According to Priscella Moranga, Deputy Board Clerk, this fee holiday will be limited to the first 30 applications, and no more than two applications from any applicant will qualify for the fee reduction.

The intended purpose of the Board’s action appears to be to encourage and facilitate residential growth in this county of approximately 50,000. Applications for commercial projects will only receive a deferral for the Facilities fees; there are no Parks and Rec fees levied on commercial properties. Normally paid upon application for a building permit, they will be deferred until building completion and occupancy.

County officials said that while several other California counties had instituted fee deferral programs, Amador County is the first county in the state to eliminate fees for a specified time period.

This writer hopes that other California jurisdictions recognize the wisdom of the County of Amador’s Board of Supervisors. The fee reductions are temporary, they are limited in number and scope, and address an economy that may be in recovery. Financing both residential and commercial project should be easier with a reduced burden, and the decision may spark builders to supply needed product that could not otherwise pencil or be financed.

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• While vacancy is still up 1.1% from 2007 at 7.2%, it began a trend downward in the first quarter.
• The only areas in where the vacancy exceeds 7.2% are Carmichael, Greenhaven, Rancho Cordova, Natomas(North and South), and Roseville/Rocklin. The average vacancy is weighted by the leasable square footage in each submarket.
• Notable improvements are in Elk Grove (4.3%) , Lincoln (6.1%) and Folsom (6.3%)
• Net Absorption is up from 2007, but trending down for the first quarter which saw 275,148 square feet leased.
• Construction is trending up from 2007 and up for the first quarter. Most of these 3.374M SF under development are large user deals, the new Elk Grove Mall, or projects to be delivered within 12-18 months. 242,000 SF was added to the GLA this past quarter.

” Although the retail market has slowed over the past twelve months…the Sacramento Region is poised to weather the storm. Torto Wheaton predicts job growth at 1.7% over the next two years, and an unemployment rate of 6.2%, against the California average of 6.1%. “

The article went on to say that the largest unemployment gains will be made in the government sector and in private educational and health services.

LocalCenters experienced our best leasing quarter since the 1st quarter of 2007. The prospective tenant quality is improving, and while rents have certainly softened for now, they appear to be firming up in the areas where vacancy is dropping.

More importantly, our tenant sales are improving overall. Our restaurants are doing OK to great, and all vacant restaurant space has been absorbed. Rents ultimately reflect the tenants’ ability to pay them, and the firming up is consistent with strengthening sales.

While nearly all tenants had a rough time in Q4 2007, especially during October, this is the time when those that bite the bullet and spend the money for advertising and offer value deals pull away from those who do not, and those tenants have a much higher chance of an ultimate failure rate.

Nationally the trend appears to be consistent with our local market. The quality retailers are reporting even to slightly higher same store sales, while the laggards are starting to fold. When this “thinning of the flock”has occurred in the past, it often serves as an indicator that we’re near a bottom and capitulation. From Associated Press:
“I think that the desire to sell is coming off,” said Thomas J. Lee, equities analyst at JPMorgan. The fact that the market has not been shaken by recent disappointing economic data “tells me that the recession is largely discounted.”
In addition to the congressional testimony, investors got a bit of relief from the Institute for Supply Management. The ISM said Thursday the services sector contracted only slightly in March — a stronger performance than in February, and a better reading than many economists predicted.

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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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Pick Up Stix, a San Clemente,CA based chain of fast casual Asian restaurants, has shuttered 26 stores in Northern California, Nevada, and Arizona as of January 15, 2008. Apparently there was no notice given to the local employees, according to the buzz on Elk Grove, CA based Elk Grove Online (requires registration).

“We have made the difficult business decision to close 26 Pick Up Stix restaurants effective January 15, 2008. We took a hard look at our existing business in light of the current economic situation and at this time will focus on our core markets,” said Amy Freshwater, vice president of communication and public relations for Carlson Restaurants Worldwide, parent of Pick Up Stix restaurants, in response to The Strip Mall Insider’s inquiry as to the reason for the closures.

Carlson Restaurants Worldwide, a subsidiary the Carlson Companies, owns the Pick Up Stix and TGI Fridays brands. Carlson Worldwide owns and controls brands in the restaurant, travel and lodging verticals.

Pick Up Stix was founded in 1989 by Asian-American entrepreneur Charles Zhang. In July 2001, the company was acquired by Carlson Restaurants Worldwide.

Why Pick Up Stix closed 26 stores in a rapidly growing region of the country is still an unanswered question. This writer believes that the attempt to consolidate a fragmented submarket of small Asian restaurants that also dominate this region may have failed for this chain. What do you think?

