The biggest bane to Los Angeles and greater Southern California retail shopping center landlords?

Vacancy.

Each day a unit in your center sits empty is money lost.

And sadly, that’s money you’ll NEVER recover.

While there are several critical steps you can take to minimize your property’s vacancy rate, one measure in particular stands out.

Carefully vetting prospective tenants.

There are a number of factors that strongly indicate a tenant’s potential for success. These indicators include a prospective tenant’s:

  • Credit history
  • Financial position
  • Past operator track record
  • Ability to secure a lease guarantor

It goes without saying landlords should closely examine and carefully evaluate these factors when considering a prospective tenant.

Of course, there are no “guarantees.” Unfortunately, no landlord or real estate professional has a “crystal ball.” Thus, it’s impossible to say with absolute certainty whether a particular tenant will succeed.

There are a number of possible mitigating circumstances…

  • A personal, professional, or financial setback
  • A sudden or unexpected turn in the economy
  • An unforeseen shift in a particular market

These, along with a host of other eventualities, may come to bear on a tenant. Circumstances that can send their operation into disarray, and ultimately forcing them out of business.

But all of this said, analyzing credit, finances, and business track record provides a strong impression of a prospective tenant’s potential performance.

And toward that end, here are the key elements to consider when evaluating a prospective tenant:

Credit History

Running a credit check is your FIRST line of defense.

A credit report that returns a bankruptcy, foreclosure(s), eviction(s), outstanding collections, or late notices should give you pause. These are all SERIOUS red flags.

In some cases, there may be mitigating circumstances. And if the prospective tenant appears desirable and otherwise financially healthy, it may be worth further investigation.

You could offer them the opportunity to…

  • Explain their checkered credit history
  • Provide additional documentation disputing their credit report
  • Provide a guarantor on their lease who will take financially responsible should they default on the agreement

But generally speaking, a tenant with these sort of dings on their credit record is far more likely to be problematic. And as such, they’re probably not the type of tenant you want to invite into your shopping center.

Financial Documentation

With a clean credit report in hand, your next request is financial documentation.

This includes tax returns, bank balances, other financial asset statements, P+L statements for other current or prior businesses, and the like.

Tax Returns

What is the tenant’s annual income, according to their tax returns?

If the business they plan to locate in your property is their sole source of financial support, and they show little or no annual income on their returns, that could be a red flag. Are they’re failing to turn a profit? Or barely earning enough to the cover operational expenses? If so, it could be that their business is not sustainable in the long term.

If the tenant appears otherwise desirable, it may be worth further exploration. In some cases, a tenant’s tax return shows they “make no money” to minimize their income tax liability. It’s not uncommon for business owners to “get creative” with their expenses to show a loss and avoid paying income tax.

If you’re interested in pursuing a tenant with this sort of financial track record, request an explanation. The tenant may be able to produce records that demonstrate their gross profits. And they may have additional documentation that illustrates their “true” net income.

Bank Balance + Other Cash

Every business is susceptible to unexpected financial hardship. It could be due to a lull in business. It could be a health or family issue that’s distracting focus from their business. It could be the result of an overall economic downturn.

Whatever the scenario, it’s important that the business owner has cash on hand to sustain their business in challenging times.

It’s tough to say how much is “enough.” But depending on the type of business the tenant’s operating, along with their monthly rent + CAM obligations, you can usually make a reasonable guestimate.

The point being, executing a lease with a tenant that only has few grand in the bank is quite risky. If they hit a “rough patch” (for whatever reason) their likelihood of default is well above average.

Additional Assets

Cash isn’t always a tenant’s only asset. Again, for tax purposes, in addition to serving other financial logistics, a business owner may not show significant cash assets.

But in lieu of cash, what other assets do they hold? Stocks, bonds, and other financial instruments worth respectable sums? A home or other real property? Another productive business or businesses?

These are credible assets worth considering as acceptable financial collateral.

Liquidity

There is, however, a catch when qualifying non-cash assets. Ultimately, you need to evaluate how liquid the prospective tenant’s assets really are. Can they readily convert assets into cash if needed to fund their business?

