Northcape

Property Services

What to do in a re-development….

Over the past few months a number of my retail clients have been impacted by shopping centre redevelopments. I realise that not all retailers are located in shopping centres, however a lot are, so in this article I thought I’d explore the dark art of shopping centre re-development, how to survive it and navigate through the process.

When a shopping centre is to be redeveloped, a landlord obviously believes there is an opportunity to add more space to rent, so the project is usually underpinned by securing one or more major or mini major tenants. To ensure the redevelopment stacks up financially, a landlord needs to add a significant amount of new specialty retailers who ordinarily pay much higher rents proportionally than major and mini major tenants.

In addition to adding retail space, a prudent landlord will often modernise the old part of the shopping centre (or at least they should do) which means a lot of demolition, construction and almost certainly business interruption.

Depending upon the scale of the redevelopment, it is not unusual for car parks, malls, entrances, common areas and large sections of retail shops to be impacted by construction. In most cases shoppers are also inconvenienced by the works, however this is very difficult to avoid, but that said a landlord is obliged to minimise disruption wherever possible.

Operating a retail business during heavy construction can be very challenging, especially if the number of customers frequenting your shop decreases significantly or worse, the landlord wishes to relocate you.

So what can a retailer do if they have a business in a shopping centre that is about to undergo a major redevelopment ?

  • Most Australian states and territories have specific retail lease legislation that offers some protection when it comes to re-development and relocation. If your centre is about to undergo a major re-development, I highly recommend that you review the retail lease legislation that applies to your particular state /territory.

 

  • The next most important task is to review your lease in detail to understand your obligations and rights as they pertain to redevelopment and re-location. I suggest that you have a competent solicitor also review your lease, just to ensure there are no inconsistencies with your lease and the relative legislation.

 

  • Before any major works are to take place in a shopping centre, a landlord will more than likely formally communicate details with all their tenants. It is imperative that any communications to your retail business are personally directed to you at all times to ensure that any issues involving relocation or redevelopment are brought to your attention immediately.

 

  • If there is a major redevelopment planned, it is usually a good thing and normally beneficial to everyone in the long term – a landlord intending to re-invest in their centre usually means there will be an improvement to the tenancy mix and common areas of the centre which should in theory attract more shoppers. To ensure that you are completely clear about the scope of the redevelopment and how it might affect you, I would arrange a one on one meeting with the landlord/agent to ensure you understand what is going on around you.

 

  • Ensure lines of communication are kept open at all times and that you have a harmonious relationship with your landlord/agent (if possible) – this is very important, particularly during the course of a redevelopment as there are often a lot of unexpected disruptions to business continuity such as intermittent loss of services (water, electricity, air-conditioning etc), as well as constructions noise, dust and vibration. The better your lines of communication with the landlord/agent, the quicker they can respond to these issues.

 

  • When you meet with your landlord/agent and you discover that your shop might be affected by construction or that they wish to relocate you, don’t be alarmed, hear what the landlord/agent has to say. They might actually offer a better location or attractive lease incentives, so I suggest that you do a lot of listening and not a lot of talking at the initial meeting and don’t commit to anything at this point.

 

  • Ask the landlord/agent to put everything in writing to you in the form of a proposal after the meeting to avoid any miscommunication. Once you receive the formal proposal, analyse the information and work out what it means to you in terms of both short and long impact. I recommend that you involve your accountant during this process, as they should assist you with financial modelling in terms of sales projections, cash flows, P&Ls, Balance Sheets etc.

 

  • If you believe that the landlord’s proposal is unfair or that you will be severely impacted by the project, ensure you review the relative retail lease legislation in your state, as most acts have safeguards in regard to these matters.

 

  • Do not be afraid to reject the landlord/agent’s proposal if you believe it is not in accordance with the law or detrimental to your business – if necessary I suggest that you engage a lease negotiator or solicitor to negotiate with your landlord/agent to improve your position.

 

  • If your landlord/agent advises you that there will not be any direct impact to you as they don’t plan to relocate you or your tenancy isn’t affected by construction this is good news, but be wary. It is important that you understand what the landlord is planning to do in the common areas, such as the malls, carparks, entrances, travelators, lifts etc. Very often construction to common areas will result in major declines in customer numbers which may impact your business significantly, so ensure that you understand what is happening and when.

