In Center 1, Ican get into an endcap not on the hard corner but on a pad 50 yards or so from the light. Visibility is excellent as is parking. It is a small sized center and is anchored by a CVS/Pharmacy store and Jack in the Box Drive thru. Occupancy is around 50% currently (with more tenants
promised)
Center two is a larger center anchored by a grocery chain as well as Starbucks, Carl’s Jr. Dental office, Bank, clothing store, etc. The problem is that my location is inline (4th in a pad of 6 spaces). Visibility is very poor, the Starbucks pad and a Carl’s Jr drive thru are in front of my pad and it cannot really be seen easily from the main street. LL has offered space on the monument sign for a fee of course. In front of the space offered there are 2 disability parking spaces. In general parking is very poor for my location.

Assuming Rent and CAM are similar for both locations…what is the optimum location for me to get into?
I know Center 1 is smaller and not anchored by a major, but I get a great location endcap on main street with great access and parking. Center 2 is much larger with more draw and daily traffic, however visibility and parking is very poor.
PLEASE HELP!

Ripsy, you’ve come to the right place and I’ve got your answer;-)

Now remember, I have a bias as I’m a strip mall developer, and we only have one anchored center. BUT, this site is about you, not I, and I think I can be objective. I like to list a rank order of preferred locations for convenience tenants, and your sandwich shop is a classic example. Here would be my choices as a tenant:

First Choice: Hard corner, endcap, anchored (assuming great exposure)
Second Choice: Hard corner, endcap, unanchored, (assuming great exposure)
Third Choice: Inline, anchored with great exposure
Fourth Choice: Inline strip mall, with great exposure
Fifth Choice: Inline anchored with marginal exposure

Sixth Choice: You were expecting inline strip mall with marginal exposure, right? Wrong. That is NOT an option. Strip malls work because of the 100% street exposure. Without an anchor to draw the customers in, poor exposure in a strip mall should be a pass for both tenant and developer.

Ripsy, you’re in a numbers game, and I don’t care how people see you as long as they DO see you. I favor big traffic numbers over small slow drive bys or walk bys, because even though you get a better kill rate with those, the numbers are often too small. If you have a traffic count of at least 30,000 cpd going by your strip mall, and I’m sure you do with Jack and CVS there, you have numbers on your side.

As Professor of Marketing at CSUS years ago, I used to tell my students that they were subjected to 40,000 impressions daily, and it was up to them as marketers to be a part of that and to stand out. Imagine the number today. Why keep your store a secret in center 2? I’m going for the proven concept, Ripsy, and that’s Center #1. Good luck and let is know what you decide.

Your comments in agreement or disagreement are welcome! 

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Michelle, there are a few ways to assemble some of the contact you’re seeking.

Strip Mall Owners: TOUGH, as there are so many of them in any given area. The easiest way is to designate a geographic area and ask a friendly title company rep to give you a printout of the parcel ownership. If you have a larger area, you should probably be thinking about a data provider subscription, like CoStar.

If you wish to establish yourself as a retail expert, a membership in the International Council of Shopping Centers is always a good investment for both education and contacts. The downside is that many of the members own and lease larger centers and strip malls aren’t usually the main focus. Why do you think I started localcenters.com??

Mini-Storage Contacts:

Hands down, get in touch with the Self Storage Association. They are a very active and organized group, and most mini storage owners who have any kind of property belong to them. They have conventions and regional meet ups too. If you want to get to the smaller owners, call ‘em! Often the number on the sign will get you there. Hope this helps a little, Michelle.

Note to you entrepreneurs! Directories for Strip Malls and Mini Storage are ALWAYS Being Requested!

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Jennifer, the ability of the landlord to do that is totally dependent upon the lease terms. For example, if you have a 5 year lease with a 5 year option to renew and you exercise your option, you have a lease. Not only do you have a lease, but normally any buyers are “stuck with you.” Here’s the language from my lease:

35-6. Successor and Assigns. The covenants and conditions herein contained, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto.

Now, if I am a landlord and Wal-Mart want to make a favorable deal with me, here’s what I might do to get you to leave:

• Attempt to default you on any permissable grounds, like being one day late on the rent. Depending upon your jurisdiction, I may or may not be successful. In California, the judge would look at my tactics as not acting in good faith. In Texas, he might very well find for the landlord.

