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LEASE LANGUAGE: Lease cheat-sheet for rookies

As a retail broker with a number of land listings, it appears there is an increased interest in developing small-shop, multi-tenant retail projects of less than 15,000 sq. ft. Many inquiries come from novice developers, motivated perhaps by the recent poor performance of the equities markets to find a more lucrative investment. Some of these developers bring sufficient financial backing but little experience.

And while barriers to entry for a small-scale development are lower than for a larger, anchor-driven retail development, the analysis process and rules apply to both. The pre-development review includes five areas of analysis:

Trade area

When it comes to the trade area, it's not just about asking questions. It's about asking the right questions to evaluate the potential need for the development. These include:

  • What are the demographic trends in your primary trade area? Are income and population numbers static or increasing? Is the population a balanced mix of age groups or skewed to specific age groups?
  • Are competitive retail developments in the area fully leased? Are trade-area tenants national and local retailers that can pay the required pro forma rents? Or are they second-line retailers attracted by low rents?
  • What are the traffic counts? Are they increasing or decreasing? What time does traffic peak?
  • What types of retail uses are missing in your trade area?

Governmental regulations

While local governments often encourage retail because of the sales tax benefits it generates, zoning requirements regarding floor area ratio, green space, building and parking setbacks, and parking ratios will determine the size of your project. As you analyze governmental considerations that may limit your project, ask the following questions:

  • Does your development intrude or negatively impact nearby residential areas?
  • What is the timing and cost of road improvements or new signals?
  • What is the attitude of the transportation agency responsible for the roadway? Will existing curb cuts remain? Can you get new curb cuts?
  • What is the parking ratio for specific uses? For example, restaurants require more parking than stores. Are blended ratios possible?
  • What signage restrictions need to be considered?
  • Are utilities available to the site? At what cost?

Site review

The main objective in creating a viable retail development site is simple: Maximize the store frontage while minimizing the depth. Make sure the parcel dimensions provide enough area for parking and a building that is no more than 60-ft. to 70-ft. in depth. Get a technical recommendation on how much of the proposed site is buildable, taking into consideration soil conditions, drainage, etc.

Tenant mix

The number one consideration in determining mix is: What is the draw? Is your small-shop development located on an outparcel of a big-box retailer or on a freestanding site that is subject to impulse traffic? Is it in a discount apparel center or a suburban strip center? Is it an inner-city infill development or part of a large mixed-use development?

What establishes the identity of your small-shop development? What uses will complement the existing retail landscape? If you are in an apparel center, you might create a specialty mix of stores that offer accessories, maternity clothes, jewelry, tuxedo rental, etc. If you are in an outlot of a super discounter, you might create a convenience mix including a restaurant, sandwich shop, hair and nail salon, mailing service, cleaners, jewelry store and bakery.

Pre-leasing requirements

The pre-leasing requirements of lenders vary widely. Much depends on general economic conditions, the level of your personal investment, your experience, your proposed mix, the quality of the site location and many other risk-mitigating factors. Typically, although lenders can demand pre-leasing from 10% to 80% of your project, a 50% pre-lease requirement is not unusual before construction to assure that the development generates enough cash flow to cover debt obligations.

The analysis process and rules for big-box retail development also apply to small-shops. The only real difference is the number of zeros.

Joel I. Erickson is vice president of the Retail Brokerage Group of NAI Hiffman, one of Chicago's largest and most active commercial real estate brokerage and property management firms.

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