Leasing: The Location Factor
Wed 8 August 2007 - 3:15 pmLegal
Leasing a retail space is a daunting task and can present a minefield of options and crucial decisions that could make or break your business. Stephen Spring takes us through the first major step in the process to reveal location and leasing go hand in hand
The three Ls of real estate are well known—location, location, location. But in retail real estate, there’s a fourth: lease. If you’re about to open a retail business or renew a lease, location and lease are two things you should have uppermost in your mind.
Have you ever stopped to wonder why a location is great for one type of business, but bad for another? Perhaps you’re about to buy a poor performer to turn into a good one? How do you truly know what’s a good location and property deal for your future business?
The right location on the right lease is the single major determinant of profit and goodwill. A poor choice in both will haunt the business for years or send it broke. A highly visible shop on unaffordable rent is just as bad as a shop on cheap rent that can’t be seen.
But location issues are just the tip of the iceberg. What constitutes a fair lease? A well-thought-out business plan, rents, lease terms and location are so intertwined, it’s impossible to conclude a fair deal without considering all aspects.
And there are traps for the unwary. With most retailers leasing premises, it is vitally important documentation is correct but lease terms and lease law are complex. Property leases should balance the risks and interests of landlord and tenant and commercial terms must allow the business to make money and avoid a costly mistake.
In this first instalment of our two-part series, we explain about the importance of choosing the right locations and what retailers need to know when negotiating retail leases.
Few mistakes in business are as permanent or potentially damaging as the wrong location, the wrong property type, or the wrong lease. While true in all industries, it makes or breaks retailers.
Have you ever wondered why successful high profile businesses seem to be in the right spot, or on the right side of the street or in the right shopping centre? You almost expect to find certain food retailers in food courts, top brand names in top centres and the best services in the high street. In fact, whole suburbs are often defined more by their retail offer than virtually anything else. For retail to work successfully critical location and leasing is all about research and most of it is planned years in advance. This is because good locations are hard to come by and not always offered to independents or unproven businesses.
Many good retailers now turn to specialist retail property consultants to assist them with the inside running on good locations. Landlords are keen to secure well-known names that will pay the rent and keep their property well maintained. There’s a myth that the best location virtually guarantees success, but each location has its own peculiarities and idiosyncrasies. And one reason why consultants can greatly improve the chance of business success is because many new small businesses choose locations once every decade and know relatively little about the business they are entering into. On the other hand, property people do this work every day and often know what works, what doesn’t, how much rent to pay, what services and features are critical and what’s just an expensive and unnecessary luxury or a plain bad deal.
Look Before You Lease
If you decide to do it alone or employ help, look at as many properties as you can to compare facilities, conditions and rents. Little by little you will get a good overview of the true retail rental market and ignore the hype. Ask lots of questions and speak to as many agents as possible. After all, it’s potentially your life savings on the line.
As you look at the properties, take photos of what you see and ask lots of probing questions about the facilities you need. For example ask about loading docks, parking, lighting, security, shopfronts, grease traps etc.
For your own piece of mind, keep a detailed location and lease file of all conversations, notes, documents and correspondence when dealing with all property related issues. Ask for a blank or draft copy of the lease, but don’t sign anything. Leases can be complicated and hard to read and you need time to carefully read over the document and consider it later. Most people don’t understand leases. Ask any first year law student and they’ll tell you leases are powerful, complex and legally enforceable documents with profound economic impact, either a valuable asset or an expensive liability.
Unfamiliar lease language is used, but boiled down, all leases are based on the principle that a tenant has use of a specific piece of land or building for a fixed period of time in exchange for a fee commonly known as rent. The lease simply controls the rights and obligations of the landlord and tenant. Care taken prior to signing can be insurance for problems later on. Keep in mind, as you view properties, you will need to know common lease terms:
• Term in years and any options.
• The usage.
• Rent escalation mechanism.
• Any proposed rent based on turnover.
• Any demolition clauses.
• Hours of trade.
• Security deposits or bond.
• Lease commencement and finishing dates.
• Any incentives or inducements.
• Anything the agent knows about the property likely to affect your business that you should expect to know.
Think Like A Customer
In retail, it’s all about deciding your customers’ needs—targeting their profile, their lifestyles, their wants, travel habits and making it easier for them to see you, visit you and spend with you rather than the competition. Matching this customer information with your precise business needs, and translating all that into a good property decision is something many small businesses take years to work out, or don’t bother with. Surprisingly, many small businesses fail to complete even a simple customer analysis and rush to sign a lease just to get started. If you get it wrong, the business will struggle or fail. Get it right and the business stands a much better chance of success.
