If you’re a retail operator, there are seven critical ways to optimize your lease portfolio. By keeping these issues top-of-mind, you’ll have time to strategically plan for changes, take advantage of time-sensitive opportunities, and even cut your losses when the time is right.
- Continually focus on all leases expiring within the next 36 months.
Most business owners and real estate executives are so focused on “fighting fires” that they rarely have time to think about lease expirations beyond the current year. However, by keeping expirations occurring within the next 36 months on your radar, you’ll have time to make sound decisions and necessary adjustments. Remember, each lease can take months to renegotiate, so if you wait too long, you may be out of runway.
- Request landlord contributions for significant location improvements occurring throughout the next couple of years.
If you’re planning to make space improvements that will substantially increase its value to the landlord, request that he or she contribute funds. If your renovation includes more than a new coat of paint and décor, it never hurts to ask. The worst thing your landlord can say is no.
- Know if your franchise agreement mandates refreshing or remodeling locations within next 5 years.
Many franchise agreements require that retail locations refresh every few years, or even undergo a major remodel every 7 to 10 years. If you’re facing a significant investment in a leased location, it’s a good time to evaluate the long-term viability of the space. If it’s not a highly profitable spot, there may be an opportunity for early lease termination if the landlord knows it can be rented to someone else at a higher rate. If it’s a hard location to lease and you want to stay, you may have leverage when requesting a TI contribution.
- If you own the building, determine if there’s an advantage to a sale leaseback.
If you own your building and need additional capital to grow the business, there are times when selling the building to an investor and leasing it back from them is a good idea. This will provide you with no-interest investment funds.
- If you’re paying below-market rent, consider whether purchasing the building makes sense.
If you’re in a long-term lease that’s below market rate, it’s often smart to consider purchasing the building at a negotiated price. Offering 80 percent of what you would pay throughout the life of the lease, for example, may be the landlord’s best ROI since investors are not likely to wait until the current lease ends for a return. This scenario is beginning to play out following the economic dip that occurred about 5 years ago.
- Closely monitor the landlord’s activities to ensure full compliance with all lease provisions.
Since the provisions outlined in the lease help protect the profitability of your location, there may be room for negotiation if the landlord fails to comply. Review your co-tenancy restrictions on a regular basis to ensure that factors like the tenant mix and occupancy rates are accurate. Also conduct periodic site reviews to ensure that landlord restrictions are upheld. If a competitive business has moved in, you may be entitled to a significant rent reduction or lease termination you wish to leave the location.
- Always have a solid plan in place for managing the bottom 20 percent of the portfolio.
When considering the overall profitability of your lease portfolio, you’ll likely be forced to make tough decisions about the bottom 20 percent. The underperformers most likely earned that position due to an unbalanced occupancy cost-to-sales ratio, which can take an enormous amount of time to reconcile. This typically results in a lease termination, subleasing or assigning the lease, or renegotiating the terms. Read more about strategies for managing underperformers here.
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