Terms & Concepts Cont.

• Rent Structures

– Base rent plus breakpoint (daily, weekend, weekly, monthly, quarterly, annual)

– Percent in lieu/Percent only

– Utilities (included or not)

Objectives

• Revenue– NOI– If you are not covering extras in your inline spaces then you are

merely off-setting expenses• Merchandise Voids

– Offer products or services not currently offered in line– Seasonal tenants

• Incubation of Retailers– If good, could possibly become a permanent tenant

• In-line Occupancy– Increase of percentage for co-tenancy purposes– Be cognizant of slippage

“Show me the Money”Short Term License Fee vs. Long Term Rent

• Licensee fees do not typically account for or delineate recoveries– If you are not exceeding your slippage on inline temp deals

then the deal is not “gravy” it is expense offset• Goes directly to bottom line – NOI• Rent is a function of sales

• Typically look for 15% of sales for temp retailers and 25 – 40% of sales for vending

• Evaluate the sales per square foot of the permanent retailers in the center when looking to set market rent for short term agreements

Administrative Tools

• License/Promo/Storage/Sponsorship Agreements• Applications• Approval Forms• Visual Merchandising Guidelines/Standards• Check In/Check Out Forms for Merchants• Demonstration Rules and Regs• Default Guidelines and Templates• Buy-out agreements• Termination letter templates• Canvassing Logs• Merchant Handbook

One Size Fits All – Not Hardly

• What type of center are you leasing – Be honest– Indoor/Enclosed vs. Outdoor– Top 10 DMA vs. Secondary Market– SWOT (Strengths, Weaknesses, Opportunities, Threats)

• Who is your target - both merchant and consumer– Socioeconomic demographic– Ethnicity– Trade area – where are you pulling from

• How is the temporary program impact long term tenant sales– Synergy vs. Cannibalization between the programs– Vibrancy or clutter– Line of sight issues

Create a Merchandising Plan

Who Goes Where:

• Key Traffic Patterns– Where is the fifty-yard line?– Where is the highest

amount of two way traffic?• Synergy with Permanent

Retailers– Do they want it?

• Demonstration uses must be carefully placed

Why:

• Specialty retailers are not destination retailers, they survive on the traffic generated in the center by national chains

• Like uses create healthy competition, although some specialty retailers may not find this an important factor.

• For the comfort of both the customer and the surrounding retailers

Ancillary Income

• Is traditional specialty leasing AND:– Storage– Events– Mall as Media– Sponsorship– Partnership Income

Mall As Media

The Future…

Did I mention

EXPERIENCE???And I am not talking

Years in the business…

The Message is the Experience

WHAT IS POP-UP RETAIL?

It is dynamic…and professional

It is generates a sense of urgency and exclusivity

Temp to Perm Conversion

When to Convert

What is it Really Costing You?

Slippage – Inline leasing

• What are your costs on the space?

• How are utilities allocated and billed back?

• If the deal does not cover the cost then it is no longer gravy to the bottom line, it may be expense offset.

Sales Volumes vs. OCC Needs

• What type of center is it?• Do you need the occupancy?

– Do you have national leases that are close to occ thresholds in which they will be able to leave or go to an alt rent?

• Evaluate their sales– Will their sales volumes enhance or diminish center sales?

• The actual lease process follows the same for all other permanent deal making.

Amy Jo Hall, SCLS, SLDSr. Director, Local Leasing

GK Development, Inc.257 E. Main Street

Ste. 100Barrington, IL 60010

amy@gkdevelopment.comwww.gkdevelopment.com