Take care with location decisions because changing business location is not like packing up and moving home. Caution is the watchword and the golden rule is ‘think like a customer’.
In the start-up phase, many businesses often get by without risky property overheads but eventually want to grow and enjoy exposure to customers in a shopfront, showroom or office environment, needing street or mall presence. They will have set minimums for population densities, proximity to roads and transport networks or specific retail precincts and other factors. They need visibility for branding, signage and walk-in trade potential. But where?
In retail there’s a lot of choice, from neighbourhood centres (supermarket and few specialty shops) and bulky goods centres (homemaker and big box shops) to regional or super regional malls with department stores, discount department stores, supermarkets, and hundreds of specialty shops sucking in customers from a wide trade area. Highly specialised malls are popular, such as festival markets, factory apparel outlets, furniture and hardware, auto-only or speedy drive through.
In the cities, most retailers have potential competitors to saturate the market, although a complementary cluster of shops adds to potential customers. We shop at fashion precincts because of a wide choice in one place targeted to a particular segment of the market. We visit a homemaker centre because of the many brands in one easy day out. So thinking like a customer means you would definitely visit one of those places, but the trap is that too many shops selling the same type of goods means retailers struggle. So be aware, because all too many centres offer above-average sales per square metre but the price of entry and survival is often very
In recent years, many rents in shopping centres have maxed out, to the extent many tenanted businesses are not viable. Beware of the hype. The lease conditions make it virtually impossible to make little more than an average wage working for very long hours or, worse, sustain substantial losses. Don’t allow yourself to become a statistic. That’s not the reason why you went into business.
Streetfront shops can also be competitive. In recent years, shopping centres have sucked the lifeblood out of many high streets. Streetfronts have less footfall and tighter council zoning restrictions, without mall style car parks, all weather protection or a critical mass of fellow retailers enticing large volumes of shoppers for high impulse sales. Streetfronts have dead zones and parking problems and often older-style shops attracting only local trade, making them suitable for only certain types of retailers. If your business is one of them, it’s likely to be a bakery, supermarket, fish and chip shop or the like. But here’s a tip: the rents are often much cheaper and can be a goldmine for the right shop in the right location.
Retailing in the CBD is something different altogether. The CBD is driven by employment dynamics and peak selling times such as around Christmas, movie launches, parades and lunchtimes. These are the times you will make the money because those are the days when people are out and about, but most of the time you will cater to tourists and the work crowd.
Whichever way you decide to go, it’s important to do your research. After location, it’s where the homework starts to pay dividends. In the next issue of Giftrap we’ll look at key considerations when signing an agreement and your obligations throughout the lease term.
* Stephen Spring is a consultant for Australian Retail Lease Management. He can be contacted on (02) 9968 4775 or visit www.retaillease.com.au
This is general advice only and should not be considered specific legal advice.
• Get to know your core target customer. Without this, you’ll fly blind from the outset. Don’t assume, keep the target customer firmly in your sights.
• Using a detailed regional map, determine your trade area and sketch on the boundaries. It’s impossible to draw customers in without knowing the area you currently serve or intend to serve.
• Work out your market structure. Every city and suburb has one. Include physical and psychological barriers, socio-economic characteristics, roadway patterns, commercial and industrial concentrations among other considerations.
• Analyse factual demographic data within your target trade area. Get hard evidence on population and pedestrian traffic data. Is it static or changing? Is there enough density of potential customers within the trade area?
• Understand visibility and exposure. Recognise what’s critical to your type of business. For example, is it proper signage or the drawcard of a well-known mall or business park?
• Ensure adequate accessibility. Poor access is rarely overcome by reputation or promotion, especially when competition is plentiful.
• If employment dynamics drive your business, check day parts very carefully. For example, many food retailers rely solely on breakfast and lunches, usually related to local employment.
• Identify and document all major and minor activity areas. Activity is people and people are potential customers. Detail all characteristics of areas and drawcards such as transportation, drive times, vehicle densities and entertainment hubs.
• Study local habits and patterns because people are habitual. Chat to local traders, it’s surprising how much they talk about an area.
• Evaluate competition properly. Most retailers think they are unique but the majority are not. In over-saturated markets, competition is so significant, ignoring it will eventually kill a business.
• Realistically estimate potential sales by day, by week, by month and, importantly, by seasons. Benchmark the business and if possible, get to the true heart of the financials to clarify sales, margins, classifications and expenses. If this is new to you, get help from a specialised analyst.