As the new owner of an existing shopping center, you might think you have an easy job ahead of you. The hard work of attracting anchor stores, negotiating leases and vendor contracts, and hiring center employees has already been done by the previous owner. All that’s left to do is replace some signage, switch over accounting systems and start collecting rent, right?
No one ever expects it to be that easy, but many are surprised at just how complex the transition can be. With new ownership—or even a new property management company—taking over operations, there area a myriad of details to consider ranging from dealing with current center employees and human resources arrangements to combing through piles of lease agreements and vendor contracts.
Of course, each transition has its own unique set of challenges, but following these six essential steps can help ensure a smooth transition to operating a profitable shopping center.
- Do your due diligence. Begin to lay the groundwork for a smooth transition before the purchase by fully investigating the property’s condition, interviewing existing tenants, and examining the financial statements of the shopping center. Carefully review any reciprocal easement agreements (REAs) that may be in place for use restrictions, no-build areas, parking ratios, operating covenants, and other restrictions. Analyze zoning regulations, and be sure to conduct a comprehensive market study including a competition analysis, demographic analysis, and marketplace needs analysis. Gathering as much information as possible at this stage will help you avoid future headaches and understand future development possibilities.
- Examine lease agreements. One of the first things you want to do is carefully review lease agreements. Unlike developing your own shopping center where you might have 50 leases that are, for the most part, identical, when you acquire a center, you have to accept leases that someone else negotiated as long as a decade ago. Two or three different owners or property managers might have negotiated leases over the years, each with different language and a different way of organizing the various sections. It’s a good idea to have leases professionally abstracted to summarize the key information needed to monitor, review and update them easily, including tenants’ names, lease terms, square footage, address, base rent, and percentage rent. Lease abstracts allow you to start entering crucial information into your accounting system so that you can determine accurate billings. Pay particular attention to commencement and termination dates, information which also helps determine the timing of rent increases, as well as co-tenancy clauses and sales kick-outs.
- Get the financial picture. The lease information should be added to the accounting system, along with any expenses, including administrative costs, that could/would be reimbursable by the tenants per the existing leases. Understanding the current full comparative income statement for the property in detail will assist in understanding future profitability and valuation of the property. Reviewing vendor contracts will help you figure out the expense side. Landscapers, janitorial services, security, maintenance, parking lot sweepers and plumbers—any kind of service that the shopping center outsources will have a vendor contract that spells out the specific terms of service and the costs. This information should be added to the accounting system, along with current payroll expenses, in order to assess the center’s current and future profitability.
- Transition employees. Unless the previous owner agreed to other arrangements, your purchase contract probably involved absorbing existing center employees, at least until the ideal long-term staffing levels can be determined. You will need to review paperwork to understand their current terms of employment including salaries and benefits packages. Among other human resources arrangements, be sure to interview each employee to ensure a good fit within your organization.
- Identify new income opportunities. There’s just no such thing as a turnkey shopping center t hat you simply purchase, change nothing, and profit. That means you should be looking for ways to increase income and reduce expenses throughout the transition process and beyond. Depending on the type of center, your plans might involve redevelopment or simply more effective leasing. You might also want to consider some of the more innovative ways centers are creating additional income these days: Vending machines for products such as Coke and Pepsi, for example, offer prime advertising space as well as a venue for sales, and sponsorship and branding opportunities like the Rolex Court in The Forum Shops at Caesars Palace have become a big source of income for many centers.
- Hire a property management company. Every owner prefers a different level of involvement with its properties, but most are seeking an investment opportunity, not a huge increase in their own daily responsibilities. That’s why the majority of shopping center owners hire a property management company early in the transition process. Look for a firm that specializes in the type of center you have purchased, understands the local market and its relation to national and regional markets, and has a track record of success consistent with your investment objectives. Beyond handling the day-to-day operations that will keep your mall humming, the property manager you hire should be able to assist in the transition by conducting due diligence, abstracting leases, onboarding employees, and strategizing merchandising and marketing approaches.
Hiring the right property management company is probably the single most important step you can take to ensure a smooth transition of ownership. A firm with comprehensive mall management capabilities—from repositioning and redevelopment to leasing and merchandising—will help your new property reach its fullest potential.