5 Questions A Landlord Must Ask A Prospective Tenant Before Lease Signing
By LC on Dec 16, 2007 in Featured Articles, Retail Business Coaching, Strip Malls
Behavioral Patterns of Winning Tenants and Great Landlords
Part Two of a Multi-Part Series
In our first article in the series, “4 Rules for Strip Mall Tenants Before Lease Signing,” we gave some guidelines for prospective strip mall tenants. This article discusses questions a landlord must ask that tenant before a commitment (lease) is executed in order to more accurately determine the viability and longevity of the proposed tenant.
Although our record is being seriously challenged now in one strip mall 
our company is known for very low tenant turnover, about 3% as opposed to the average of 10% in our primary development region. An essential process in reducing future turnover is through a series of questions, the answers to which enabling the landlord to assign a more accurate probability of tenant success. These questions should always be conducted face to face; you will be watching body language and assessing their sales ability that they’ll need in any retail environment.
#1 Tell Me About Your Background
You’ve of course received the tenant’s financial information and conducted a credit check; if they didn’t pass that first test, they would not be before you now.
Only second to working capital and a history of paying bills as agreed, the tenant’s professional background is the best predictor of success probability in a convenience-oriented strip mall. Here’s what we like to see, in order of preference:
- An expansion of an existing business
- Successful history of other businesses in which they have had a risk position
- A career in the proposed business, not at risk (a manager, executive, or operating employee)
- Front line managerial experience in unrelated retail business
Surprisingly, those with management, but not at risk, backgrounds in the same category are less likely to succeed than one who has no experience in the category but does have a successful background in owning other unrelated retail businesses.
We do not have a good history with managers from unrelated retail; those that have owned their own retail business and have been successful have proven that they possess the ability to take ownership of their failures and adjust accordingly and to leverage their successes.
#2 How Much Time Will You Be Spending at your Store?
Just as the most successful “one-off” restaurants are usually chef-driven and operated, the concept of working full time elsewhere and hiring a manager to run your store is practically a guarantee of failure for an independent business. The volume will not be enough for years to pay for a skilled manager, and one reason final consumers like the indies is that they are often face to face with the business owner who cares about their needs, knows their shopping patterns, and gives them personal service that a chain store manager cannot. We want to hear that the tenant will be at the store full time.
#3 Who Is Your Competition, and How Will You Differentiate from Them?
The response for which we are literally praying they will not give is “we have no competition,” and at least 30% do respond in that manner. That tells us they have not properly surveyed the market or are deluded with their expertise and business plan accuracy. The fact is that each retail, food, and service category has a certain amount of dollars available (market potential) and a reasonable amount of that flowing to the subject operation (store sales potential). While a highly successful store can actually create new category demand which in fact does increase the market potential, that scenario is bonus volume and should never be used for P&L underwriting.
The strip mall business caters to the convenience shopper. The merchant must be realistic about the population base that could shop her store, and then focus on all of the 4 Ps of Marketing which we will discuss next in our series. We want to hear a solid plan of how they are going to trump the competition and still make some money.
#4 What is Your Projected Sales Volume?
This question is asked by less than probably 20% of strip mall landlords, and a reasonable response, backed up by some data, is absolutely crucial and here’s why.
I simply want to know 1) if they have investigated their sales potential, because I need a plan 2) to pay my rent! Amazingly, fewer than 50% of the potential tenants that advance to this Q&A process have a good answer.
A good answer depends largely on the category, and a strip mall landlord MUST know the approximate percentage of rent than can reasonably be paid by each category. A gym, for example, can pay must more rent out of gross sales volume than can a restaurant, and a dress shop can pay less rent percentage of gross than can a restaurant. The determining factors include the cost of goods sold, the labor and equipment expenses, and the ancillary costs such as utilities and insurance. Education is paramount on this topic, and if the landlord is not aware of the appropriate percentages, there are strip mall conferences, trade magazines, and articles such as found on this website that should be utilized.
A good example of a bad answer happened about a year ago. I was walking a center with a prospective LRTW (ladies ready to wear) tenant. Although dress shops normally don’t do well in strip malls as we rarely approach the gravity model parameters necessary for comparison good shopping, she was proposing an ethnic store and the concept made sense. The rent was about $5,000 per month. Her response to my volume question was “I can do at least $12,000 a month. That’s only four $100 outfits a day.” Humm…..let’s see. Cost of goods is 50%; that leaves $6,000 to pay the bills, before markdowns of 10%, that’s $5,400. $5,000 to rent, that leaves $400 for utilities, labor, advertising, insurance, etc, which obviously doesn’t work. When I went through my calculations with her, the answer was “OK, $20,000 then!”
I passed, but I am sure someone nearby will not. You get the picture. It’s not right to take money from one whose naiveté and inexperience exceeds their ability to succeed, regardless of how much you need or want a deal.
#5 Who Is Your Target Market?
This is a tough question. In the last article we discussed the importance of the tenant knowing what business they are really in. “Everyone” is not a good answer defining their target market. If you are a restaurant, we’re looking for targets of families, singles, people looking to hook up, ethnic diners, employees constrained with short lunch breaks, that sort of grouping for the primary target market. Your prospective tenant needs to approach their target market with a laser focus, not just open the doors hoping they come in. They won’t without knowing why they should.
The next article in this series will start examining the 4 Ps of Marketing– Product, Price, Promotion, and Place–as they relate to strip mall retailing.
On Dec 18, 2007, Joe Weber said:
Dig the blog a LOT!
Nice style and I like the way you discuss the problems . I’m going to book mark it.
On Dec 21, 2007, Vinicio said:
A question on point #1. If you have a potential tenant who has told you they have previously filed bankruptcy, have emerged, and have the backing of an SBA gauranteed loan in addition to 2-3 investors, is there anything else to consider on their financial background?
On Dec 21, 2007, LC said:
Vinicio–we always like to know the nature of the BK. Over the past 10 years or so we’ve seen a number of people who have over extended their credit cards, taken the Chapter 7 route, emerged and have paid as agreed since. Those people we like. If you have a record of paying as agreed a little prior to and after the filing, you should be fine.
We like to see some cash or source for working capital, improvements, fixtures, and inventory of course, but if SBA likes you, chances are we will too!
Beyond financial considerations, your retailing background is especially important if you are going to be operating as an independent. If you’re buying a franchise with a good record, then your background becomes secondary to their track record of training and support.
LC