How Can a Landlord Reposition a Failing Mall?

Many major retailers are going down the drain as of late. Many of them have gone bankrupt in the last few years.

One of the biggest consequences of these bankruptcies is the fact that the malls housing them are also failing. This may be due to the e-commerce industry, which is undoubtedly problematic for shopping malls.

With that in mind, we thought it prudent to advise landlords on how they can reposition a failing mall and still find success. Let's take a look at what you can do.

Why Are Malls Failing?

The shopping mall rose to popularity in the 70s and 80s. Consequently, developers used this opportunity to build, and by 2016, the U.S. had 23.5 square feet of retail space per citizen. To understand how massive that is, Canada and Australia have 16.4 and 11.1 square feet, respectively. The two countries are right behind the U.S., which has the largest square feet of retail space per citizen on the planet.

So, in many ways, the malls ruined themselves with such massive expansion. In the world of today, there isn't enough need for such an enormous number of retail spaces. The newer generations are less and less interested in shopping, and when they are, they prefer to shop online than to go to the mall. Essentially, there isn't enough business for malls to stay open.

How Can You Find Success with a Failing Mall?

Even though the malls are failing, the buildings can still be used. They are massive investments that cannot be left to rot.

Landlords can reinvent the mall by adding something new to it, like chef-driven restaurants and movie theatres, for example. However, most of these improvements and changes are expensive, and there is still no guarantee that they will succeed.

If a mall is failing, there is no reason to keep it as a retail asset. Naturally, you can sell it if you manage to find a suitable buyer with a large enough offer. However, you can also try out some of the several available repositioning options.

How to Reposition a Mall

Shopping malls are large buildings, and one of the best ways to use them that's not retail-oriented is to turn them into warehouse facilities. Instead of using the building for selling products, it can be used for product distribution, as their location is often useful for it.

Outside of that, a failing mall can be turned into a:

• Farmer’s market

• Park

• Church

• College campus

• Medical facility

• Residential property

Many options exist, but you still need to choose one that’s best for you. You also need to consider the location of the property, what commercial tenants are looking for in the area, and what the current macro trends are. A radical change in the use of the property demands for a careful and detailed analysis.

After taking everything into careful consideration, you can be confident that the decision you make will pay off in the end. For more information, you may reach us at jkillinger@cbicommercial.com

What You Need To Know Before Signing A Commercial Real Estate Lease

Many business owners make a mistake by rushing into signing a lease after making a seemingly fantastic deal. They forget that after signing, there's no going back. That's why it's essential to make sure everything is in order before doing so.

With that in mind, we wanted to tell you all the things you should look into before you finally sign any real estate lease.

Read and Understand the Entire Lease

Nobody likes reading long contracts, but when it comes to real estate leases, you need to. Many landlords use standard leases with general terms, but they can still make mistakes and forget to add something specific to your deal. What’s worse, they can easily add a clause that you might not like.  Also, even if the lease is a “standard” form, you can still negotiate the language to protect you better.

So make sure you read the entire lease and check with a commercial real estate lawyer that specializes in leases to see that everything is in order. 

Don’t Rush the Negotiations

The negotiations are crucial in any real estate deal. You should never rush them, and you should never accept the first offer you get from the landlord. Refuse and try to negotiate the price or other concessions like facility costs, pass-through protections or tenant improvements. 

Important advice: Always be prepared to walk away. If you portray that willingness, the landlord will look at you in a different light, and you'll be in a position from which you can get much more than you have previously hoped to get. 

Are the CAM Fees All Right with You?

The common area maintenance or CAM fees are an essential part of any commercial real estate lease. They state how much of the building’s maintenance you’ll have to cover and how much the landlord will cover. The fee should be based on the percentage of the building you’ll rent, but some landlords try to increase the fees even if that doesn’t correspond to the percentage of your part. Also, what fees should be included in the CAM fees should be reviewed and approved.

Remember, you can, and you should negotiate CAM fees.

Is There an Arbitration Clause?

Disputes can always happen, which is why your lease should have an arbitration clause in it. Most do, but not all will contain this clause. Make sure you check if yours does and if it gives you the right to participate in the selection of an arbitrator and other decisions that relate to arbitration.

Make Sure You Do a Professional Assessment of the Property Beforehand

Even if the property looks good, it's still essential to get a professional to assess the location and the building itself. It will ensure everything is the way it was promised. What's more, only an expert can do a proper assessment of the building. 

Hire Experienced Agents

Before reaching any deal, it’s best to hire the service of an experienced real estate agent. They are not only great at finding you the best deals possible, but they can also assist you in the negotiation process. A good agent will advise you, make recommendations for service providers that specialize in this field (attorneys, inspectors, expeditors, etc…), and ensure you cover everything that matters before you sign the lease.

