Where are we heading, what do we need to avoid and how do we structure tenant incentives to ensure the best result for our retail developments?
There are very few landlords over the last 10 years that can say unequivocally that they have not been burnt by the odd retail tenant having gone bust. The story is always the same – tenant goes bad leaving a bank guarantee in place, a relatively new fitout that the current landlord mostly funded through a cash contribution to fitout and no incoming tenant wants. We often find that a lack of understanding about how a retail business functions, it’s performance expectations, the cost of a fitout and the track record of the retailer are often over looked in preference to chasing largely unsustainable rents and getting the deal done quickly. Most importantly no real assessment or value judgement on the retailers set-up and fitout costs in relation to the amount of fitout contribution given and little or no project governence through the fitout period to ensure the concept originally developed is delivered in terms of quality of workmanship and materials.
Where are we heading?
With many quality retail developments on offer and only a limited number of top quality operators, it has been and will continue to be in the foreseeable future, a operators opportunistic market place. How do we insure against bad risk without putting such onerous conditions into the deal that it never comes to fruition? Or that only an inexperienced retailer would accept? Some points to consider below.
• Set realistic income projections and understand what turnover is possible in that location.
• Comparable rents mean very little – conservative valuation approach to bench marking historical data is irrelevant in today’s market.
• Projects are often not ‘fit for purpose’. For F & B ensure that a services audit aligns with the concepts developed. This is a critical success factor in the development phase and something we provide on every project.
• What a retailer might be paying currently across the Road, 5 years into a lease with fixed 4% increases is not necessarily what they will pay today.
• Exit clauses and get out jail cards have no place in a lease – it just means your backing the wrong horse!
• Never give away more than 50% of the retailers fit out cost in total incentive. Even to your ‘anchor’ drawcard. Any more than this and you have an unequal partnership. And this leads to divorce!
• Through the Fit out process tenants will require a draw down on their fit out contribution. Ensure they are meeting you halfway and that you leave 10% of the total contribution aside till defects are rectified after completion of the fit out.
“To attract top quality Food and Beverage operators in highly sought after CBD sites, the market is currently sitting at incentives equivalent to 12 months gross rent on 10 year lease terms. Qualtiy projects in the CBD or City fringe need to offer 12-18 months incentives on a 10 year lease. This off course is always subject to the site being fit for purpose with all required services in place, ready to connect.”
Angela Bonnefin, Principal of Bonnefin Property.