Eighteen months ago, the word in retail was contraction. Talk of expansion was mostly shelved, pending some kind of palpable turnaround in the economy.
Today, as 2010 comes to a close and all eyes are trained on 2011, discussion about adding stores is supplanting talk of closures. But, caution the experts, retail growth should unfold slowly and strategically, and not with the optimistic abandon of years past.
“Before embarking on or resuming expansion, it is important to arm yourself with specific information prior to launching negotiations for new space,” David Rodgers, director of lease audit for St. Louis-based Brown Shoe Co., told attendees of the National Retail Tenants Association, or NRTA, annual meeting, Sept. 27-29 in Anaheim, Calif. “It’s about gaining leverage, and that is more important now than ever.”
In the session entitled “Living with the Deal,” presented by Rodgers and Matthew Bisignano, a director of development for the Taco Bell division of Louisville, Ky.-based Yum! Brands, the following lease provisions were presented as key negotiating points for the expanding retailer: termination rights, use clauses, no radius restrictions, consents, occupancy protections, first rights of refusal that at the very least allow the retailer to purchase its existing location, and assignment and sublet provisions. “
A termination right can be the single greatest clause to have in the event your store needs to close before the end of the term,” Rodgers said. Even when focus is on expansion, smart retail chains will provide for the possibility of closure, he noted.
Use clauses are another key lease provision worth bringing to the negotiating table. “Consider any possible use,” Bisignano advised, “and don’t be restricted to just your category of business.” A provision to avoid, Bisignano said, is radius restriction. “It limits the ability to grow your business.”
A buzz phrase among all lease negotiators is occupancy protections, and Rodgers and Bisignano noted four main protections to negotiate into new leases: co-tenancy; exclusive use rights; specific signage rights that include design, size and location; and visibility protections.
“At minimum, protect yourself against structures being constructed that would interfere with your store’s visibility,” Bisignano said.
Another key provision to negotiate into new store leases is eliminating percentage rents, which both Rodgers and Bisignano said are prohibitive for future expansion, remodeling and second concepts. As well, nixing percentage rents in a lease “removes budget uncertainty and eliminates sales reporting requirements and the labor associated with the reporting,” Rodgers said.
He added that building automatic renewal options into new leases ensures a retailer will never lose a store by missing a notice deadline and provides leverage if the landlord wants to re-tenant a space for a higher rent amount.
Other negotiating positions include relocation clauses to allow recovery of all unamortized costs of improvements, plus money for moving expenses, the ability to waive reconciliations and adjustments if not invoiced within reasonable time frames, and the right to obtain more capacity if needed for expansion or other concepts.
“In short, when negotiating leases for new stores, think long term and push for protective language for common issues, expansion and/or failure,” Rodgers said.