 

  • Once construction starts, it is prudent to create a “Re-development Log” to record everything that is occurring in the centre that might impact your business. Issues such as dust, excessive noise, vibration together with any obstructions to traffic flow within the car park and mall areas, vertical transport etc.. anything at all that could be detrimental to your business – also I recommend that you take photographs wherever you believe it is necessary. The reason this is important, is that in most states/territories a landlord, must reimburse retailers for any loses that arise as a result of excessive business disruption, so the more objective evidence you have, the better your chances of obtaining fair compensation if the need arises.

 

For those of you in the midst of a redevelopment or about to go into one, I hope that the above has been useful to you.

Cheers,

Michael

 

 

“Negotiating – knowing what to give away, what not to give away and when”

In our last article we talked about how negotiating is a process that can’t be rushed. We also touched on the process, in terms of knowing what to give away, what not to give away and when.

In this article I’d like to explore the what and when of negotiating .

Before I embark on a new lease negotiation, one of the very first steps I take is to try to understand what my client’s key objectives are. I really try to hone in on what is important, what is a nice to have and what is not that important to them. Sometimes my clients don’t have this clearly identified and this is to be expected, after all it’s not every day that a retailer negotiates a new lease.

I often ask my clients to actually write down what is and isn’t important to them and to categorise these items in order of importance – I then work through the list and determine whether or not I am able to trade off some of the less important items for other objectives that are more important to my client. I find this approach very useful as it crystalises what the ideal outcome is for my client and they often feel far more comfortable knowing what the game plan is. I actually believe this is the most important step in the negotiation process, knowing what you won’t give away (non-negotiables) and what you can give away (negotiables).

After establishing this and the other key leasing parametres, I make an assessment of the landlord whom I will be negotiating with. Fortunately I know most of the large retail landlords and have a fairly good idea of what their key drivers are. For example, some large landlords are driven by valuation, so obtaining the highest possible rent psm/pa is very important to them, whereas giving large amounts of capital contribution is something that they will give ground on more easily (well…at least in the current market). Smaller landlords generally don’t don’t have access to large amounts of cheap capital, so their incentives are usually in the form of longer rent free periods, so I try to negotiate with these facts in mind.

I recommend that you undertake the same process of trying to identify what is important to your landlord and what isn’t so important – a good way of establishing this is to talk to your neighboring tenants whom might have recently negotiated a new lease. Without being specific, your fellow retailers might have some very useful background information that will help you build up a profile of what the landlord considers important to them. If you deal with an agent or leasing executive who acts for your landlord, they will often reveal how the landlord thinks, so it a good idea to make mental notes whenever you can.

When lease negotiations begin, you must be very clear on the issues that are important to you and what you are willing to give away – try to stick to your game plan, as deviating from it could be disappointing later on. I have seen many situations where retailers have given far too much away and too quickly only to regret their decision afterward.

As negotiations unfold there will naturally be a lot of back and forth communications, so this is where the “when” comes into play. As equally important as “what not to give away” and “what to give away” is when to give concessions away .

After negotiations have opened, I generally only give ground on the least important points early in the process and as we approach the pointy end of the deal, try to hold back on the more important trade offs for as long as possible and only release them if I have to. If I have been fortunate enough to achieve the objectives of my client, then I will not give any more ground at all. If however, I haven’t quite reached our goals, then I will drip feed the last “giveaways” in order to secure them.

It’s imperative to not release your “giveaways” too quickly as you will run out of trade offs and effectively have no room to maneuver.

Recently I was negotiating on behalf of a retailer – my client’s key objective was to significantly reduce their rent and when I mean significantly, I am talking many tens of thousands of dollars per annum. During the course of the negotiations I learned that the state of my client’s fit-out was a source of irritation for the landlord and something that they had wanted to be addressed for many years. Armed with this knowledge, my client and I created a list of cosmetic works that we were prepared to do and were not overly expensive. We prioritised each of these items in order of how important they were to the landlord and how costly they were to my client, starting from the least expensive to the most expensive

In this particular case we agreed to install new LED lighting, upgrade the main shopfront sign and do a repaint of the ceilings and walls, amongst some other minor maintenance issues. The landlord wanted a full upgrade including a new shopfront, ceiling, fixtures etc. however we were not prepared to do this, as the total cost would have been very expensive. As we had already prioritised what we could give in on, we drip fed these items during the course of the negotiations on the basis that the landlord agreed to reduce the rent to a level that we thought was acceptable. In the end we successfully negotiated a new lease, achieved a very large reduction in rent, with a trade off of doing some relatively minor works that actually benefitted my client, as their shop’s appearance was enhanced and contributed to a lift in sales.

