LocalCenters.com » The Strip Mall Insider Responses to Questions

Population density and impressions determine sales in strip malls

LC — Fri, 16 Apr 2010 22:08:05 +0000

Strip mall sales volumes are usually closely tied to traffic counts and population density. Sometimes being a block off the action isn’t good enough. The answer to this question from Lino in Chile applies universally.

LINO ALFARO wrote: Hi, I got a location and I want to develop a Strip Mall in CHILE. Its 1 block,426 ft Long Avenue front, but not the main Avenue that is narrow than this. This Av. serves as a connection on main Aves. Great visibility, 70 parking spaces, grass, 2 story building. One of the possible good tenants told me that he prefers the busy avenue. But they are from other city, as a local I can tell that busy Av. is a crowded one so you lose time trying to move there, so if i get destiny traffic this could be a nice area to do business close to busy crazy slow traffic. Is there a Study about nice Avenues alternative to bussy ones that i can read somewhere? Thanks I appreciate your help.

Lino this is a great topic, and after several studies there’s an easy answer. Several years ago, Randalls, a Safeway company, built a store in South Chicago. The average household income was $16,000 per year, i.e. very low. The store was surrounded by subsidized housing, and the area was crime-ridden. No other store would consider the area due to these negative factors. What Randalls saw was a density of nearly 150,000 potential customers within one mile. Granted most of them were on food stamps, but they still had to eat. Within two years it was one of the highest volume stores in the chain, and in all of Chicago. The fact is, Lino, that our business is based on conversions from potential buyers. If you were a merchant, you’d prefer to have 20,000 people driving or walking by each day than 10,000, because even though their location on the less busy street might be more convenient, they just don’t have a chance to lure in as many people. Consider building a more economical building, and targeting destination, rather than convenience tenants. LC The Strip Mall Insider

How to Find Strip Mall Owners

LC — Sun, 02 Mar 2008 05:39:41 +0000

Michelle Russell writes:
Hello,
I’m looking for a directory that contains strip mall, shopping center, ect and storage unit owners names and contact information. Do you know where I can find that information?

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!

Can My Landlord Kick Me Out for a Better Deal?

LC — Sun, 02 Mar 2008 05:08:54 +0000

Jennifer asks…
Have you ever come across a strip mall landlord trying to force out the tenants in order to be able to sell the land and rebuild a Walmart type store? Can a tenant have a long term lease for say 25 years? And if so, what would be some of their tactics be?

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.

Strip Mall Maintenance Costs

LC — Sun, 02 Mar 2008 03:09:27 +0000

Homer from Oklahoma wrote:

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.

How To Calculate Rent For a Freestanding Fast Food Drive-Thru

LC — Wed, 16 Jan 2008 09:07:28 +0000

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 article on estimating sustainable rent, 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

Shortcuts for Estimating Sustainable Shop Rent Levels

LC — Sat, 12 Jan 2008 06:49:37 +0000

From Kathy in Athens, GA

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?