• Offer a buyout
• Offer a relocation to another center for the same or better terms

You asked about a 25 year lease. Are you thinking of becoming a “spoiler” Jennifer? That would put you in a very strong position. For a strip mall, however, it’s unlikey that you’ll get a 25 year lease, more likely 5 to 10 years with some options to renew on conditions, for either term.

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What is the average cost to maintain a strip mall (each year over a five year period)? What is the typical agreement between the leasee and the leasor ( in terms of: who is responsible for what when something breaks down)? What is the average rent paid for a space in an average sized strip mall?

This is a multi-part question and harder to answer than you may think. Let’s break them down:

Average Rent: The averaged stabilized rent (after free rent and when the tenants have been operating for two eyars or so) for a strip mall depends on several factors, among which are:

• Geographic location and market
  • Guaran-friggen-tee-ya that California is higher than Oklahoma!
• Location within the market
  • Translates into sales potential
• Market conditions
  • We’ve been hit hard here in Northern California, so our rents are generally stable to down from 2007. In Seattle, they’re up

  What matters more than anything else, Homer, is the sales potential. No matter where the retailer is located in the country, the margins are about the same. A sit down restaurant, for example, needs to have a rent factor about 12% of gross sales. So, depending on the average sales in the area, the stabilized rent could be between $18 and $48, with $24 a good medium market figure (but higher in California generally).

Landlord and Tenant Responsibility: This is totally dependent on the lease document. Here are some variants:

• Absolute Net Lease: Tenant does everything including grounds maintenance. These are typically free standing, single tenant buildings.

• Triple Net Lease, Shopping Center: This is the norm for most strip malls 30 years old or newer. The tenant pays his proportionate share of real estate taxes, common area insurance, and maintenance. The landlord takes care of the maintenance and bills the tenant back in the triple net or CAM (Common Area Maintenance) charges.

• Modified Gross Lease: The CAM above is included in the rent, and the tenant pays the increases each year.

Average Annual Maintenance Costs: Impossible to answer without knowing the age, condition, and climate. If there’s snow removal or security, that really adds some cost. In our new strip malls we might spend $6,000 a year for the first five years, and that includes landscaping and general maintenance. In a 20 year old building we might have to start replacing air conditioning at $1,500 per ton, or $6,000 per unit, average. Add painting, roofing, parking lot maintenance and the costs which go back to the CAM can easily be four times that of a new center.

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Higher Sales Volume and Costs Justify Higher Rent for a Freestanding Drive-Thru As Opposed to a Strip Center Endcap or Inline Shop Space–But How Much Higher?

From Lyle in Illinois

Q :We are looking to open our first fast food franchise location. We have found a location which is an ex-fast food location with existing drive through and the building size also fits what we need.
The location is in anchored strip mall with a grocery store and a few other brands. Asking price for the inline strip shops is $24-$25 psf (NNN) per year, but the freestanding building landlord is asking about $50 psf for the 2,400 SF building. My questions are:
1. Does this make sense?
2. What can we do to bring the rent down?
3. How can we estimate sales from the demographics or traffic count?
4. Any other ideas?

A: This is a great question,Lyle, and involves some time and basic math. Let’s get into it.

Let’s assume for now that the landlord is firm, and we’re working to determine sustainable occupancy cost for your fast food franchise. Here are some factors:

1. Replacement Cost for a Fast Food Drive-Thru

2,400 SF of building will need about 24,000 SF of land to self-park and meet code which is probably about 1 space for every 3 seats. You didn’t say if it was a hard corner (on the intersection, no setback), so let’s assume it’s an outparcel in the center, and for a small piece we will give the land a value of $14 psf, or about $336,000.

The construction cost for strip mall with a basic interior finish runs about $125 psf (I’m guessing again, it’s more in California, what isn’t ) , and as we have a very small building we’ll say $200 psf, or about $480,000 to reach the same level as a strip mall buildout. BUT, I’m going to add $100 psf Lyle, because you probably have a 400 amp panel, floor drains, lots of plumbing and wiring, fixtures, etc. That’s another $240,000 and that includes permits and fees. So far…

Land: $336,000
Building: $$480,000
Extra Restaurant Improvements: $240,00
Total Estimate Drive Thru Building Replacement Cost: $1,050,000+/-

Landlord ROI= 10%=$105,000 per annum= $43.75 psf. So, we’re close, Lyle, depending on the condition and age. We’re on the edge but not off the radar from the cost approach.

