Investment Analysis
Lease to Sell
A leasing agent’s perspective can improve a retail property’s salability.
By Jamie Swanson |
When an
owner considers the sale of a retail property, the process begins not the day a
listing goes online but two or even three years beforehand. A smart owner will
assemble a team to develop and execute a plan to prepare and market the
property.
Exit
Strategy
In
addition to the owner, the leasing agent and property manager are critical to
achieve the owner’s goals for a property. An experienced leasing agent can
bring important information to the table, including local market vacancy rates,
competition, tenant prospects, and leasing trends.
Leasing
is an essential element of selling the property because potential buyers look
at more than just base rent and net operating income. Minimizing restrictive
and adverse lease provisions in new leases and eliminating them from existing
tenant leases should be a key component in the overall leasing strategy. The
leasing agent can improve results by weighing in on the following factors.
Determine
tenant mix
. Tenants set the tone for shopping centers, so consider if the
existing businesses support each other. For example, business or medical
offices may not be a good fit for a grocery-anchored shopping center. The
solution could be to relocate them to a better position for their use in the
center or replace them with tenants that improve the overall tenant mix.
Problem
tenants, such as poor operators, outdated concepts, or those with collection
issues, may need to be eased out of the property. That’s doable in a two- to
three-year period. Identifying and incorporating these spaces into the overall
leasing strategy can open up additional leasing opportunities that may not be
available with just the existing vacancies. Larger spaces can be created or
end-cap opportunities may be available, expanding the list of potential tenants
that can be targeted.
Attract
best-in-class tenants
. Reputation, creditworthiness, and the kinds of customers
the tenant attracts should all be considered, for both the larger national and
regional tenants as well as small-shop and local tenants. Understanding these
targeted tenants’ needs and lease structures is essential to determine how to
attract them to a center and away from your competition. Depending on the
landlord’s flexibility, lease terms can be more generous in terms of rent,
tenant improvements, signage, location in the center, and renewal and extension
options.
Integrate
leasing into the sales strategy
. Lease extensions for the best tenants add
tremendous value to a sale. When approaching tenants, a smart leasing agent
starts with questions: Is the space the right size? Is it in the right
location? What capital improvements are needed? Do they plan to update the
store? The answers will tell the owner whether to invest in an early lease
renewal as well as identify tenants that may have plans to leave or close,
allowing the leasing agent to actively pursue replacement tenants before the
existing leases expire.
Establish
realistic market rates and lease structures
. The leasing agent studies the
market to establish realistic market rates, but the toughest part is figuring
out how much to spend on build-out. Tenant improvement dollars will vary
greatly depending on the tenant. Regional or national tenants will have
specific needs, requiring either a “modified white box,” substantial TI
allowance, or a combination of the two.
An
experienced leasing agent will evaluate local tenants to determine their
viability and whether a landlord should invest in them. Alternatively,
incentives such as free rent, reduced rent, or lower initial base rates with
annual escalations that grow the rate back to the market rates over a few years
can help local retailers to succeed in the center. A leasing agent can attract new tenants or
negotiate lease extensions by offering TI money, but a smart agent will use
that carrot carefully because experienced buyers recognize when a landlord is
buying up the rate. The leasing agent can also help reduce the number of lease
red flags that a prospective buyer will discover during due diligence, such as
co-tenancy requirements, kick-out provisions, and exclusives or restricted
uses.
Determine
what improvements and deferred maintenance are needed
. The leasing agent’s
unique perspective can help inform decisions on investing dollars to reduce
vacancy and improve the tenant mix in a way that raises the market value of the
property. Such insights include:
- evaluating and advising if existing
vacant spaces should be returned to a whitebox condition, removing previous
tenant finishes;
- demising larger spaces or combining
smaller spaces to meet market needs;
- improving viability and access;
- determining if additional or improved
signage is needed;
- updating overall exterior appearance through
renovation; and
- improving landscaping and site
lighting.
Savvy
owners bring trusted and knowledgeable leasing agents into conversations when
the decision is made to sell the property. The ultimate goal of the leasing
agent is to produce the best return on investment, whether that comes from
re-doing the façade to attract better tenants or renegotiating a lease so that
a quality occupant is secured for a number of years. The leasing agent best
understands how terms, rates, and property improvements affect the sales price.
Jamie
Swanson is a director of Franklin Street, a full-service commercial real estate
firm in the Southeast. Contact him at Jamie.Swanson@FranklinSt.com.