Shopping Center Land Grab

Shopping centers are distinctly different from downtown andlocal business strips. The shopping center building is pre-plannedas a merchandising unit for interplay among tenants. Its site isdeliberately selected by the developer for easy access to pullcustomers from a trade area. It has on-site parking as a commonfeature of the layout. The amount of parking space is directlyrelated to the retail area. Customers like the shoppingcenter's convenience. They drive in, park and walk to theirdestination in relative safety and speed. Some shopping centersprovide weather protection, and most provide an atmosphere createdfor shopping comfort. For the customer, the shopping center hasgreat appeal.

Can You Qualify?

Developers and owners of shopping centers look for successfulretailers. If you are considering a shopping center for afirst-store venture, you may have trouble. Your financial backingand merchandising experience may be unproven to the developer. Yourchallenge is convincing the developer that the new store has areasonable chance of success and will help the tenant mix.

Whether or not a small retailer can get into a particularshopping center depends on the market and management. A smallshopping center may need only one children's shoe store, forexample, while a regional center may expect enough business for twoor more.

Darrell T., a licensed dealer of Thomas Kinkade artwork, thinksthe main reason the Seattle mall leasing agents allowed him inwithout prior retail experience is because the artist his galleryexclusively represents has a great reputation--and because of theproduct line the gallery carries. "In nationwide mall tenantpolls, I believe [the artist] is No. 2 in sales per square foot,second only to Sunglass Hut," says Darrell.

To finance a center, the developer needs major leases fromcompanies with strong credit ratings. The developer's ownlenders favor tenant rosters that include the triple-A ratings ofnational chains. However, local merchants with good businessrecords and proven understanding of the market have a good chanceof being considered by a shopping center developer. So if you oryour store manager has a good reputation and track record inretailing in the area, you may be able to make a strong case foracceptance into the center you want.

Center Costs

In examining any shopping center location, get answers toquestions such as these: Are its shoppers your prospectivecustomers? Would the center offer the best sales volume potentialfor your kind of merchandise or service? Can you benefit enoughfrom the center's access to a market? If yes, can you producethe appeal that will make the center's customers come to yourstore? Can you deal with the competition of other stores?

How much space do you need and where do you want it? Naturally,the amount of space you want will determine your rent. Manymerchants need to rethink their space requirements when locating ina shopping center. Rents are typically high, so space must be usedefficiently. What amount of space will you need to handle the salesvolume you expect to have? Be sure that it has adequate interiorspace for sufficient inventory, an area for an office, and possiblya receiving and shipping area. You should also consider thenecessity for adequate space for expansion when business picksup.

Your location in a center is important. Do you need to be in themain flow of customers as they pass between the stores with thegreatest customer pull? Who will your neighbors be? What will theireffect on your sales be?

"We're in [a mall that] has about 60 specialtyshops," says Darrell T. "We compared it to some of theother sites in the territory that were available to us, and basedon the information we received--sales per square foot, otherstores--we went ahead and chose [this mall]. We have to be a littlepicky about our location. Galleries located in a prime spot withina mall do much better than those that are in an out-of-the-waylocation. Even though the malls are comparable, basically a'C' location in an 'A' mall is not the same as an'A' location in a 'B' mall," he says."And location in the mall is quite possibly the most importantfactor--even more than the mall you are in--in my mind. As long asyou are visible and can catch the shopper's eye, I thinkyou'll do well wherever you go."

What will rent really cost? In most nonshopping centerlocations, rent is a fixed amount that has no relationship to salesvolume. In a shopping center, the rent is usually stated as aminimum guaranteed rent per square foot of leased area against apercentage. Typically, this percentage is between 5 and 7 percentof gross sales, but it varies by type of business and otherfactors. This means that if the rent calculated by the percentageof sales is higher than the guaranteed rent, you pay the higheramount. If it is lower than the guaranteed rent, then you pay theguaranteed rent amount.

But this guarantee is not the end. In addition, you may have topay dues to the center's merchants' association. You mayalso have to pay for maintenance of common areas. Therefore, youmust think of "total rent" when considering what you canafford to pay. Can you draw enough sales to cover the true rent ofbeing in a center?

Don't forget that you still have to design and finish outyour space. You pay for light fixtures, counters, shelves,painting, floor coverings, and installing your own heating andcooling units. Some landlords provide a cost allowance towardcompletion of your retail space. This "tenant allowance"is for storefronts, ceiling treatment and wall coverings. Theallowance is a percentage of their cost and is spelled out in adollar amount in the lease. Some developers will help you planstorefronts, exterior signs and interior color schemes. Theyprovide this service to ensure storefronts that add to thecenter's image rather than detract from it.

Specialty Leasing

About 80 percent of America's 1,800 enclosed and regionalshopping malls have temporary tenants, which include kiosks andcarts. There are between 10 and 40 carts per mall at the Simon DeBartolo Property Group malls of Indianapolis, which rely on cartsto add color and variety, as well as to generate income.Entrepreneurs can display their wares in a prime, high-foot-trafficlocation with little investment. Some cart operators move in justto capitalize on busy holiday seasons, and others remainyear-round.

Rent for in-line stores is about four times the rent for cartsand kiosks. You can buy a cart for $3,000-plus or rent one from amall. Many entrepreneurs find carts and kiosks a low-cost way tolaunch a retail business or to supplement an existing business.You'll see a variety of specialty products introduced thisway--silver jewelry, engraved products, imported fragrances, hairaccessories, watches, etc. Some retailers use carts as testbusinesses in potential markets, while others make more than $1million by operating several carts in several malls and cities.

At Bloomington, Minnesota's Mall of America, about 100temporary tenants dazzle 40 million visitors a year. Cart rentalrates are about $2,300 a month or 15 percent of monthly sales,whichever is greater. All temporary tenants must pay $1,500 in"key money," which pays for a store designer to designand build a cart with the right look.

Everything Is Negotiable

Once you've decided what kind of space you want, where, andhow long you need it, it's time to consult a lawyer to discusswhat specific issues you need to address in order to negotiate thebest lease for your business. Core points to review carefully areoccupancy date, chargeable floor space, which renovations or tenantimprovements the landlord will do or pay for, services to beprovided, liability, and renewal or termination terms. Onceyou're close to reaching an agreement with the real estatebroker, leasing agent or landlord, your attorney can make sure thateverything is in writing to clearly define each party'sobligations.

Retail space is usually rented on what's called a "netlease" basis, meaning that you arrange for most of itsservices. Unless your premises are tied to the building'smechanical systems, the costs for most services--such as heatingand air-conditioning--are your responsibility.

The breadth of your use clause (the specific use intended forthe space) will affect your ability to assign your lease or subletthe premises. The broader the definition, the better. If you'veleased the space to sell ski equipment, for example, and businesslags because of a lack of snowfall, you want to have the option ofopening a juice bar instead.

In addition, it's a good idea to get a restrictive covenantto prevent the landlord from leasing space in the same building ornearby to a business that competes with you. How far this provisionextends will depend on the type of area you're located in. In acity, it might be a few blocks, whereas in the suburbs, it could bea few miles.

With shopping center leases, you are customarily charged formaintenance of common areas and for the mall's marketingefforts. Find out what the mall's plans are for any structuralalterations or remodeling, resurfacing the parking lots, orreplacing the roof. These can be devastating assessments for ayoung business. Requirements for hours and days of operation,employee parking restrictions, participation in community serviceevents, gift certificate and loyalty programs, and storefrontappearance may not fit into your business plan or capabilities.Make sure you will be capable of conforming to theserequirements.

Excerpted from Howto Start a Retail Store