By: Cheryl Todd, Coreland Companies
As published in Western Real Estate Business, May 2015
With all of the things a shopping center owner can be concerned with – including vacancies, maintenance, emergency protocols, etc. – the last thing he or she wants to add to the list are lease assignments. They should be a top concern, however.
This is an era in which shopping center tenant synergy is a high priority. Today’s most viable shopping centers are either needs-based with complimentary tenants, or entertainment-driven shopping destinations. They are centers that attract niche audiences looking for specialty retail, ethnic influences or dining diversity.
As activity continues to intensify for retail properties, so has the demand to acquire established businesses. A significant increase in lease assignments has been quietly making its impact on the Southern California landscape of neighborhood shopping centers.
Throughout Coreland’s management portfolio of 7 million square feet across the Greater Los Angeles region, lease assignments more than doubled over the past 18 months. Five percent of tenants within the portfolio assigned leases, as compared to 1.5 percent in 2012 and 2013.
“I believe that so many of these independent retailers, mainly mom-and-pop service providers, weathered the recession and are exhausted,” shared Coreland’s Regional Real Estate Manager Dinny Shryock. “I think they are jumping at good opportunities to sell their businesses.”
Among the tenants selling their businesses, 60% are service providers and 25% are restaurants. Not surprisingly, services and restaurants are also the two categories that have proven to be the strongest areas of growth for new leasing activity within the same period. According to Coreland leasing statistics, these two categories have accounted for more than 50% of leasing activity over the past two years.
It’s no coincidence that many of these “announcements” are being made after a lease renewal has been successfully negotiated. The tenant is primed to take advantage of the added value. The landlord is presented with a new, unknown entity that can either disrupt synergy and present new challenges, or enhance the asset if well-vetted.
“We have been surprised lately by the number of tenants who have assigned leases,” shared Asset Manager Carolyn Leslie of Watt Companies. “From the landlord’s perspective, underwriting a new owner/operator is always a risk. However, new blood can, and has, translated into higher sales with a refocused and recapitalized tenant. ”
As a landlord’s representative, it is our responsibility to ensure that the best interest of the landlord and center is protected. Even before a tenant informs the manager that the business is being sold, our focus is to identify ways the landlord can maintain the upper edge.
Plan for the Future
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 from the landlord on any assignment. Ensure that a complete financial submittal package and business plan is presented to properly vet new ownership. If landlord approval cannot be negotiated, consider adding or increasing an assignment fee that would cover the cost of legal review.
Protect Your Interests
Negotiate the addition of reasonable fees to protect your interests. Consider adding an additional security deposit or the collection of 2-3 months payment in advance from the new lessee to provide additional security.
Take advantage of the opportunity to eliminate or renegotiate any provisions in the lease that might be restricting your 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.
When negotiating a new lease with a ‘mom-and-pop’ regional restaurant, include a clause that replacement tenants must be experienced operators with strong financials. Add terms that require replacement tenants to have 1-2 other operating locations. The replacement tenant must be equal to, or a better operator than the existing tenant.
Limit the Opportunity
Adding a clause to prohibit the tenant from assigning a lease within the first 3-5 years limits the tenant’s opportunity to kick-start a business and walk away. You want tenants who are willing to invest in the shopping center as much as you, the landlord, are willing to invest in them.
Ultimately if the assigned tenant breaches the contract the assigning tenant continues to remain liable to the landlord on the lease in most cases. However, the main motivation behind making these valuable lease modifications is to protect the synergy of your center and retain the customer base.