Take Two Steps to Find Solid Retail Space

March 8, 2018
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If you’re looking for retail space in a shopping center as a first time business owner, you should be aware of certain things when visiting properties and before signing a lease. Conducting proper due diligence before signing a lease is crucial. Rental rates and the length of a lease term are top items, but don’t forget that there are many other things to consider.

To make an informed decision about the space you plan on leasing and to maximize your dollars, you need to thoroughly investigate potential owners before signing any lease. This essential practice is more commonly referred to as “doing due diligence.” It’s the same process that an owner will put your business through before deciding whether it wants to lease space to you.

Due diligence involves two steps. First, investigate the creditworthiness of the owner. After you’ve determined the owner’s financial strength and/or weakness, you should do extensive research to determine what kind of reputation the owner has in the market and among its tenants.

Step #1: Check Creditworthiness

To determine the owner’s financial strength, there are certain documents that you should review. Your broker can usually get you the documents you need. If you’re not using a broker, you can ask the owner to provide the following documents, or find them on your own.

Credit report. If you approached an owner and expressed interest in leasing space in its building, one of the first documents that you would be required to produce would be a credit report. The same should apply to the owner in your case. Get the credit report immediately. This report should give you almost everything you need to determine financial strength.

Depending on the size of the owner or property management company, some information that you need might be available online as a public record. You should be able to find details about the owner’s business, such as its credit rating, number of employees, financial information, vendor payment history, and more.

Title report. To be thorough, get a title report on the building to see if the owner has any liens against the building or any outstanding violations. This document is essential because a lien or violation could potentially affect your lease and business. The title report can be expensive, but it’s worth it. However, if you’re on a tight budget, you can get similar information from your local government agencies less expensively.

Property financing information. The building’s financing information will give you an idea of what type of arrangement the owner has with its lender. This information is important to you because the terms of the owner’s loan could create roadblocks for you if you decide to sign a lease. For example, if you want a flexible assignment clause added to your lease, the owner’s lender, based on the terms of the loan, may have the right to require its approval before you can assign your space.

Your ability to obtain this information will depend largely on your clout. If you’re a strong tenant and the owner really wants you in the space, it may be willing to share the information in some form. But even if you’re a smaller tenant, you should still request the information. It never hurts to ask, and small tenants are valuable in some centers because they add to the tenant mix or synergy that the owner is aiming for.

Financial statements. The chances of an owner releasing its financial information are slim, but as with any information, it’s worth asking. If possible, review the owner’s cash flow statements, balance sheets, and income statements. This information is useful because it can highlight financial shortcomings and may serve as a fairly accurate indicator of a potential bankruptcy.

List of tenants. Vacancies have a direct impact on the owner’s income stream. If the building is only half full, there’s a strong chance that the owner may be struggling financially. To determine vacancy rates, get a list of all of the tenants in the building that you’re considering. Also, be sure that the owner provides a current list—not one that contains tenants that plan on signing leases in the future. Those deals can fall through, so don’t depend on them.

Step #2: Check Reputation

You should be equally concerned about the owner’s reputation, both with tenants and in the marketplace. If, for example, you get stuck with an owner that only plays hardball and has a reputation for being less than honest, both you and your business will suffer. Most owners are reasonable, especially during tough times, but why risk finding the one that isn’t?

Utilize broker. If you’re using a broker to help you find a space, the broker can give you a great deal of insight into the owner’s reputation. Because brokers are out in the marketplace and talk with other professionals on a daily basis, they have good instincts and can give you accurate information. Ask them directly:

  • What is the owner’s reputation in the marketplace? Is the owner known for being honest? Does the owner take good care of its buildings?
  • How does the owner deal with brokers? Is the owner cooperative or extremely difficult? Is the owner difficult to contact during negotiations?

Approach tenants. If you don’t have a broker, an equally effective approach is to talk directly to the owner’s tenants. Use the tenant list that you obtained during the creditworthiness portion of your investigation, and ask tenants the following questions:

  • What’s the owner’s negotiation style like? Is the owner a fair negotiator, or is it the “take it or leave it” type?
  • Have you had any direct lease-related disputes with the owner, and if so, can you talk about the exchange? Was it handled quickly, or was it drawn out?
  • Is the owner willing to openly share information about its property? Have you had trouble getting information that was promised to you in your lease?
  • Does the owner respond quickly to maintenance requests? Is the maintenance work good?
  • Is the owner quick to charge for minimal requests that may fall outside of what’s offered in your lease? For example, if your lease states that you’re entitled to janitorial services once a week, will the owner send you a huge bill if you ask it to send maintenance up to help clean a spill during the same week that you’ve already received your regular service?
  • How does the owner handle conflicts between tenants? Do you see any particular patterns with certain types of tenants?
  • How does the owner treat its staff? Have you witnessed any conflicts between the owner and staff members? If so, what was the exchange like?
  • How does the owner treat contractors that it hires? How does the owner treat contractors that tenants hire?

If tenants’ responses give you a bad impression of the owner, you should reconsider leasing space in the building.