Retail

A Strip Center Makeover

Successful Retenanting Helps a Retail Center Regain Class A Status.

The development, marketing, leasing, and management of a retail center is one of real estate's more complex and demanding endeavors. Regardless of how well positioned a retail center may be during its inception, new retail concepts, economic cycles, changing demographics, and the gradual obsolescence of all commercial structures make repositioning or redevelopment inevitable.

Recent national retailer bankruptcies, negative retail space absorption, increased scrutiny of national tenant financials, Wall Street and life insurance company trepidation, and the increasing saturation of retail markets have conspired to make the process of retail center repositioning and redevelopment more challenging.

The nearly 30-year history of Beaver Ruin Village in suburban Atlanta illustrates how a small, family-owned retail development company adapted to meet these challenges.

Beaver Ruin Village, once the dominant destination retail center in its marketplace, gradually declined due to obsolescence, changing retailer patterns, large space vacancies, and certain market conditions outside of its control. The ownership entity, Beaver Ruin Corp., could have done nothing and let the center decline into an underperforming class B property or even tried to sell the struggling center. Instead, the owners opted for a redevelopment strategy, with the following goals in mind: maintain the existing credit tenant base; expand the existing credit tenant square footage requirements when possible; reposition the center toward convenience-oriented tenants who seek a more upscale demographic; and create a retail center with more character and energy. Ultimately, the idea was to incorporate these goals into a plan to reposition the property and return it to a class A neighborhood retail center.

Impetus to Change In 1974 Connolly Realty Services developed Beaver Ruin Village, a 150,000-square-foot neighborhood retail center in Lilburn, Ga. The L-shaped strip center contained a 27,000-sf Kroger and an 85,000-sf K-Mart, the first in Gwinnett County. Local shop space leased quickly, primarily to shoe stores, men's and women's clothiers, and various specialty shops.

“The center drew customers from approximately 15 miles away because there was no retail competition in the area,” says J.R. Connolly II, president of Connolly Realty Services. Eventually, due to some local shop space closings and the relocation of some tenants elsewhere in the center, Kroger expanded its space to 44,000 sf.

In 1984 Gwinnett Place Mall opened just a few miles north of Beaver Ruin Village, with nearly 1 million sf of retail space. The mall's location adjacent to Interstate 85 was more convenient for shoppers, and Beaver Ruin gradually lost all of its apparel and shoe store tenants, which were steadily replaced by service and convenience-oriented tenants.

Then, in 1992, K-Mart notified Beaver Ruin Corp. that it intended to close its end-cap location and open a new store closer to Gwinnett Place Mall. Faced with an 85,000-sf vacant box and the negative impact on the local shop space, Connolly knew this was the beginning of the end unless something was done. On paper, the center continued to be viable financially due to K-Mart's lease obligations, but the long-term outlook was grim.

Formulating a Plan To keep the center afloat, Connolly started negotiations with K-Mart for a buyout of their lease obligations with a lump sum payment. At the same time, he entered into discussions with Kroger to relocate to the now vacated end-cap location using Kroger's largest building prototype of around 63,000 sf.

Connolly reasoned that the larger Kroger prototype, placed prominently at the end-cap position, with prevalent road exposure, more direct ingress/egress, and increased parking, would raise its sales dramatically and position Kroger as the dominate grocery store in this submarket.

In 1994, Kroger committed to relocating to the end-cap location. Nearly simultaneously, K-Mart and Connolly concluded negotiations that resulted in a lump sum lease buyout. Connolly then had to decide what to do with the 44,000 sf of empty space. If it were left vacant or turned completely into local shop space, it would harm the center's efforts to maintain current lease rates of $10 per square foot to $12 psf.

The company decided to demolish the front 80 feet of the former Kroger space, leaving about 20,000 sf for flexible width and depth space for small retailers. The remaining space at the rear would be converted into two separate warehouses, taking advantage of the former Kroger's loading docks.

Connolly discussed his renovation plan with the local planning and zoning commissions, looking for “a degree of flexibility,” since building demolition and renovation would be subject to current and generally more rigid zoning standards. Although the city provided no financial incentives, it did offer zoning ordinance relief to avoid negative property tax consequences.

The following redevelopment plan was initiated in 1995 and completed one year later:

  • demolition of the K-Mart building;

  • construction of a new Kroger building at the former K-Mart location;

  • construction of new local shop space on the remaining, but cleared, portion of the K-Mart site;

  • renovation of existing local shop space; and

  • demolition of the front 80 feet of the former Kroger space and renovation of the remainder into small shop and warehouse space.

The plan reduced the total gross lease-able area from 150,000 sf to 137,711 sf but added parking, which improved the center's retail space/parking ratio. The total expected cost for the redevelopment/renovation effort was $3.5 million.

During the renovation, new reciprocal easement agreements were drawn up, negotiated, and signed by all existing tenants. In some cases, weaker tenants were allowed to abandon their leaseholds or were relocated to less desirable and less expensive shop space. In other cases, lease buyouts occurred.

All the while, the retail center was kept open, with construction areas clearly marked. Existing tenants were identified and only relocated as work progressed into their spaces.

The New Tenant Mix Beaver Ruin Corp. instigated an aggressive marketing plan with new and fully renovated shop space leasing for $14 psf to $20 psf. The center was marketed as a convenience center, targeting the dominant chains in every convenience category that were not already located in the marketplace, as well as those tenants in nearby retail centers whose leases were about to expire.