One of the main reasons that we were successful, was that we knew what not to give on, what we were prepared to give on and when. I believe if you adopt these basic principles, they will assist you in your lease negotiations.

 

 

 

 

 

 

 

 

 

 

 

 

Negotiating a lease, a process you can’t rush…

Over the past 12 months or so I have been involved in several lease negotiations with retailers where an impasse had been reached with both parties seemingly unable to work through their differences.

In all but one of these cases the deadlock was eventually broken and a compromise reached with both retailer and the landlord being happy with the final outcome. The negotiations were long and tedious, however it couldn’t be helped given the high stakes nature of the areas being negotiated. (more…)

Outlook for the retail leasing market in 2015…

This time last year I wrote an article about the outlook for the retail leasing market in 2014, so I thought we should re-visit some of my predictions, before I give my views about what to expect in 2015.

In 2014 retail rents came back a little, but probably not a great deal, however significant lease incentives continued to be offered by larger landlords which I did predict would occur. During 2014 it wasn’t unusual for savvy retailers to secure capital incentives from large landlords when negotiating new leases, particularly where their shopping centre was undergoing re-development. Smaller landlords generally don’t have the access to cheap capital, so their incentives came in the form of rent free periods. (more…)

Retail lease legislation, your friend……

As a retail lease negotiator/advisor, I come across all manner of situations involving retailers who are encountering problems with their landlords. In many cases these problems are actually simple miss understandings on the part of the retailer who are actually not that familiar with the terms & conditions of their lease.

However there are some cases (and these situations are quite rare) where landlords are simply not abiding by the lease or relevant retail lease legislation. (more…)

Good landlord relationships, a must……!

I was recently speaking to a leasing executive friend of mine who is with a large retail property trust  – we were discussing various issues within the industry, in particular retailer relationships and people who do what I do, negotiate leases on behalf of retailers.

After some banter, the leasing executive became quite serious and said that he really didn’t like dealing with certain lease negotiators and some retailers. When I asked why that was the case, the leasing executive said they were just too difficult to work with and were often abrasive. At first I thought he was having a tacit jab at me, but thankfully he assured me that he was talking about a handful of individuals within the industry, not myself. (more…)

“It’s a tenant’s market”

Over the past few months I’ve dealt with a number of interesting matters that involved retailers who had worked themselves up into a lather about their impending lease expiry. In virtually all cases, the retailer was deeply concerned about their landlord potentially not offering them a new lease or asking for a massive increase in rent. Given the profitability of their business’ (and by extension their livelihood) could be seriously affected by the outcome of how the landlord was going to act, most of my clients were naturally very nervous about their situation, understandably so. (more…)

Lease Documentation – Getting it right…

Happy New Year !…. I believe 2014 is going to be a very interesting year indeed – it will bring some big challenges to the retail sector, but equally I think it will bring big opportunities too. In particular I recommend that you watch the bond and equities markets and perhaps even the property sector, particularly in the US and other parts of the developed world, as well as Australia. I think there’s a big correction coming, however we’ll see if I am right in due course.

This month I thought I would talk about lease documentation, yes I know a fairly dry subject, but one that is very important, I hope you find it interesting. (more…)

2013 A Year In Review….

I was recently having coffee with one of my clients who owns a womens fashion chain, we were talking about his expansion plans and the general state retail industry. Our conversations often go off topic and before long we are talking about all manner of issues ranging from geopolitics, government debt, monetary policy, unemployment and the list goes on.

The subject that we kept coming back to was, “what was going to happen to the economy, the retail sector and by extension, the retail leasing market”. (more…)

Selling Your Business – Dealing With The Landlord

Most retailers will at some stage wish to sell their business and enjoy the fruits of their labour. Sounds straight forward doesn’t it, simply talk to a business broker, place the business on the market, sell it and the rest is merely a formality. Well aside from the fact that the market is a little soft at present, the last part I refer to as “the rest”, is not a merely a formality. It is probably the most overlooked aspect of the sale process and often a cause of major frustration. (more…)

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