Securities can be sold, but when converted under duress, they tend to capture below market value returns. In some cases, well below market value. Will the proceeds be enough to sustain an ailing business?

Homes can be mortgaged or sold, but both scenarios take time. And it’s fair to wonder if the resulting funds will arrive quickly enough to support the business in a time of dire financial need.

Assets are certainly reasonable indicators of a prospective tenant’s financial health. But asset liquidity is also an important consideration.

Business Track Record

With a clean credit record and a solid financial base established, the next issue is the tenant’s business track record.

Some key questions to consider in analyzing a tenant’s business track record…

Is the tenant the expanding or relocating an existing business? Do they currently operate a wholly separate business and are they planning to launch a completely new venture?

With a clear image of their circumstances in mind, what’s the past performance of their business (or businesses)?

A tenant that’s helmed a thriving business for five or more years is generally a solid bet.

Of course, if their business is turning a profit, but they have little to no assets, expansion is bound to be a dicey enterprise. Opening a “new location” of an existing business isn’t quite “starting at square one.” But the expenses involved are considerable.

Plus, you need to factor in carrying costs at their existing location(s) should those operation(s) “hit a rough patch.”

Even a relocation can be costly. And if a build-out and permits are necessary, not to mention that host of other potential add-ons that might come into play, the costs can be significant.

In short, without assets to support the expansion and maintain the tenant’s current business, there’s likely to be trouble on the horizon.

And What About Businesses With a Less Than Stellar Track Record?

A prospective tenant teetering on the brink of collapse, regardless of whether they’re looking to expand or relocate, is obviously a bad bet.

But what about a business that’s underperforming or shows inconsistent or production? If their credit is clean, they have sufficient assets, and you feel their business would synergize well with your existing tenants, it may be worth the risk.

Finally, What About a BRAND-NEW Business Launched By Inexperienced Operators?

A fair number of would-be tenants are looking to launch a new business. And many of these prospects have no prior experience running a business.

They may have worked in the same industry or a related industry. But they’ve never actually operated a business of any kind.

In effect, they have ZERO track record.

If they have a legitimate business plan and they’re well-capitalized, that mitigates some of your risk.

But with no prior experience and little in the way of assets, there’s a strong probability the tenant’s business will fail.

A possible solution to overcome these issues? A well-capitalized guarantor willing to guarantee the lease.

Let’s say the tenant is able to produce a guarantor – A third party with a clean financial bill of health and adequate liquid assets who is willing to sign a “guarantee of lease.” If the tenant’s business fails or they otherwise default on the lease, the guarantor steps in.

This third party then assumes the lease + CAM payments and takes on all of the original tenant’s financial responsibilities associated with the property. In most cases, it’s assumed the guarantor will operate the business themselves, or seek an outside buyer.

Executing a lease agreement with an inexperienced, unproven, or undercapitalized tenant unable to provide a guarantor is an extremely risky proposition. But depending on your circumstances, you may still be willing to accept that risk.

Need Assistance Vetting Prospective Tenants for Your Retail Shopping Center?

Are you a Los Angeles or Orange County area retail landlord or shopping center owner?

CBM can help! Vetting prospective tenants is a HUGE part of our leasing services. Our leasing agents gather credit reports, financial documentation, and business histories. And based on this information, our agents can make recommendations on selecting financially sound tenants with solid operator track-records.

For additional information, visit our Leasing Services page.


Redondo Beach, CA – July 2019, Centers Business Management (CBM) completed a new leasing transaction with a boutique shoe retailer in an exclusive Redondo Beach location

CBM leasing agent, Aaron Guido, recently completed a lease transaction, representing the landlord and tenant, O’My Sole, a boutique shoe retailer. An independent, Southern California-based shoe seller, O’My Sole will occupy an 1,800 SQFT retail shop space in the exclusive Riviera Village, an upscale Redondo Beach retail shopping destination. The property is situated on Avenida Del Notre, where north-bound Via El Prado intersects, in the heart of Redondo Beach’s thriving beach-adjacent retail sector. This exclusive locale is home to a variety of boutique shops, trendy cafes + entries, and other notable retail outlets popular among both residents and tourists, of which the bustling area draws considerable numbers daily.

