Small Business Center
By Abby Davids, Pedal Retail Advisors
As a landlord, leasing to local businesses has always been a bit of a catch-22. Having the coolest, new retail business on the ground floor can help your building stand out from the pack, but it’s no secret that leasing to an established, national brand is a whole lot easier. Customers want to see and support local, and this is especially true post-pandemic, as many of us have watched our favorites suffer and even close. As brokers, we know firsthand that the number of established retailers seeking space has shrunk, so whether you want to or not, you’re probably going to have to consider local businesses for your retail space.
So how do you attract local retailers with staying power? Here are six tips to help your start-up retail tenants be successful in your building or project and thrive for the full terms of their leases.
Many big, established retailers have in-house real estate departments, and you are on equal footing with them throughout negotiations. Not so with first-timers. There are a million aspects of the process that we commercial real estate insiders take for granted that are unfamiliar to the rest of the world. The mere fact that we quote rents in dollars per square foot per year takes getting used to. The concept of a 10-year lease — longer than most relationships — is foreign and often daunting. But that’s OK. Just because a tenant is unfamiliar with the basics of commercial real estate doesn’t mean they’re dumb, and it doesn’t mean they won’t be a great retailer. As long as the retailer is surrounded by a team of experts to lend support where it needs it, it should get through the process just fine. You need your wine shop owner to be an expert on tannins, not TIs.
Start-up retailers are risky and leases control risk, so better to have a very thorough, airtight lease to protect your downside, right? That sounds great, but in reality, letters of intent and leases that are overly complex are the surest way to lose a retailer before you get to lease signing. Remember, in most cases, this tenant hasn’t negotiated an LOI or a lease before and even the most basic principles are going to be new to it. If you get too fancy with the lease, your would-be new tenant is likely to burn through its construction budget on legal fees and end up with a lease it doesn’t like or understand. Instead, prioritize making the basic deal terms and responsibilities crystal clear, and in the event something goes wrong during the term of the lease, focus on how both parties can exit the lease as painlessly as possible.
Yeah, you could go after your tenant for their personal guaranty and, after a lengthy legal battle, end up with their house, boat and baseball card collection, but wouldn’t you rather get your space back and re-leased to a rent-paying tenant as quickly as possible? Unless you already have an Ebay side-hustle, what are you gonna do with all those baseball cards?
Start-ups are likely to need capital for their buildouts, not exactly a recipe for a generous tenant-improvement allowance. Instead, focus spending on improvements that are likely to be more universally useful to future tenants. If you specifically want a local tenant or if you think a space is more likely to lease to local for whatever reason, you could white-box the space in advance. Big-ticket items like distribution of HVAC, electrical and plumbing can make a big difference. If a tenant can come in and add light fixtures, wall paint and coverings, flooring and bathroom finishes, the space will still feel customized to its concept without stretching its budget to cover all the basics.
Even better, you can work with the tenant and its contractor to deliver these improvements as Landlord’s Work so you’ve customized to its specifications but are still able to closely control your spending. This is especially helpful for foodservice tenants that will have very specific plumbing and electrical requirements.
Your start-up will — read: “must” — have a business plan with projections. But despite its best efforts, once it opens its doors, its sales are not going to behave like those projections. They just won’t. When their initial rent is too high relative to their sales, retailers easily can find themselves in a hole that they simply can’t climb out of. In addition to Landlord’s Work, one of the most valuable concessions for start-up tenants is some ramp-up time for their rent. Whether you can offer full or partial abatement, percentage rent only or a few set increases over the first few years to take your tenant from a lower base rent to market, any flexibility on the rent in the critical first two years will be invaluable. And it will go a long way toward making the tenant feel like you’re in its corner.
The unpredictability of common area maintenance is really tough for new retailers, which often are operating on thin margins as they get their businesses started. Capping CAM increases or even setting a fixed CAM can mitigate that uncertainty for new retailers. Of course, you need to cover all your expenses, so just make sure the CAM you estimate in the lease is high enough and pick increases you’re comfortable with. This gives the retailer the ability to plan accordingly and potentially even bow out of the deal if it realizes it simply can’t afford the total monthly rent. Much better to lose the deal before it’s signed than have your tenant realize the first time CAM increases that it can’t afford the rent with CAM.
Following the first five steps to attract local retailers and then not promoting them is like a fumble at the 1-yard line. You likely have a broader audience than this new retailer when it launches. Even if you don’t have a robust marketing program for that building, you probably have other tenants that get your newsletter, even tenants in other buildings.
Another way to support these retailers in a meaningful way is to buy gift cards in small denominations directly from them to distribute among your network. This not only puts cash in the retailer's till but also helps spread the word and bring traffic to the exciting new concept. If you already have a dedicated marketing budget for the building, it can be as simple as prioritizing these new retailers for the promotions you were already planning to run.
Leasing space to local retailers is harder than leasing to established tenants, and you deserve credit for that! Promoting your new retail businesses is a win-win. We all like the idea of a diverse retail offering where there is always something new to discover, but it wouldn’t be possible without landlords that are willing to adjust their own operations to better meet the needs of inherently riskier new businesses.
By leasing to locals, you’re helping build the world your community wants to see, and we firmly believe it can be done while still managing your risk and maximizing your return!
This article originally appeared at www.pedalretail.com.