Commercial Investment Real Estate September/October 2013 - Page 18

INVESTMENT ANALYSIS Retail Remodel Are partnerships the key to brick-and-mortar success? by Bridget Grams and Mark Richardson For the majority of landlords who work with credit tenants, it is in their best interests to adopt this new way of doing business. A partnership attitude between landlord and tenant creates a win-win for both parties and can comprise various strategies, depending on the existing situation as well as local mar- ket conditions. Working together, tenants and landlords can restructure existing leases to increase cash f ow for tenants while also enabling property owners to refinance at today’s record-low interest rates. Landlords and tenants can split the costs of remodeling brick-and-mortar locations to create more consumer-friendly store layouts and improve revenue for the tenant. At the same time, 16 September | October | 2013 these improvements add value to the under- lying asset for the owner. The property’s value can be further enhanced with a term extension that can result in a lower capital- ization rate and a higher valuation. Transparency is key in building a suc- cessful partnership. Tenants must approach landlords with full disclosure of the store’s specific financial situation as well as that of the corporation. Landlords must clearly understand whether the store and the com- pany as a whole are struggling or thriving, and tenants must understand where the property falls within the landlord’s portfolio. In addi- tion to accurately communicating the store’s f nancial health and broader corporate situa- tion, tenants must be well educated on market conditions, co-tenants, vacancies, and current comparable rents. From a landlord’s perspective, approach- ing tenants with an understanding of what adds value for the tenant sets the tone for a mutually benef cial relationship. Fram- ing negotiations in ways that demonstrate how both parties can benefit is an effec- tive strategy for landlords to use in build- ing successful long-term relationships with their tenants. For example, in the case of a remodel, a landlord could be incentivized to contribute to the remodel cost in the form of cash or a rent abatement for a period of time. In exchange, the landlord could receive some portion of increased revenue generated by the refreshed property or an additional f rm term by the early exercise of an option period. Remodeling Options Certain types of exterior and interior remod- eling options not only increase traf c and rev- enue for stable retail sites, but also can keep distressed brick-and-mortar stores afloat. Successful property modif cations include creating new logos, refreshing exteriors, and updating signage and other outside imagery. Commercial Investment Real Estate i In today’s slowly improving economy, retail success depends upon regularly updating the customer experience and a constant focus on managing occupancy costs. One way to accomplish both of these goals is to combine store remodeling campaigns with commercial lease restructuring efforts. With a partnership approach between tenant and landlord, these seemingly unrelated and potentially confl icting efforts can have a benefi cial outcome for both parties by creatively aligning incentives.