The Permitted Use Clause – Smothering Restrictions Or Room To Grow?

The Use clause of your lease has as much impact on your potential for success as the financial terms of the contract.  It has the ability to constrict your growth or let it soar.

Case study:  a young couple was in escrow to buy a popular independent coffee house in the North County area of San Diego, California, with barely nine months left on the lease.  They engaged my services to negotiate a fresh lease term.  They wanted to get favorable terms for a new five year lease but they also expressed consternation over restrictive permitted use language in the existing lease. 

To protect the exclusive use provisions of a national restaurant chain that was located in the shopping center, the existing  coffee house lease listed specified breakfast menu items that the coffee house could sell that were safely differentiated from the big chain’s menu items, and capped the use clause with the popular “and for no other purpose.”  This put the tenant on a mine field, risking a default if they ran afoul of these restricted uses.  It severely restricted the tenant from trying new menu items and ideas, the key to long term success for any restaurant. 

Our strategy: change the language in the coffee house lease to affirm the exclusive use provision of the major chain restaurant (this placated the landlord) and allow all breakfast items that were not protected in the other lease.   This strategically shifted the burden of proof from the coffee house to the chain restaurant.

The Garcia’s coffee house was named the best independent coffee house in San Diego by a popular local newspaper after just six months of remodeling the store…and the menu.

When it comes to the use clause of your lease, it is better to be in a position to ask for forgiveness than for permission.  

Aaron Weiner, CCIM, CPM, LEED AP
aaron@bailesre.com

Traffic Counts -- When More Is Not Necessarily Better

One of the most closely watched metrics in measuring the relative desirability of a business location is traffic count.  Having a real estate broker that can access this information in real time is highly valued by tenants who consider this critical information.

But consider this: One of the most heavily traveled roads in Southern California is Pacific Coast Highway.  For the affluent population residing near the Pacific Ocean, this road connects all of the communities up and down the coast.  Most of the highway is wide and carries a large volume of traffic efficiently.   But many of the retail shops that line the highway are struggling or empty.  This may have you scratching your head, but stay with me here…there is a very sensible explanation.  In some locations along the highway, convenient ingress and egress are sacrificed due to high volume, high speed traffic flow – people are zooming by and don’t slow down long enough to identify the businesses in the area.  The rent premium paid for high traffic at these locations is unfortunately wasted; worse, it becomes a burden that could put the business under.  What a shame.

There is more to traffic count than meets the eye.  It is more than just a number:  Is the subject traffic artery busy due to local commerce, or is it a favored route across town or to the freeway?  Is exposure of your brand (i.e. your sign) your goal, or is your objective fitting strategically into the fabric of shopping patterns for your target customer?  There is no universal right or wrong here.  But you need to define what is right or wrong for your business.

You and your real estate broker need to clearly understand your customer and their reasons and methods of patronizing your business.  Traffic count is indeed very valuable information, but only if interpreted correctly. 

Tenant Improvement Allowance -- It's Not Just How Big, It's How Long

So tell me, how does it feel when you negotiate $100,000 of landlord-funded tenant improvements in your lease, you use $75,000 to get the premises ready for your occupancy, and then find out there isn’t any allowance left a year later to replace the broken down air conditioning unit on the roof?  You just got the shaft, dear tenant…twice!

That is a common retail refrain, but it happens a lot in the worlds of industrial and office real estate as well.  Most leases – especially the commonly used “industry standard” ones such as those published by AIR Commercial Real Estate Association – are skewed heavily in the landlord’s favor.  Language in these leases often state that the landlord allowance is for construction and improvements to the premises that relate to the initial space plan and that are performed prior to the lease commencement date; in other words, “use it” for only this work and within this time frame “or lose it”.  Most tenants and many inexperienced or oblivious real estate brokers don’t give this much thought.  The tragedy is that most landlords don’t even pay close attention to this detail; that is, until the tenant surprises them down the road with a request for funding for subsequent improvements, and then they turn the tenant down flat.

