CBM’s Retail Shopping Center Management & Leasing Blog

Retail Real Estate News & Trends in Southern California
 

Sale-Leasebacks Gain New Appeal for Retail Owner/Occupiers

By Globe St | June 25, 2018

Scott Holmes, Marcus & Millichap “Retail companies operating out of a property they own face new tax rules,” says Holmes, “and many could benefit from selling their property and leasing it back from an investor.”

CALABASAS, CA—Strategy changes for retail owner/users have become more frequently debated, says Scott M. Holmes of Marcus & Millichap, who reports that this shift in approach is largely due to changes to the tax code. This bodes particularly well for the sale-leaseback sector, as the SVP and national director of retail indicates in the firm’s Retail Spotlight.

“Investors’ desire to own stabilized assets with long-term tenants,” he says, “and the ability of owners to unlock equity for reinvestment into operations keep retail sale-leaseback transactions steady.”

This consistency in deal flow occurs against the backdrop of equally firm market fundamentals. “Encouraging single-tenant trends persisted last year,” Holmes states, “as demand for single-tenant locations held firm and rents continued their upward trend. Limited development will support the current trends through 2018, reinforcing the demand of these generally stable assets.”

Simply put, the new tax code minimizes some former benefits of ownership for companies operating from a location they own. “Previously,” says Holmes, “owner-user companies could deduct all of their interest expenses on their taxes, but the new provisions restrict the deductibility of business interest for companies with gross receipts in excess of $25 million. Now, interest totaling just 30 percent of earnings before taxes, depreciation and amortization can be deducted on taxes.” By selling the property and leasing it back from the investor, the facility cost once again becomes deductible.

Investors are focusing heavily on several single-tenant retail types, including quick-service restaurants. These assets are especially attractive, given their brand visibility and ability to resist both economic mishaps and e-commerce. “Investors also seek grocery stores, discount stores, fast casual dining, pharmacies and a range of other business types,” Holmes adds.


In a prior post, we addressed our #1 most frequently asked question: How Much Does Property Management Cost?

Which brings us to our second most frequently asked question: What Services Does Property Management Include?

This is a GREAT question! And obviously, key to any landlord’s decision when considering hiring a property management company to oversee their portfolio.
So, to answer this all-important, burning question, here are the 7 Primary Services Retail Property Management Services includes:

Accounting

At CBM, we employ a dedicated accounting department and use specialized property management-specific software to monitor and track all aspects of Accounts Payable (AP), Accounts Receivable (AR) and Common Area Maintenance Reconciliation for our entire management portfolio.

Software platform – We use a property management software platform called Skyline, which is specifically design for commercial retail properties.

Accounts Payable – Our AP services include paying, recording, and cataloging all utility bills, vendor invoices, mortgages, and property taxes. At the end of the year, just hand your CPA our General ledger to provide a complete property accounting!

Accounts Receivable – Our AR services include receiving and depositing monthly rents and Common Area Maintenance (CAM) payments. Additionally, to make these payments, most of our tenants use an automated online bill pay service (ClickPay.com) that debits funds from their bank account and transfers them directly into the property’s trust account.

Common Area Maintenance Reconciliation – Our accounting department conducts Common Area Maintenance Reconciliations, ensuring tenants on Triple Net (NNN) leases are paying their proper share of Common Area Maintenance (CAM) fees.

Site Visitation

CBM property managers visit the sites they manage on regular basis with detial reprots that include photos communicated electronically. These visitations serve several purposes:

Monitor property condition – Managers ensure the property is in good physical condition and free of any damage or hazards that may cause accidents and lead to lawsuits. Additionally, managers monitor the property as a whole, and take note of any larger issues that may require maintenance – HVAC systems, roof, building façade + structure, parking lot, sidewalks + curbs, etc…

Confirm + evaluate vendor services – Managers ensure vendors are not only performing the services for which they have been contracted, but executing those services at a high level.

Develop a rapport with tenants – Managers make themselves visible to tenants onsite, both to establish authority at the property as an agent of the landlord, and to allow tenants the opportunity to voice concerns and make complaints.

Tenant Relations Management

Managing tenant issues is a never-ending and thankless task. Tenants gripe and complain. Tenants have disputes and conflicts (with one another and landlords). And tenants ask for breaks and reductions in rent and CAM payment, often accompanied by hardship pleas (whether legitimate or not). Meanwhile, dealing with this relentless stream of demands is exhausting and often emotionally draining.

