GLOBEST.COM: Reaping Rewards From Lease Renewals

By Carrie Rosenfeld | Orange County

As published on GlobeSt.com, May 27, 2015

IRVINE, CA—Lease renewals present owners with the opportunity to eliminate provisions that might have been restricting the leasing efforts or operations of their properties, Coreland Cos.’ VP of real estate management Cheryl Todd, CCIM, tells GlobeSt.com. We spoke with Todd exclusively about how retail owners can maximize the opportunities that renewals afford them and the importance of sales reporting in obtaining leverage during lease negotiations. Many of these concepts can be applied across all property sectors.

GlobeSt.com: What is your view of the market in terms of the landlord-tenant relationship?

Todd: Based on our portfolio, today’s market is a much more balanced environment than over the last 10 years. I would neither refer to it as a landlord’s or tenant’s market. Retail vacancy rates are sub-5% across the Greater Los Angeles region, but we are still very cautious of pending fallout from the mergers and closing of various retailers. Overall, the strength of the market and strong demand for quality space on the West Coast puts owners in an advantageous position to level the playing field when it comes time for lease-renewal negotiations.

GlobeSt.com: How can landlords create value through renewal negotiations?

Todd: Given how much the market has changed over the last decade, renewal negotiations today are extremely critical. This is the time when we want to take advantage of the opportunity to eliminate or renegotiate provisions in leases that might have been restricting leasing efforts or operations of the property. Eliminate exclusions and/or options, or add a sales-reporting requirement if it is not currently in place.

GlobeSt.com: Is sales reporting key to a landlord’s leverage?

Todd: Absolutely. This is something I can’t stress enough. An owner can accumulate a valuable amount of insight and leverage through monthly sales reporting. However, it is a challenge, first to negotiate this requirement and then to actually follow through. It is the primary responsibility of your management team to make sure that this information is collected. Sales reporting will allow an owner to foresee potential challenges. It will enable them to set strategies in motion that might prevent a tenant’s closing or limit the time on the market with a vacancy.

The manager’s active awareness of all tenants is just as important as reporting. Just as important as reporting is the manager’s active awareness of all tenants. Managers must keep a pulse of the center with frequent visits to the various establishments. Be active with tenants. Talk to store managers and employees. Make note of a tenant’s inventory levels. How many customers are in the store? All of this provides us with a thorough understanding of the health of each business.

GlobeSt.com: Do you think small businesses are healthy again?

Todd: In certain sectors, yes. It has been interesting to watch the demand to acquire established businesses intensify as market activity has done the same. We have seen a significant increase in lease assignments across our portfolio. The percentage has more than doubled over the past 18 months. It has become very common among service or restaurant tenants, primarily after a successful renewal negotiation because the tenant is primed to take advantage of the added value.

I always recommend that owners take the time to focus on lease-assignment language when negotiating a new lease or during the renewal process. Renegotiate to require review and final approval on any assignment. Negotiate the addition of reasonable fees to protect your interests, such as an additional security deposit or the collection of two to three months’ payment in advance from the assignee to provide additional security.

GlobeSt.com: In terms of renewals, how should owners deal with poor operators?

Todd: To see asset growth, it is sometimes necessary not to renew certain leases and instead target healthier retailers. This is why consistent evaluation of tenant health, as well as the shopping center’s tenant mix, is absolutely necessary.

Always be asking, “Where do we want to be with this tenant at the end of the term?” Maybe it is time to look to replace a struggling tenant with a stronger, more synergistic retailer. Maybe you have a good use, such as a dessert concept or coffee house, but a poor operator, so you look to replace it with a better brand. When we see a struggling retailer, we often turn to our brokerage team to start evaluating if there are stronger retailers in the market to potentially fill the space. This is the type of consistent evaluation needed in advance of a renewal negotiation.