2. Calculating Break Even Rent with the Market Approach

I’d like to see you pay no more than 10% of gross sales in rent for a freestanding drive-thru in the suburbs. Your retail shopping center lease form probably calls for percentage rent of 6%-7% of gross as we discussed this <a href=”http://localcenters.com/retailing/featured-5/”> article on estimating sustainable rent</a>, but while we talked about in our article about how to estimate sustainable rents, 12% for a sit down restaurant, your margins are thinner and a10% rent factor on stabilized volume is where you need to be.

$50sf rent x 2,400 SF= $120,000 annual rent/.10= $1,200,000 annual sales volume. That’s $100,000 per month, $25,000 per week and $500 psf in sales volume.

Here’s where your franchisor needs to help you. That’s a lot of volume for a Starbucks, low for McDonald’s, about right for a Church’s, on the low side for Chick-Fil-A and the list goes on BUT, other than Starbucks those stores are about double the size of yours.

I don’t like it, Lyle, this is why we fix a rent point first and work backwards. What 2,400 SF operation could do that volume? Why did the past tenant leave? I’m feeling like the deal-killing attorney here

I think your question is answered, if my estimate from 2,000 miles away without knowing your specifics are even close to being accurate, I think you need to meet with the landlord, tell him it’s a great location and he’s the greatest guy in the mid-west, but the numbers don’t fly, and could he help you understand how you can make money here??

I am visualizing a B to B+ location, not on a hard corner, dark store, and am estimating volume at $750,000 a year. Sounds like a $33 deal to me. Let us know how you deal works out, Lyle! ~LC

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From Dennis in Keene, NH

Q: We have financing and are looking to make profit managing a 6-10 store strip mall. How can we get help in finding anchor stores for our project? thank you…

A. Dennis, if any of us had the definitive answer there would be no one to compete against us, right?

It’s a great question, and I will try to make the response somewhat specific to you and your vicinity. First, you used the word “anchor,” and we typically don’t have anchor tenants in strip malls. An anchor is a larger tenant like a grocery store, a discount box store, or a deparment store that activates the gravity model of a critical mass of on site shoppers. We don’t achieve that critical mass in strip malls, and as such we have to cater to the convenience tenants who are often essential services, not luxury or discretionary-based shopping goods.

In your case, your town is about 25,000 which is a small market but viable. In addition, I see arterials meeting in Keene from every direction, so your trade area is expanded, and that’s always a good thing!

Tenants come to you usually in one of five ways:

• Sign call
• Broker
• Referral
• Walk and Talk
• Direct Marketing

Signing: Brokers may tell you of their intense marketing plans, and if they do it that’s great. The fact remains that your prospects are usually not obvious, and about 65% will initially inquire from a leasing sign on site. That sign should look good, and the biggest line on it should be the contact phone number. And I mean BIG.

Broker/Agent: It’s unlikely there are any large firms in the vicinity like CBRE or Grubb and Ellis, so if you go with a listing leasing agent, and in your case as you’re not experienced I would, you will have to select an experienced commercial agent, not a house broker. They not only need to know WHO to talk to, but HOW to talk to them.

Referral: You seemed like a nice, talkative guy in your email, and as long as you’ve been in your particular business, I’ll bet you’ve met most people in Keene! Pick out some key local business people, get a good looking plan and duplicate it, and show it to them. Ask them if they have any ideas of someone who could benefit from that location. They will talk it up, I promise. Be sure to “remember them” with a nice bottle of wine or even a check if they have an idea that works out for you.

Walk and Talk: The difference between Referral and Walk and Talk is that you pick the prospects and go talk to them. If you’re not a salesman this can be intimidating, but once you make your third call you’ll get in the rhythm and will probably enjoy it.

One of the most exciting things about strip mall leasing is that everyone loves to talk about shopping and retailers. Even after 30 years in the business and owning a number of strip malls, I still “cold call” because there is an exponential progression of local knowledge to be gained by doing so. Don’t assume that the person you call on must say yes; but expect many to be your referrers to real prospects!