To mitigate this drudgery, property managers step in to create a buffer between landlords and tenants. Managers fields tenant requests and report all communications to landlords. Landlords are then free to make carefully considered decisions, without pressure from emotionally overwrought or manipulative tenants.

Ultimately, managers enforce lease terms, carefully balancing landlord rights and tenant concerns. In short, exercising a firm but fair hand.

Vendor Oversight

To ensure your property remains in peak physical condition, property managers closely monitor vendor services to confirm consistent and high caliber performance.

As part of site visitations, managers verify that sweeping + general cleaning, trash removal, landscaping, and other Common Area Maintenance task are being executed. And executed with careful attention to detail.

Additionally, if a vendor fails to perform a contracted service, performs inconsistently, or performs poorly, the manager will hold that vendor accountable. And if the vendor fails to improve, the manager will terminate their services and hire a replacement provider.

Finally, if a vendor’s fees increase while their level of service declines, a manager will source alternative providers, solicit bids, and make recommendations as to which alternative makes the most sense for the property.

Project Management

Over time, as a property ages, wear-and-tear is unavoidable. Eventually, building exteriors + facades, roofs, HVAC systems, parking lots, sidewalks + curbs, etc… all need to be replaced.
Obviously, this is a Herculean task that involves identifying contractors, soliciting bids, selecting a suitable vendor, and overseeing the project.

Now, a property manager is by no means a general contractor. And possesses neither the expertise nor legal authorization to act as one.

But your manager can help you…

== > Source contractors for various construction projects

== > Solicit construction bids

== > Advise you on the pros and cons of each option

== > And interface with your contractor of choice, acting as your agent in monitoring the construction process

Lease Assignments + Subleases

In many cases, tenants come and go before the term of their lease is fulfilled. It’s just the reality of the retail strip center world.

Of course, to vacate before a lease term has expired, a tenant must “assign” their lease or or sublease their space. And while not quite as difficult as executing a brand-new lease, assigning a lease is still an involved process that requires fully qualifying a replacement tenant.

Managers undertake this qualifying process, conforming prospective replacement tenant’s use-type acceptability, verifying their experience and business ownership track record, and determining their overall financial fitness. Ultimately, managers strive to ensure the replacement tenant will meet the vacating tenant’s financial responsibilities.

Lease Renewals

Whether lease options are in place or an initial lease is simply expiring, tracking and executing lease renewals is an integral part of maximizing a shopping center’s profitability.

To ensure lease options + lease renewals are handled accordingly, managers…

== > Keep landlords appraised of approaching renewal dates

== > Update landlords on tenant decisions to exercise options or vacate following lease expirations

== > Advise landlords on current market rents to negotiate competitively price renewal agreements

== > And assist landlords in negotiating financially beneficial lease agreements

And These Are Just a Few of the Core Services Property Management Provides…

For more information, visit our Property Management Services page at cbm1.com/propertymanagement


Why Fitness Tenants Are Leading Retail Leasing

By Globe St. June 29, 2018

Petra Durnin is the director of research and analysis for the Southern California market at CBRE.

Fitness tenants are driving retail leasing activity in Southern California. According to a new report from CBRE that looked at retail leasing activity, fitness tenants are among the top five retail users in Southern California, and they are expanding. This is a stark change from the activity from this retail segment in the past, when fitness centers were not considered a primary tenant. Today, fitness centers are occupying big boxes as well as smaller footprints and in some cases can even serve as anchors in shopping centers. Last year, there were nearly 1.2 million square feet and 100 transactions of fitness centers in Orange County, the Inland Empire and Los Angeles. This year, there has already been 400,000 square feet in fitness leasing activity and nearly 40 transactions. We sat down with Petra Durnin, director of research and analysis at CBRE Southern California, to talk about the research and what is driving fitness center activity.

GlobeSt.com: Why have fitness tenants become such active retail occupiers?

Petra Durnin: Fitness clients seek more experiential retail options that extend beyond the workout period. Fitness centers provide a service that is internet proof, occupy much of the space left behind from big box/department store closures, fill non-peak retail hours, and attract new customers willing to travel farther for unique fitness experiences. The natural partnership between anchor tenants such as grocers is formed due to the trend towards healthy living. Nearby amenities such as restaurants, coffee shops and personal services attract gym goers, increase foot traffic and sales.

GlobeSt.com: These were once considered undesirable tenants. How have landlords responded to this new demand, and has the lease negotiation or vetting process changed?