The marketing effort involved telephone cold-calling, targeted mailing, and hard copy and electronic notification to potential end-users, as well as face-to-face meetings with possible tenants at various International Council of Shopping Center events. Connolly also used Storetrax.com, a retail property information database system that hosts detailed property information.

A sampling of the successfully targeted convenience providers includes the following tenants: Sally Beauty Supply, Gold & Diamonds, U-China, Dollar Zone, Card $mart, Voice Stream, Somethin' Country, Sylvan Leaning Center, Landmark Dental, Nail City, Pearl Alterations, Radio Shack, Blockbuster Video, Bank of America, Georgia Department of Vehicles, Cingular Wireless, and Starbuck's Coffee. Efforts also targeted local medical, office, and restaurant end-users.

Key to the leasing success was timely follow-up on every property inquiry, attentiveness to transaction detail, a fair but firm negotiation style, and a hands-on management approach.

“The investment in the infrastructure stabilized and then increased the value of the center, as rents also increased. The revitalized center also made it easier to lease and re-lease existing shop space,” Connolly says. Though the center's once 15-mile trade area is now five miles, clearly its functionality as a convenience neighborhood retail center has improved. “It probably serves the same population numbers as it did in its heyday, but obviously at a higher [population] density, and with higher surrounding household incomes,” he says.

Today, Beaver Ruin Village continues to market, re-lease, and upgrade its tenant mix to retain its high occupancy rate and to increase its profitability. The leasing staff looks for tenants that mutually reinforce each other and increase the number of customer trips, which ultimately increases the gross sales of each tenant, reinforces the value of the location, and improves the bottom line of the retail center. The center is 98 percent occupied in an increasingly oversaturated retail market. “Beaver Ruin Village is the dominant class A neighborhood retail center, commanding higher rents and generating higher sales per square foot, compared to any competitor retail center in this marketplace,” says Ed O'Connor, Connolly's vice president of leasing. 

David C. Mayo, CCIM

David C. Mayo, CCIM, is principal of Vector Realty Advisors, a firm specializing in retailer and restaurant representation nationwide. Contact him at (502) 648-7828 or [email protected] Audits Can Help Landlords Recapture Expenses The repositioning of a retail center is the perfect time to perform lease audits to evaluate the language of current leases and the impact of various pre-existing lease provisions. A well-designed lease audit helps landlords understand the return on investment that is recouped through operating expense recoveries, as well as what revisions may be beneficial to landlords when structuring updated provisions to increase reimbursements of these expenditures. For example, language related to the pass-through of common area maintenance charges should be rewritten to include monthly payments based upon budgeted amounts for the upcoming year or increased as the landlord\'s costs increase. Currently, many leases permit only monthly estimates that are based upon the prior year\'s expenses to be billed monthly to the tenant, as opposed to the upcoming year\'s anticipated costs. Typically, these costs are reconciled in the following year, which, in many cases, is several months subsequent to the actual expenditure. Modifying this language would allow the landlord to increase cash flow and accomplish a higher degree of return simultaneously based upon true and current expenses. If possible, it also is advantageous to insert language clarifying a tenant\'s right to audit the CAM expenses, while limiting the tenant\'s options to review the landlord\'s expenditures. Further, as part of the lease audit process, lease language should be reviewed carefully to ascertain whether or not the landlord is recapturing 100 percent of operating expenses. A few examples of reimbursable expenses are roof repairs, security, insurance, and payroll. One such area deserving scrutiny is the repairs and maintenance language contained within the common area provisions of the lease. Many leases call for the reimbursement of repairs vs. more specific language that incorporates reimbursement for repairs, improvements, and replacements, including expenses of a capital nature. In numerous court cases tenants have not been held responsible for replacements and improvements when the lease states merely “maintenance and repair.” To avoid ambiguity, landlords must insert clear language that permits them to recoup all anticipated pass-through costs. Insurance is another area where specificity of lease language is critical. In response to the terrorist attacks last year, insurance costs skyrocketed, and, in many instances, property owners are trying to mitigate the impact of the increased premiums upon both parties. This can be accomplished by either reducing coverage or increasing deductibles and/or the amount of self insurance where applicable. As properties change hands, insurance costs need to be re-evaluated within the context of both the lender\'s requirements and the reimbursement features contained within the leases in order to evaluate the potential exposure. It is paramount to insert concise language specifying the reimbursement of cost vs. a more restrictive premium reimbursement to assist in recapturing the true costs. Finally, all existing documents should be reviewed by way of stringent due diligence to verify that any landlord-subsidized costs for major tenants are being recovered via the remaining tenants. To that end, the definitions of gross leaseable floor area, gross leaseable occupied area, and other pertinent terms should be examined and refined to maximize potential reimbursement to the property owner. When repositioning a retail center, landlords have an opportunity to recapture expenses by performing lease audits designed to review management\'s standard lease language and to provide recommendations to ensure the greatest possible recovery of costs. Having a clear and unambiguous document that accurately represents, in written form, the original intentions of the landlord and tenant is always in the best interests of all parties to any lease. --by Jeffrey N. Strauss, CPA, director of lease audit services for Schonbraun Safris McCann Bekritsky & Co., a real estate accounting and consulting firm headquartered in Roseland, N.J. Contact him at (973) 618-5002 or [email protected]

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