O’My Sole retails fine dress and casual shoes for men and women. The thriving merchandiser boasts eight locations in total. Four in Southern California, including stores in Beverly Hills, Marina Del Rey, Long Beach, and Redondo Beach. And four Northern California locations, with stores in Santa Cruz, Monterey, and two sites in Carmel.

The transaction proved an “Exceptionally easy deal!” according to CBM leasing agent, Aaron Guido. This level of ease, however, is not always the case for space in exclusive, upscale locations: “Positioned center stage in Riviera Village, Redondo Beach’s premier retail district, at Avenida Del Notre + Via El Prado, which is about as Main + Main as it gets, this was not an expensive space” Guido notes. Of course, the cardinal rule in real estate is: location dictates price. And given this premier location, the landlord’s expectations were by no means modest. Fortunately for Guido, the dominos fell effortlessly into places on this deal: “O’My Sole contacted me directly on a sign call (meaning, the prospective tenant reached out to Guido through a For Lease sign on the property). They were open to the rate and terms. So, we negotiated a modest TI (tenant improvement) allowance on a long-term lease, and inked the contract,” Guido says of the deal’s straightforward nature. “I wish more of them were this simple!” Guido adds offering a wry lament.

“Every day, headlines tout the closure of yet another retailer. But desirable locations will ALWAYS be in demand,” says CBM President, Rick Rivera. “And we continually see retail units leased for uses, supposedly rendered “extinct” by the internet. Moreover, these businesses aren’t just springing up. In the right location, their thriving, and even expanding,” Rivera adds, countering the pervasive myth that retail is “dying.”

For more information about CBM and their retail leasing and property management services, please contact: Rick Rivera 310.575.1517 x201 | rickr@cbm1.com.

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Redondo Beach, CA – March 2019, Centers Business Management (CBM) completes a new leasing transaction with Chick-A-Fila in a former Burger King Drive-Thru location on busy Artesia Boulevard in prime Redondo Beach.

CBM leasing agent, Kelly Harrison, recently completed a ground lease transaction, representing the landlord in a deal Chick-Fil-A fast food restaurant. Situated on a seven-acre parcel, the site is currently occupied by a Burger King drive-thru location. The well-located property is on the major signalized intersection of Artesia Boulevard and Aviation Way in prime Redondo Beach, a thriving South Bay area retail hub. In addition to the physical restaurant, the sizable lot will also host a large parking area. Stationed along a bustling retail corridor, adjacent businesses sharing the intersection include a pre-school, School of Rock (children’s music school) franchise location, and a Pep Boys automotive supply store.

Chick-Fil-A was founded in 1946 in College Park, George, when the company is still headquartered. The thriving restaurant chain operates 2,200 locations nationwide, which includes over 100 stores throughout greater California. With plans to open additional locations across the US and Canada, Chick-Fil-A is currently in heavy expansion mode. In fact, the fast-food giant has publicly stated its aim to become the 3rd largest restaurant chain by 2020.

“The deal involved buying out [the lease on] an existing Burger King [drive-thru location],” says CBM leasing agent, Kelly Harrison. With heavy restaurant saturation and land for suitable sites scarce in Southern California “repurposing existing restaurant sites” is often the best, if not only option, Harrison adds. Harrison also notes the “lengthy and costly entitlement process, paired with the high construction costs” present further barriers to restaurant development deals. As such, there is no start date for principle construction or stated plans for the new location’s grand opening date.

“Restaurants continue to be the most active retail segment. But this deal demonstrates two of the biggest challenges food-users, even well-capitalized, creditworthy organizations face: Land scarcity and high development costs,” says CBM President, Rick Rivera. “A+ sites are few and far between, which is why investors swarm every new opportunity like blood-thirsty sharks,” Rivera remarks on the circumstances that continue to inflate land prices. Rivera also points out, “Chick-Fil-A is making an enormous investment in this project,” adding “they’re on the hook for the Burger King lease-buyout, entitlement fees, architectural and construction expenditures, and carrying costs. And that’s all before they earn a single dime on the deal.” The reason you only see “top-tier credit tenants on Main + Main intersections” is that, as Rivera states, such enterprises require “deep pockets.”

