What tenants can do to find suitable space in a variety of markets from lease strategies to letters of intent.
It’s no secret that the lack of new construction in recent years has made it harder for tenants to find suitable space in many markets. Rental rates have increased and landlords have gained the upper hand in some areas.
So what can a tenant do?
Greg Stanislawski, vice president at The Retail Strategy, says his firm always presents tenants in the best light possible to prospective landlords. Make an effort to educate the landlord about the tenant’s product or service and get them excited about the brand, he advises.
Also, do your homework. If the desired locations aren’t for lease, then make calls to find tenants who might want to be bought out of their leases.
“In a tight market, the good sites are those that you uncover though old-fashioned research, communication and networking the landlord or developer networks,” says Stanislawski. “You are able to uncover some great opportunities and that is where we have seen the most success.”
It’s also important to look beyond the numbers to markets where data doesn’t paint the whole picture. Some border towns in Texas with modest income levels have a daily influx of travelers who want to shop and eat. It’s similar for some sites near the outlet malls in North Georgia.
Dot Your I’s and Cross your T’s
When it comes time to do the deal, putting the right information in the letter of intent (LOI) makes the process unfold more quickly and smoothly.
First, make sure the tenant is correctly identified — or simply listed as “to be determined,” explains Jonathan Neville, a partner at Arnall Golden Gregory LLP, who focuses his practice on commercial real estate development and franchising.
“It’s almost better to have it bracketed ‘to be determined’ rather than to have to change it,” Neville says.
If the tenant is asking for an SNDA (subordination, non-disturbance and attornment agreement) clause, that needs to be in the LOI. But don’t bother putting a deadline for the LOI to expire.
It’s the most useless clause that could possibly exist, Neville insists. “If people are not negotiating well and getting along in the sandbox, the deal is not going to happen. Some artificial date in a letter of intent won’t do anything.”
Lease Strategies for Tenants
Neville also notices two important lease trends for retail tenants.
Tenants today may have a better chance of getting their landlord to agree to a SNDA clause in the lease. The clause gives you the right to have an SNDA, which is a separate legal document, explains Neville.
“Landlords and lenders are getting more cooperative — I think certainly for our smaller users who used to get laughed out of the room when they asked for an SNDA and are now getting it,” he says.
But fewer landlords today are agreeing to co-tenancy clauses, because they have burned too many landlords in the past.
“I think co-tenancy is becoming a dinosaur,” Neville says. “Everything is a give and a take. More and more landlords are giving SNDAs, but I think one of the things that has come off the table is co-tenancy.”
Tenants should identify potential risks in any deal and use their leases to protect themselves against an uncertain future.
“When you’re putting a deal together and you’re excited about the business terms, you need to think about what might happen if it goes wrong,” Neville says. “Have a lawyer or someone else on your team help you deal with those risks.”
Experts agree: a back-up plan is crucial.
“Having a back-up option is key when you are negotiating for locations because you never know what could go wrong,” Stanislawski says. “You don’t want a landlord to feel like they can corner you and bully you into things that you normally wouldn’t agree to.”
Sales Tax, Anyone?
For years, brick-and-mortar retailers have been evolving to compete with online retailers who often don’t charge sales tax. From mobile apps and real-time coupons to free shipping for out-of-stock items, stores are always striving to maintain market share against the virtual marketplace.
There finally could be some relief ahead thanks to proposed federal legislation, according to another guest on this week’s show.
Sales tax fairness legislation would require online sellers to collect sales tax in states where they have no store presence, said Laurel David, an attorney at The Galloway Law Group LLC.
“The bills are really aimed at leveling the playing field,” David says. “If I walk into a store on Main Street and I have to pay sales tax, why shouldn’t I have to pay that same sales tax if I buy something online?”
Meanwhile, 24 states — including Georgia — have already voluntarily agreed to streamline taxes.
And, some online giants such Amazon have started collecting taxes in certain states. Amazon, which now charges sales tax in eight states, will start collecting it in New Jersey and Virginia next year, and in Indiana, Nevada and Tennessee in 2014.
— Michael Bull is the host of America’s Commercial Real Estate Show, which addresses a variety of topics every week that confront the real estate industry. The entire episode on retail tenant strategies is available for download at www.CREshow.com.