Direct Marketing: It used to be mailing to a prospect list, but we use email now. It’s effective if you think out the right prospect categories, and you can find most business emails on the internet. While we’re very careful about spamming the general public, most businesses are pleased that you thought of them, and they like to know about new projects too.

Hope this helps, Dennis. We will be publishing several articles in much more detail about each of these methods soon. Thanks for writing, and good luck being a developer!

John

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Q: I have been approved for [xx] franchise, and have found a strip mall in a good location. The landlord is not moving on the rent. How do I know how much rent I can pay?

A. Kathy, I’m deleting the franchise name and will send you a complete percentage rent table, and I will explain how to use it. For this discussion, I found a short version of a percentage rent table here.

Here are some steps to take which aren’t a substitute for a sophisticated income model (which this franchisor doesn’t typically use), but will give you an estimate that’s fairly close to the maximum sustainable rent you can pay.

1. Shop around in comparable locations. Yours is a common use so you won’t be able to get in to some places as the use will be taken, but ask the leasing agents and even the shop owners what they are paying. You should be able to determine if your landlord’s rent is in the right range.

a. Don’t forget to ask the triple net rents, or CAM. They can vary widely between centers, especially if the property has been reassessed upon a sale. Here in California the CAM can increase dramatically after a sale is closed, from the property tax increase.

2. Look at the percentage rent tables; in your case the typical percentage rent is 7%. Although most strip mall leases do not require percentage rent clauses or the landlord often will waive them, we should understand what they mean. Let’s say the minimum base rent is $24.00 or $2.00 per square foot per month. Divide the annual base rent by the stipulated percentage rent figure, and we arrive at $343.00($24/.07). Remember, we’re discussing square footage, not absolute rents. Multiply your space square footage, let’s assume 1,2000 s.f., by $343.00 and our product is $411,600. When you have a percentage rent clause, that figure of $411,600 is known as the “break point.” If your annual sales are above that figure, you will pay the greater of 7% of your gross sales, or the minimum base rent of $24.00 psf. So, if you did $40,000 per month, or $480,000 per year, your adjusted rent would be (7% x$480,000)= $33,600, whereas as if you did less than your breakpoint of $411,600, your rent would be $28,800.

The significance of hitting a break point is that your rent has dropped to a highly favorable( read low) percentage of gross sales. In the past two decades CPI increases (which our legal contributor Dave Durrett does not recommend) or fixed annual increases have all but replaced percentage rents in strip mall leases, but the calculation is significant for calculating commercially reasonable rent levels for each category of business.

3. Take the table percentage and double it. In your case, that means you can pay around 14% of your sales volume in base rent and sustain operations. This is a very rough estimate, but sometimes close enough for a go/no-go decision.

4. Divide the quoted minimum base rent ($24) by the doubled percentage figure (14%) and we arrive at $171. Multiply by the square footage of 1,200 and we arrive at the lowest volume needed to keep the base rent at 14% of gross sales, or $205,200 annual sales volume. If your sales volumes are at that level or better you should be fine (in your business; rent levels differ for each category) but with volumes below that figure you might have trouble breaking even as your rent would exceed 14% of your sales.

5. Divide and Conquer. $205,000/ 12 months = $17,083/4 weeks = $4,271 per week volume to pay the bills.

Can you do that, Kathy? Looking at a recent aerial photo, your location in Athens doesn’t appear to be in the newest growth area, but if it’s stable I think you can do those volumes with that franchise.

Capsule Notes-Estimating Maximum Base Rent Payable

 

• Ascertain average vicinity rent levels
• Find the appropriate percentage rent factor
• Double that factor
• Divide the annual base rent by the doubled factor
• Reduce to monthly or weekly as needed
• Your decision is now can you produce the minimum sales volumes to sustain operations?

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From Oscar in Bonita Springs, FL

Q: Hi, I am a contractor and my clients want me to build a strip center on their land. I told them that it doesn’t cost much more to build a bigger building by making it deeper but the architect says not to. What is the best depth for a strip center?

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From Jason in Lansing, MI

Q: I am opening a game store in a strip mall. I have a good rent deal, but the lease is 35 pages long. Should I pay a lawyer to negotiate with the owner?

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