For more information about CBM and their retail leasing and property management services, please contact: Rick Rivera 310.575.1517 x201 | rickr@cbm1.com.

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This year’s ICSC Western Division Conference, scheduled for October 8-10, is happening just over a month from now.

As always, CBM is exhibiting at the convention. And once again, we’ve been assigned a prime end-cap locationBooth #1003 —  just inside the convention hall’s main enterance. The floorplan below indicates are our booth location — Just look for the big green dot ;—)

Are you planning to attend the convention? If so, please swing by booth #1003 and say hi! Members of Southern California’s leading retail leasing + property management firm will be on hand meeting and greeting.

We look forward to seeing you there!

Click to enlarge floorplan

 


Net-Lease Rides Wave of Retail’s True Fundamentals

By Globe St. May 31, 2018

”Retail sales will continue to grow this year as discretionary income ascends.” So Marcus & Millichap kicks off its First Half 2018 Net-Leased Retail Research Report.

Recently named national director of retail Scott Holmes points to a two-fold driver of this good news. First, “The tax law changes and the general health of the economy are creating more discretionary income for many purposes, including investments,” he tells GlobeSt.com.

Holmes also points to a release of last-year’s pent-up demand on the part of investors waiting to see where the then-proposed tax reform would lead. “There was a lot of fence-sitting last year,” he says, “which has turned into increased volume.”

Interestingly, much of that volume is coming from apartment investors, seeking higher returns and lower management responsibilities. “We’re seeing some apartment investors selling that product type at historically low cap rates and moving that money into less management-intensive products, such as single tenant, net-lease retail,” he observes, “and they’re doing so generally at a higher cap rates than apartments.” (Cap rate spreads remain at such historically high levels, the report notes, that they may temper any adverse impact from Federal Reserve rate increases.)

The result of these myriad tailwinds are evident. “This year,” the report states, “retail spending is forecast to post a 4.5% advance, buoyed by the continued acceleration of e-commerce growth. Although online stores consistently expand their footprint, the e-commerce sector is just a small part of a much larger retail setting.”

Among the net-lease retail sectors, “Dollar stores continue to perform well due to their inexpensive convenience items crafted to serve low-income households,” according to the report. “Grocery stores remain a highly sought-after asset as well, which can be largely attributed to the continued improvement of the overall experience. Dine-in options, wine and cheese bars, and more quality products keep foot traffic high and occupancy strong for owners of these assets. Necessity-based stores, like grocers, have proved to be relatively resistant to the rise of e-commerce.”

Tracking the development side of the net lease picture, Marcus & Millichap reports a contracting pipeline. “As the retail marketplace has improved throughout the cycle,” says the report, “builders have largely responded by supplying build-to-suit product for net-leased tenants. As a result, single-tenant structures have routinely made up more than two-thirds of annual deliveries since the recovery began in 2009.

“Despite rising inventory availability due to several high-profile closings,” the report continues, “net absorption has remained positive, generating robust growth in the average asking rent, which rose above 2008 levels for the first time in 2017. Elevated development costs that could be bolstered by the new metal tariffs may trigger further upside in asking rents as tenants vie for the limited space coming online.”

Even interest rates, for the time being at least, are fueling volume. The interest-rate question was the biggest issue after the wait-and-see Holmes indicated previously. “We had a pretty rapid rise in the 10-year Treasury last year,” he says. “It seems to have settled down to the new normal, and for that reason as well more people are transacting. There has been a modest rise, but it always depends on the market and the product type, especially in retail.”

In fact, he adds, high-credit, long-term net lease transactions have in general been less impacted than other types of retail, such as power centers. But it’s really “a case-by-case question,” he says.

As both the report and Holmes point out, the fundamentals of the market–and the resultant investor interest–belie the headlines of doom-and-gloom. In fact, despite said headlines, there were more store openings (4,000 in all, according to Marcus & Millichap) than closings last year.

In all, Holmes sees a strong market for the foreseeable future, with only one bit of advice. “Certainly, the refrain for quite a while now has been cautious optimism,” he says. “There have been some headlines, but as you go through the fundamentals on a broad national basis, conditions, especially earnings, still very much lean to the positive. Despite the headlines, vacancies are near all-time lows, there’s rental rate growth and supply is constrained.”