I’m giving away a valuable trade secret here, so pay attention!  Delete the language that puts time restraints – direct or implied – on the use of tenant improvement dollars provided by the landlord.  It is amazing how infrequently I find landlords accepting this change to the lease.  The poor soul at the top of this blog could have been $25,000 to the better if his broker had done this for him!

 

What I can't tell you is the secret to getting the landlord to allow you to use your tenant improvement allowance for fixtures and telecom systems that are typically disallowed by the standard form leases.  For that one, you will have to pick me to represent you.

 

Aaron Weiner, CCIM, CPM, LEED AP

aaron.weiner@weinerproperty.com

 

Corporate Image: Inside vs. Outside -- Does Your Broker Get It...Or Even Care?

Did you sign a lease for a beautiful new building only to watch employee morale disintegrate after you moved?  What the heck just happened?

Your corporate image is reflected in many ways, including your branding and marketing materials, but perhaps in no way more dramatically than in your place of business.  Tenants, be they retail, office, or industrial in nature, choose buildings based on their outside appearance  or “curb appeal”.  While there is no discounting the way a building looks from the street, experienced and knowledgeable real estate brokers know that what you see isn’t always what you get.  Poor brokers and naïve tenants overlook the fact that there are two distinct audiences for their corporate image:  the outside world (their clients and the public at large) and, no less important, their employees. 

On the outside is the architecture, the building skin of granite or glass, the expansive lobby and the corporate identity (not necessarily theirs) on the top of the building.  But what is important to your valuable employees?  Think ease of parking, the speed of the elevators, the smell of the bathrooms, and the comfort of the suite.  What do you think it does to productivity to have your employees chronically complaining that they are too hot or too cold in their work area, or worse, going home feeling sick because they are hypersensitive to these temperature extremes?  Or when they take longer lunch breaks because the food amenities located in or nearby the building are lousy?

How else does a building impact your business operations?  Is that impressive grand lobby in your three story suburban building inflating your rentable square footage and costing you more relative to other alternative buildings?  Are you setting yourself up for surprise billings from the landlord because they are doing a poor job managing building operating expenses?  It might surprise you to learn that these are all things a good real estate broker can identify before you sign your lease.

Think about it: those companies rated as “the best places to work” in your local business journal never cite the exterior appearance of the building.  It’s all about happy employees.  And happy employees make for happy clients.

Aaron Weiner, CCIM, CPM, LEED AP
aaron.weiner@weinerproperty.com

The Myth of "No Free Rent"

Did you ever sign a lease only to feel your stomach turn when find out that you left two months of free rent on the table?

Tenants are understandably intimidated by improving market conditions.  Space is actually getting leased up again.  Rents are slowly climbing out of the doldrums of the recent deep recession.   In some  submarkets they are rocketing up.  Tenants succumb to pronouncements of landlord rep brokers that “the space won’t last long”, “the premises are being leased ‘as-is’”, and that “the landlord is not offering any rent concessions.”

Those pesky brokers – are they lying?  No – they are just doing their job; that is, to gain the best advantage of improving market conditions for their clients, the building owners.  They are professional salespeople.  And the best ones are great salespeople.  Most tenants are blinded to the fact that they need an advocate who understands the landlord’s position in the market and who isn’t cowed by the pronouncements of their brokers.  Consider: When two professional brokers get down to negotiating a lease, the sales-y rhetoric evaporates and is replaced with the language of the deal.

Let me tell you: in all but the most in-demand micro-markets and neighborhoods, rent concessions are still on the table.  It helps to have an agent who knows whether that building you really like is really as hot as the owner’s broker would like you to believe it is.  Quality tenants are highly valued.  There are flex points in the economics of the lease that will allow a good agent to tailor the deal to your specific needs.  Believe me. 