Durnin: Fitness retailers have become much more demanding in their requirements for stronger co-tenancy, earlier termination rights, and more exclusive contracts to protect their brand and business. There is also strong demand among budget-oriented fitness clubs that require 15,000 square feet and up to provide a no frills experience and a clean/well-equipped center.

GlobeSt.com: Is the growth of fitness operators enough to absorb the space from some big box closures that we have seen? Why or why not?

Durnin: Big box product appeals to many different types of tenants, but those located in close proximity to amenities that tie in to fitness and health will appeal to gym goers and attract fitness tenants.

GlobeSt.com: Restaurants have been another tenant that has driven retail leasing, but there is some talk about a surplus of restaurant options. Is there any concern about the number of fitness spaces opening or if the consumer demand can support the trend?

Durnin: The rise of health and fitness supports the current growth and options are important in relation to the live/work/play paradigm. Both the aging population and younger generation will further drive the evolution of this sector.

GlobeSt.com: Is this a lasting trend? What is your outlook for fitness center activity?

Durnin: A future trend could be for fitness clubs to locate near residential communities or medical/hospital complexes. They could partner with mixed-use and lifestyle centers with a larger experiential platform instead of traditional retail centers. Boutique fitness clubs could look to diversify further to provide an even more personalized experience with unconventional offerings such as trampoline parks and skydiving centers.


We wish you a happy and safe holiday 4th of July as you enjoy this holiday with your family and friends!


853 Atlantic Avenue, Long Beach, CA

Centers Business Management (CBM) leasing agents, Aaron Guido and Daniel Barriga, recently completed a lease transaction representing the landlord and tenant, a salt therapy clinic, on a 1,152 SQFT freestanding office building. The unit is in a completely remodeled, corner freestanding office/retail building at the intersection of Atlantic Avenue and 9th Street in prime Long Beach. Boasting exceptional curb appeal, this architecturally distinctive property is situated amid a dense residential neighborhood.


8422 Sunland Boulevard, Sun Valley, CA

Centers Business Management (CBM) leasing agents, Brett Mero + David Guardado, recently completed a lease transaction representing the landlord and tenant, an urgent care clinic, on a 1,500 SQFT retail space. The unit is in a corner strip center at the signalized intersection of Sunland and Nettleton, less than a block north of the 5 freeway, in prime Sun Valley. An Acapulco Mexican restaurant and 7-Eleven anchored strip center are across the street. And Mobile gas station is adjacent to the block-long neighborhood center.


Did The Supreme Court Just Save Retail?

By Globe Street, June 22, 2018

WASHINGTON, DC–In September 2019, a mall in Toronto owned by Ivanhoé Cambridge will debut the first Cirque du Soleil Entertainment Group’s concept of indoor family entertainment experiences specially designed for retail locations. Called CREACTIVE, it basically lets shoppers take the stage and flex their inner circus skills. “CREACTIVE is perfectly aligned with our vision for the future of retail: to join forces with the right partners to offer innovative experiences for the benefits of local families and communities,” said Claude Sirois, president, Retail at Ivanhoé Cambridge in a prepared statement.

CREATIVE is the latest example of how retail is remaking the shopper experience by offering exciting experiences and entertainment. Experiences and entertainment, it can be noted here, cannot be disintermediated by the Internet. Retail has been heading in this direction for some time and for many reasons — a main one being the bleeding it has suffered from online sales competition.
South Dakota v. Wayfair

Yesterday the US Supreme Court struck a blow on behalf of physical retailers with its 5-4 vote in the case South Dakota v. Wayfair. Essentially it ruled that US states may impose sales taxes on Internet businesses, even if they don’t have physical locations in those states.

The justices, led by Justice Anthony Kennedy, overturned the court’s 1992 decision in Quill v. North Dakota, which had affirmed the “physical presence” test for state sales-and-use tax collections.

“Each year the physical presence test becomes further removed from economic reality and results in significant revenue losses to the States,” Kennedy wrote. “These critiques underscore that the physical presence rule, both as first formulated and as applied today, is an incorrect interpretation of the commerce clause.”
A Game Changer?

At its heart, this was a story about states seeking to recapture lose sales tax revenues as well as one about the supposedly unfair advantage that internet retailers have had for so many years over brick-and-mortar stores that must pay sales taxes.

Now that the Supreme Court has spoken, the question becomes how much of a benefit will physical retail realize?