Which leads us to the advice, directly tied to the essentially local nature of the retail market: “Do your homework on the market,” he concludes.


Well, in the protected waters of Marina Del Ray’s harbor anyway ;—)

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Gorgeous Marina (Del Rey) Views Aboard Dream On

But the harbor scene was no less exciting or enjoyable than open waters. And the setting couldn’t have been more perfect if we’d scripted it… Bright and sunny cloudless blue skies and ideal temps (not too hot, not too cold), trimmed by a gentle, airy breeze that trailed our vessel, Dream On, as we cruised the gorgeous Marina inlet.

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A Grand Time Was Had By One-And-All!

Meanwhile, the entire team was on-hand partaking in a delectable lunch, luscious libations, and engaging conversation as we sailed through the vivaciously glowing midday rays.

All set to the dulcet tones of a solo guitarist, expertly strumming a bevy of classic tunes on his nylon string Spanish guitar.

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The Perfect Ending to Another Productive Year

All-in-all, our boat bash provided a perfect crescendo to another successful year!

Check out more pix from our dreamy cruise aboard Dream On at CBM’s Facebook page

P.S. Many thanks to Hornblower Cruises for making our party such a monumental hit!


Shake Shack Poised for Biggest Growth Year Ever

By QSR Magazine, November 2, 2017

Boosted by both revenue and overall sales increases of nearly 27 percent during its latest quarter, Shake Shack is planning to open more locations in new markets throughout 2018.

During a conference call Wednesday, CEO Randy Garutti said the company plans to open between 32 and 35 new company operated locations by the end of 2018, with about 20 percent of those units expected to open in new markets. 2018 will be the biggest year of unit openings for Shake Shack to date, and will result in year-over-year unit growth between 36 and 40 percent. Shake Shack has revised its forecast of opening 24 restaurants by the end of 2017 to potentially opening 26 units.

New units will include a Shake Shack at LAX Airport and at Hartsfield-Jackson Atlanta International Airport. During the third quarter, Shake Shack entered the San Antonio market and added its second Michigan location.

While sales and revenue increased during the third quarter thanks to year-over-year unit growth of 36 percent, Shake Shack’s same-store sales fell by 1.6 percent compared to a 2.9 percent increase last year. Traffic decreased 3.8 percent.

“We’re pleased with both our top and bottom line growth in the third quarter despite the negative impact of Shack closures caused by two major hurricanes,” Garutti said, adding that the company closed nine locations for a total loss of 33 operating days during the storms.

Earlier this month, Shake Shack launched its kiosk-only, cashless store and tested a split kitchen for greater throughput. Garutti says that the company will continue to invest in these types of innovations and expects an increasing proportion of ordering to be conducted through the Shack app and delivery channels.

“Our average check via the app remains higher than in Shack,” he said. “We’re seeing encouraging return rates from our app users and while [it’s] still in the early days for us, we believe the Shack app is a really important tool for us to deepen our connection with our guests with a strategic push towards more personalized marketing initiatives to drive greater frequency and spending.”

Shake Shack launched its Hot Chick’n LTO during the quarter, and will continue to test chicken as an expanded menu category.

Garutti says that the brand has been pleased with delivery pilots and there is high demand for Shake Shack delivery.

“In terms of where we ultimately go with delivery, anything we choose to build will be with long-term sustainable economics in order to create a strong healthy business,” Garutti said. “For now, you’ll continue to see us approach this area of our business thoughtfully and strategically.”

View original article here…


Center Centers Business Management (CBM) leasing agent, Brett Mero, recently completed a lease transaction representing the landlord and tenant, Wanderlust Creamery, a local ice cream parlor, on a 1,000 SQFT retail space. The unit is situated in a newer, corner shopping center at the intersection of Glendale Boulevard and Glenhurst Avenue in the steadily gentrifying Northeast Los Angeles enclave of Atwater Village. The well maintained, artfully designed shopping center features stunning curb appeal and a variety of successful co-tenants, including Subway, Dunkin Donuts, the UPS Store and more.