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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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As such, Fair Tax advocates such as Ron Paul would not do our industry many favors over the mid term. Over 50% of all income producing properties purchased in the US are wrapped in an IRS 1031 Deferred Exchange agreement, wherein the purchaser elects to defer the payment of capital gain income taxes until the property, or its successor, is sold.

One may argue that the buyers of such property would have more after-tax capital in the event of a substitution of a national consumption tax for the current income tax, and thus more liquidity to purchase income producing properties. There is no argument there, however if there were not tax advantages for many income producing properties, and especially smaller properties like our strip malls, one could arguably postulate that those investors would demand a higher return rate (Cap Rate) than the 7% or so we are seeing today.

The worst possible scenario would be raising taxes and eliminating capital gains. Currently a 1031 exchange is predicated on a holding period equal to the capital gain qualification period. With higher taxes and virtually no tax incentives, cap rates could easily become double digit once again as we experienced in the late 70s and early 80s. With a chasm-like positive leverage gap created between the cap rate and the current mortgage loan constants, one of the two would have to normalize over time. I’d bet on the mortgage bankers, and you really don’t want to be on the wrong side of that bet.

The most significant Congressional act of my career was Tax Reform Act 1986. Prior to that reform, there were so many loopholes and incentives for purchasing investor real estate that there were actually promoters guaranteeing negative cash flow to unsophisticated investors. TRA 1986 jettisoned most of these tax advantages and shortly thereafter real estate was once again valued on…..cash flow! And that is as it should be.

Ron Paul is not a contender, but we’re still on the sidelines as buyers until we get a little clarity of what the new administration and the Congress might bring us in 2009.

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Using the CPI Can Cause Major Problems in Collecting Those Rent Increases!

By Legal Contributor David Durrett, Esquire–Cohen Durrett, LLP

Many commercial lease structures include rent adjustment provisions that rely on changes in the Consumer Price Index (”CPI”) which is assumed to reflect the cost of living increases, if any. Unfortunately, landlords do not appreciate that the U.S. Department of Labor, Bureau of Labor Statistics publishes many indices and does not publish every index every month. Also, the base year for comparison, the year on which the rental increases is to be based, has been changed for some indices. The calculation of the rent increase can be done for the single year just completed or for the period of time back to the original date of the lease.

Ironically, the negotiation of a CPI clause often results in a tenant’s desire for a ceiling (e.g., not to exceed five percent per year) and a landlord’s desire for a floor (e.g., not to be less than two percent per year). In essence, each party desires some certainty concerning the rent adjustment.

Because of the risk of using a CPI provision, landlords may be better served by simply increasing the rent by a fixed percentage each year.

Aside from often not clearly indicating the appropriate index, landlords often forget to enforce the CPI clause and to make the required calculations. If a landlord should fail to make the calculation and advise the tenant of a rent increase, then the landlord may be surprised to learn about Section 2076 of California’s Code of Civil Procedure.

Section 2076 requires a person receiving money, at the time the money is received, to object if the money tendered is insufficient. If no objection is made, then the person receiving the money is considered to have waived any right to additional payment. Based upon this statute, the California Supreme Court held in the case of Julian v. Gold, 214 Cal. 74 (1931), that

a landlord cannot demand payment of rent for past months if he has already accepted partial payment for those months without objection

. A similar result occurred in Bettleheim v. Hagstrom Food Stores, 249 P.2d 301 (1952), where a landlord was entitled to an increase in percentage rent from two percent (2%) to four percent (4%), but who continued to accept two percent (2%) by mistake. The appellate court held that the landlord lost its right to demand the additional two percent (2%).

Too often landlords contact attorneys after they have forgotten to send the tenant a notice of an increase based on the CPI adjustment. Section 2076 poses a problem as to the rent already collected. Landlords would probably be better served by using a rent schedule that shows fixed percentage bumps that require no future calculations by either party over the course of time. Of course, this still does not relieve the landlord of comparing the check with the rent schedule. The underlying theory for such a schedule is to keep it simple. If landlords feel that complexity makes the provision better, then attorneys will profit in resolving the complexity.

Attorney David Durrett has practiced as a shopping center lease specialist for over 25 years in Northern California. David has represented Fortune 500 clients and sole practitioners. He can be reached durrettatcohendurrett.com, or at (916) 927-8797. Neither Cohen Durrett nor Mr. Durrett are offering legal advice with this article, and any legal questions pertaining to this content should be directed toward your legal counsel.

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