For more information, you can reach us at jkillinger@cbicommercial.com.

Ready To Buy A Building For Your Business?

Ready To Buy A Building For Your Business?

Many business owners opt for renting a property for their business instead of buying it. The most common reason is that it costs less. However, purchasing a building has its own set of benefits and advantages.

Yet it's not easy to determine which road you should take. That's what we aim to help you with, which is why we'll explain in this piece when is the right time to stop leasing and the time to buy a building for your business.

The Economics of Buying vs. Leasing

First and foremost, we have to look at the economics of both options as they play the biggest part in your decision. 

So, what are the main differences:

• When you lease, you initially pay a much smaller amount, but you end up paying more in the long run

• When you buy, you initially spend more, but your long-term costs are significantly lower

Both options have their advantages, so you have to reconcile the two and find which one is better. You can do that by analyzing the cash flow of both options. That way, you'll see if you stand to lose more or gain more when you buy the property. 

To do this, you need to look at the following facts:

• The terms of the lease

• The combined federal and state income tax rate

• How long your business will use the building as that affects depreciation

• The estimated value of the asset for when you decide to sell it

• Cost of capital

• All the other expenses you'll have once you buy the building

In addition to this, you need to take a look at what your long-term plans are for the business and the building you’re considering to buy. Most business owners look at the short-term, which is why you need to get out of that mindset and consider the future. Will it be necessary for your business to stay in the same location in the future? Do you think your business will require modifications to the building that the landlord might not accept? If the answers to questions like these end up being positive, then it will be best to buy the building.

Other Questions to Consider

Several other questions can help you decide whether or not you should buy the building:

• Do you need to control the building for your business to operate smoothly and advance?

• Are you able to cover the potential losses you might have in the first year or so?

• Are most buildings that you find suitable for your business only offered for sale, and not for renting?

• Are you ready to take over all the maintenance duties and expenses that would otherwise be covered by the owner?

• Is the value of the land where the building is located increasing, and will it most likely continue to do so?

• Is the building located in an opportunity zone or in a location that offers tax incentives for owning properties?

If your answer to most or all of these questions is a resounding yes, then there's no need to continue to deliberate. The decision has already been made – you should buy the building. However, if the answers are mostly negative, then you should choose to lease instead. 

If you require some further assistance in your decision-making process, you may reach me at jkillinger@cbicommercial.com.

Can I Modify My Space in a Commercial Lease?

Commercial leases are a complicated business for most landlords and investors. Much of it is legal talk and almost always requires help from a lawyer, in addition to the help you get from your commercial real estate agent. 

A lot goes into a regular commercial agreement, and there is much you need to understand before we can answer the question. By the end, you will know whether or not you can modify the space you have per your commercial lease, and who will be responsible for the modification.

Using a Commercial Lease Amendment 

Naturally, if any party contained in the lease were to modify the space listed in the contract, they need to change the very agreement. Doing this is possible with the use of an amendment. If both the landlord and the tenant agree, a single paragraph or a whole section could be changed in the agreement. The change is made to allow for modification or other improvements that were not previously mentioned in the lease.

This change is called a commercial lease amendment, and it is not to be confused with a commercial lease addendum. An addendum is a separate document that goes together with the lease once it’s signed. 

If you decide to go this road, proper negotiation between the owners and renters must take place. 

What Does an Amendment Change and What Does It Allow?

Several things can be achieved with a commercial lease amendment:

• The terms of the lease can be extended

• An adjacent space can be included in the lease and occupied by the tenant

• Modifications and improvements to the space from the lease can be made

The last part is of interest to us. In addition to modifications and improvements, an amendment can allow for the space to be increased or decreased in size. All of these things are very important for commercial leases because the business occupying the space leased can grow or struggle through time. That makes changes to the actual physical space necessary.

Many of these changes are often allowed by the initial lease as tenants may want to make changes to the building from the very start. The changes are outlined in the lease, and the tenant makes the changes upon signing the contract. 

However, as we’ve already mentioned, changes might be required over time – most of which are rarely planned in advance. For the desired modifications and improvements to take place, both parties need to agree and change the lease appropriately. What’s more, the amendment should also clearly state who is responsible for these changes. In most cases, it is the tenant, but sometimes it could be the landlord as well. 

Key Takeaway

All in all, almost any kind of modification or improvement to the space from the lease is possible. As long as both parties can agree, they can make it work. They only need to make sure the lease acknowledges their deal to the letter so that no future disputes will occur.

For more information, you may reach me at jkillinger@cbicommercial.com