Investment Analysis

Pop Goes Retail

Temporary stores need their own lease language.

A pop-up lease is more than just a new name for a traditional short-term lease. The power of new media, along with the effects of the Great Recession, has created fertile conditions for a new breed of short-term retail lease.

Standard short-term commercial leases are nothing new. Typically these leases run a year or less, going month to month after that initial period, allowing either party to end the agreement. Because of the short term, the parties usually negotiate simplified leasing arrangements and avoid serious financial commitments such as upfront expenses for new construction. They may even avoid any demising of the space at all. For example, in office buildings, short-term tenants may share open corridors, access, and reception areas; in industrial warehouses, short-term tenants may separate their spaces with only a chain link fence or rope, or even a mere paint stripe, and they may share dock doors.

Retail Pop-Ups

Pop-up leases adapt these concepts to the modern retail environment. A long-established type of pop-up shop is a seasonal business, such as a Halloween or Christmas store. But now all types of retailers seek novel advantages from the pop-up arrangement.

New retail marketing approaches have embraced the pop-up idea. A retailer with a new concept may want to briefly occupy a prominent space solely for the visibility and the buzz it creates, or to temporarily experiment in a test market. Online retailers increasingly seek a physical store presence to complement their websites. Established national retailers, no longer willing to cede the short-term lease market to small businesses, are increasingly exploring pop-up arrangements to exploit seasonal or other short-run market opportunities.

A new real estate concept may even be evolving, where a particular space is operated as a permanent pop-up site for a continually changing cast of new and attention-getting tenants. The viral marketing nature of Facebook and other new media fuels the success of these approaches.

Landlord Considerations

Landlords facing daunting vacancies have been unusually open to offering even prime retail locations to these short-term tenants. Normally, any landlord would prefer a solid, long-term tenant, but landlords can also receive benefits from pop-up leases.

With hopes of an improving leasing market in the future, a landlord can opt to fill up its vacant space now with a cash-flowing tenant without getting stuck long-term with currently low rental rates. Landlords can also exploit the attention a pop-up retailer creates, bringing shoppers and market visibility to a fading center. Pop-up retailers also provide dynamism and entertainment value to landlords of mixed-use projects who are seeking amenities for their office or residential tenants.

Even with these quick, simplified deals, landlords need to carefully structure pop-up leases to create sufficient flexibility so that the space remains marketable to attractive long-term prospects. In addition, landlords need to have enough standard legal protection to avoid liability and runaway costs.

A pop-up tenant may want a very short lease term, anywhere from six weeks to six months; some may desire month-to-month leases with the option to grow into a long-term tenancy. But a landlord needs flexible termination rights of its own so it can keep the space available for a solid long-term tenant. Also, because short-term tenants, for whom time may be critical, will probably be extremely sensitive to initial delivery deadlines, the lease agreement should clearly spell out these targets and any exceptions or penalties, so that neither party is blindsided.

Rent for a pop-up store may be as little as half of that for a traditional lease, and is typically arranged with a gross flat rate that includes common-area expenses and sometimes utilities. However, to avoid swallowing unexpected costs for pop-up utilities or special services such as security, landlords should strategically assess specific site conditions and structure the deal accordingly.

In terms of structuring rent payments, a very brief term of one to six weeks may call for prepayment or two lump-sum payments. Otherwise, it’s usually on a standard monthly (or prorated monthly) basis. Rents are usually a fixed amount, not linked to sales performance, as pop-ups are often more about visibility than sales. And the term is too short to justify the expense and hassle of reviewing and auditing sales records.

Similarly, the agreement should clearly limit the use rights of short-term tenants. With regard to sales, granting an exclusive use right to a pop-up would tie the landlord's hands for other prospective tenants; a loosely drafted permitted-use clause in the pop-up lease agreement risks conflict with the exclusive-use rights of existing tenants and risks upsetting existing tenants if the pop-up tenant engages in undesirable conduct. Remember that many pop-up tenants may desire publicity but likely feel little commitment to the quality operation and reputation of the overall project. Landlords should carefully assess the likelihood of violating existing leases, or even just injuring operations of (or relationships with) valued long-term tenants in evaluating the quality, reputation, and likely operating hours of a proposed pop-up tenant.

Finally, a pop-up lease shouldn’t surprise a landlord with pop-up liability. Legal protections in the insurance, indemnity, limited liability, and similar provisions should be just as solid as those in any long-term lease. Liability from a slip-and-fall or any other incident won’t be any less for a short-term deal.

“Pop-up” may be a trendy label, but landlords using an old-fashioned, careful approach to leasing will benefit from the new market dynamics and the opportunities that these deals present.

Steven P. Heller is a partner with Gilchrist & Rutter PC, based in Santa Monica, Calif. He focuses on commercial leasing, development, and sales/acquisitions. Contact him at sheller@gilchristrutter.com.

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