One thing is for certain: the trend of experiential retail offerings such as CREATIVE is here to stay. Or put another way, the concept and culture of e-commerce is so baked in with consumers that the additional costs that will be imposed will not be a game changer.

“Physical retailers surely will benefit from this decision, but the universal sales tax imposition alone will not be enough to reverse retail’s decade-long slide, in part because consumers already are very comfortable with shopping online, and the lack of sales tax is only a relatively minor consideration in their shopping decisions,” Colliers Chief Economist Andrew Nelson tells GlobeSt.com.
What Sales Tax Holiday?

He notes that surveys by comScore show that the lack of sales tax is the primary factor motivating only 10% of online sales, while free shipping (54%) and the availability of exclusive online deals (23%) are far more important.

Also Nelson says, most consumers no longer enjoy the online sales tax holiday anymore.

“Amazon — by far the dominant e-commerce retailer, with more online U.S. sales than the next nine such retailers combined, according to ecommerceDB.com — already collects sales taxes on all products it sells directly in 45 states plus Puerto Rico and the District of Columbia though not always on goods it sells on behalf of affiliates.” And with other leading retailers having followed suit, as a practical matter most consumers are already paying the tax.

Indeed University of Richmond tax law expert Hayes Holderness tells GlobeSt.com that Amazon quite expertly has flipped the script on e-commerce from “buy it sales tax free” to “buy it conveniently from your home.” “In light of this change, don’t expect the ruling to hurt the growth of e-commerce in any significant way,” he says.

With this Nelson agrees. “The diversion of these sales from physical to online retailers undoubtedly has hurt brick-and-mortar retailers, but physical retailers are facing a host of other challenges that are forcing a fundamental reckoning.”

He notes that e-commerce itself is nearly not responsible for all of the problems befalling the nation’s malls and shopping centers. “Online sales still account for only 10% of non-auto retail sales, rising to 20% or more if the retail categories that typically are not sold online are excluded, such as groceries, home improvement, small convenience items and prepared foods.

“Physical retail will still have to find ways to counter e-commerce’s convenience argument, and the change in tax collection obligations is unlikely to alter that fact,” Holderness says.
Challenges In Both Camps

It should be noted that this decision will move forward into the online retail world ease. E-commerce vendors will have to figure out how to handle the byzantine system of sales and local taxes, although many have anticipated this ruling and gotten a jump on this issue. “How it is implemented will be important and will be subject to much debate especially as the tax relates to companies doing business across and within every state,” says James M. Rishwain, Jr. Partner of Pillsbury Winthrop Shaw Pittman LLP.

Meanwhile retail, for all the challenges it is still facing, can expect easier times — although not necessarily because of the ruling.

“There’s reason to believe that some of the worst pain is behind us as industry players adapt to the new market and consumer realities,” says Collier’s Nelson. “But that doesn’t mean retailers can now rest. Hardly. Retail sales will not swing strongly back to physical retailers just because sales taxes will now be universal online.”


29051 S. Western Avenue, Rancho Palos Verdes, CA

Centers Business Management (CBM) leasing agent, Jason Ehrenpreis, recently completed a lease transaction representing the landlord and tenant, Pie Rise, a gourmet pizza restaurant, on a 4,650 SQFT freestanding retail building. The property, formerly a Marie Callender’s, is at the intersection of Western Avenue and Trudie Drive in prime Rancho Palos Verdes. Immediately adjacent to the site is a Broiler Express drive-thru location and a Denny’s restaurant. Across the street is a Ralph’s anchored community shopping center with a Carl’s Jr drive-thru on the hard corner.


Congratulations once again to CBM’s 2017 CoStar Power Broker Award winners!

Dave O’Connell, Jason Ehrenpreis, and David Levcovitch were formally awarded their 2017 Power Broker plaques at a ceremony this past Thursday.

The event was held at CoStar’s fiftieth floor offices at the 777 Figueroa Street building (adjacent to the 7th+Fig shopping center) in the heart of downtown Los Angeles.

A grand time was had by all on hand, set against the stunning backdrop of panoramic LA skyline views.

 


24372 Vanowen Street, West Hills, CA

Centers Business Management (CBM) leasing agent, David Levcovitch, recently completed a lease transaction representing the landlord and tenant, a local martial arts studio, on 2,800 SQFT retail space. The corner strip center is at the intersection of Vanowen + Valley Circle in prime West Hills. A newer, well-maintained, 2-story property, the center is home to Allstate, Farmers, and State Farm insurance agencies, in addition to a diverse mix of service-oriented tenants.