Aaron Weiner, CCIM, CPM, LEED AP
aaron.weiner@weinerproperty.com

RETAIL TRENDS: DEPARTMENT STORE CHANGES AFOOT

The high-profile, large-scale barometer of retail health, the department store, is in flux. Three
of the biggest retail tenants on the planet all made print in the Wall Street Journal on February 24. Sears is shrinking, almost to the point of a retreat from the national-scale department
store class. Bloomingdales, the tony NewYork-based icon is adopting grocerystore marketing tactics, and J.C. Penney is touting a grand future.

Big pronouncements are nothing new from department stores. Their size assures them notice
from national media such as the WSJ and their corporate suites make the most of that. But it remains fascinating to see how this outsized model is evolving – some say devolving – from the days they were considered the pinnacle of retail merchandising. Nobody would doubt department stores are struggling to maintain relevance.

Sears will be closing – and in many cases selling – 1,200 stores across the nation in a last-ditch effort to stop the hemorrhaging from a futile attempt to reposition the chain pursuant to their merger with Kmart. The fact is that a venerable merchandising brand has been allowed to deteriorate from pure physical neglect. They have short-changed their physical plant, allowing their stores to deteriorate. Simple property management common sense. The only real value left there is in their great product brands, including Craftsman tools and Kenmore appliances. Whether they can rebuild on those nuggets is anyone’s guess.

Bloomingdales is ditching their branded credit card loyalty strategy for a bar code fob used by the major grocery chains. This doesn’t, in this writers view, detract at all from their upscale values. In a word, smart. And Ron Johnson, the new CEO of J.C. Penney, formerly of Target Corp and Apple, has pronounced department stores the “number 1 opportunity in American retail.”

But just like in the business world in general, the real work in retail is done on a small scale, on the shop level. As always, this is where new ideas, new energy, and the vast majority of retail jobs come from. And this is where we will find reliable indicators of a reemerging economy.

Successful Lease Negotiations Address More Than Rent

This is a story about Frank. You would like Frank. A man with a passion and the courage to start a business based on his passion. Frank opened a small tennis shop in Los Angeles in a redeveloped shopping center I managed that promised to be the new commercial heart of his underserved submarket. The center was going to have big name, powerful anchor tenants and was sure to draw great traffic to his store, and Frank felt the high rent – a new high watermark for his submarket – was worth it.

Because of the developer’s skill in creating this exciting new shopping center, Frank was anxious to get on board and signed a lease that – typical of shop leases – called for rent to start the sooner of 60 days after possession or when he opened for business. Having saved his money to open this store, he jumped into action and had his store open before the 60 days was up. The catch was, his store was open before two of the anchor tenants were built-out and open, including the one two doors down from his shop.

Frank’s tennis shop was out of business in four months. What a shame; a tragedy, really for Frank.

New or changing shopping centers are a potential mine field for shop tenants in these slippery situations. After all, the rent structure for shop space reflects the value created by the potential of the center when it is fully up and running. Negotiate these terms up front so you don’t have to fight for them when your back is against the wall:

• Negotiate free, reduced, or percentage-only rent until specified (or all) anchor tenants are open for business.

• Negotiate reduced rents if one or more specified anchors go dark. While this may meet with resistance from the landlord, it is prudent to ask, since the presence of the specified anchor(s) in the center is to a significant extent what gave the center commercial value in the first place.

• Negotiate reduced rent for shop space vacancy thresholds exceeded in your section of the shopping center. How many food shop clusters in neighborhood centers have we seen with three or four “for lease” signs in the windows in the past couple of years?

• If you lease space in a center undergoing or planning capital upgrades or remodeling, ask the landlord to “put his money where his mouth is” and negotiate reversion to lower or free rent if the work doesn’t commence or isn’t completed by dates promised by the landlord when you negotiated your tenancy in the first place.

Don’t end up like Frank. You can acknowledge the value of your retail space by paying the market rent, but insist the landlord recognize when that value – and your ability to pay – is diminished by dark space in your property.