When you lease or manage a shopping center it is tempting to take the first tenant that comes along to fill a long term vacant space in the property. Yes, I know we are always on the lookout for the best tenants that can enter our property, but waiting too long for the right tenant can detract from the performance of the asset and the landlord’s cash flow. The pressure is on, if you know what I mean!
The Landlord is looking for fast results and stable market rent. That is why they appoint us to manage and lease the property for them. So do you bend to the pressure of finding any new tenant, or do you hold out for the best fit for the tenant mix?
It is a fact that a vacant tenancy space drags down the visual appearance of the property and can destabilize the tenant mix. If you have a few vacancies near to each other in the same retail property at the same time, the impact is much greater. Whilst that is a pressured situation, you should still be very careful with the tenant choices you make in the property.
If you choose poorly experienced tenants or those that are not matched to the needs of the shopper or the tenant mix, you will be extending the problem issues and just changing them. After a few months you will be back where you started with another vacancy and a defaulting tenant. All of that costs time and money.
So let’s set some rules to help the situation of resolving a tenant selection process and putting them into a vacant space in a retail property.
- Who are the people in the business? When it comes to a small business, it pays to understand just who owns the business and who is the lead partner or decision maker. Someone will hold the ‘purse strings’ in the business.
- What do they know about retail business and their product or service? They should have some history of success elsewhere. If that is in a shopping center, see if you can talk to the property manager or landlord to get some feedback and facts about the business success and history.
- Where have they been operating from over the last few years and can they show you their audited cash flows? Their accountant will be the best person to provide that information. You can also ask to see the business plan that they are working to.
- Tenant mix placement will have a lot to do with their service or product. They will need to complement the other tenants around them. Look for similarities in tenant placement. The process of ‘clustering’ does work in retail leasing and management.
- Lease terms and conditions will be set by the landlord and negotiated with the tenant. You should have a base set of terms that are fixed (non-negotiable), and others that you can achieve a compromise on.
- If the tenant wants incentives in the leasing process it should only be done if the basic lease terms and conditions of the landlord are satisfied and that you are getting a solid set of tenant covenants in the lease. Nothing is actually agreed until the lease is signed; remember that!
- Guarantees should be provided to the landlord to offset any potential lease default should it occur. Personal guarantees are not worth anything, so seek a cash bond or a bank guarantee from your tenants. The value of the guarantee should be equivalent to at least 3 months rental.
So the message here is that every tenant should be vetted and checked before they are allowed to lease the vacant premises in your retail property. When you exercise care in the selection process the property will perform better over the long term for the landlord.