When leasing a new property, directors and teams have to be mindful to educate tenants on all components of the lease, including taxes, utilities, and common area maintenance. Will there be an escalation clause, and how is it structured? What is the length of the lease? Does a tenant have the sales volume to succeed in the space, and does their brand or service fit in with the overall tenant mix and merchandising plan? There are a lot of variables that factor in to determining and securing the right selection of goods and services at a property.
The PLACES team sat down with Madison Marquette’s Leasing Director for D.C.’s forthcoming Wharf project, Marisa Michnick, to discuss the right tenant mix, and what to consider when negotiating a lease.
What makes a good tenant mix? How do you go about selecting the right composition of tenants?
For an up and coming urban development, you want to find tenants who are new to market and experiential. There needs to be a discovery component to what they’re offering shoppers. Tenants that are providing fresh, innovative experiences in their store in terms of how they attract customers, is what keeps the customer coming back. We always look for brands that appeal to a wide range of demographics and psychographics, so that word of mouth can travel across generations and age ranges. Price point is an important factor, as we always look to find a middle ground between luxe and value.
We also want to make sure the tenants complement one another and have a similar ethos in their offerings, building on one another’s brand strength and core target audiences. It’s also vital to ensure that the retail mix is laid out in a way that brands and services are situated next to mutually beneficial and complementary retailers.
What are some challenges to look out for when leasing a property?
A major consideration when leasing a property is time and scheduling; especially since most leasing negotiations can result in a lengthy process. Often, soft goods retailers are the last to sign on to a project, so we always need to be mindful of how much time these deals take so that the lease gets completed and the tenant is successfully moved into the new space for the grand opening. Other challenges often involve collective buy-in. When you have a lot of stakeholders at the leasing table, there are a lot of opinions and avenues to consider. One of the most important things a leasing manager can prepare is due diligence on the retailer’s recent sales volumes and projections. Sometimes a retailer is resistant to divulging an accurate sense of their sales numbers, but it is imperative for leasing teams to be armed with this information in advance, so they can determine how the tenant could fit into the larger merchandising plan. A team may think one particular retailer is amazing, but if they don’t have enough volume to pay rent, neither the tenant, nor the landlord benefits.
From a scheduling perspective, all deals take time, but often, smaller retailers take longer than others because typically the same person who owns and runs the business is the same person leading the lease negotiation. The leasing team always needs to consider how to weave that into the design and construction schedule in order to meet the deadline for opening. If a tenant is late to come on board, you have to work harder and more efficiently to get the lease executed, and get the tenant into the space on time.
What are the components of a good tenant?
A good tenant wants to be at the project, they know the market and have a solid handle on their consumer. They’re telling their story effectively on social media and connecting efficiently with their customer. They also know how to tailor their merchandising and marketing programs toward the particular market they’re in.
What are some things to bear in mind when negotiating a new lease?
The first thing is to craft an LOI that is mutually agreeable and beneficial to both parties from a sales and merchandising standpoint. An owner is better equipped to collect rent by having a thorough understanding of a tenant’s financials—their existing sales volumes and projections for a store in that market. The tenant also needs to be educated about exactly what type of lease they’re signing up for, the economic package they’re agreeing to, whether it’s a single, double or triple net lease, are options included, and what type of concessions, including tenant improvement, are available. If they know a tenant can’t make set numbers, it’s not good for the center or the tenant, so the economic package has to be one that makes sense for all sides. A discussion around the percentage rent should occur early on in the LOI process, as well as developing a firm understanding on the types of space a tenant desires and the level of build-out required. Some questions to ask are what kind of finishes do they need, what is the improvement allowance, and what are their projections for the market.
Another factor of sensitivity is the radius clause. If you bring a new to market tenant to a site, you want to discuss and establish radius restrictions, and whether or not they have plans to open in other areas of the city. Ultimately, the ideal negotiation is one of two-way open communications, where both parties are up front about all the information and requirements in advance of signing.