Observations & Conversations
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A friend called to bellyache about how The Gap/Old Navy was making him walk on hot coals for a deal in a "C+ at best" mall (his definition, not mine). He told me the economics of the deal and it didn't seem horrendous to me, until the issue of exclusives reared its ugly head. The Gap/Old Navy wanted an exclusive on food, apparel, sneakers and toys for any future tenants exceeding such and such square footage. I wondered why The Gap/Old Navy wanted an exclusive on food. The next day, a friend on the West Coast told me about The Gap/Old Navy bringing inside the store a food area called Torpedo Joe's, (we have calls into The Gap/Old Navy to find out more and we'll let you know what we learn). |
I called a half a dozen developers to see what they knew and
a few shared the use clause language on Gap/Old Navy leases for stores opening next year.
Their use clauses allowed for 12% to 20% of the space to be used for a coffee/tea bar with
bakery items. I asked several developers what exclusives they had to give The Gap/Old
Navy, and it varied substantially from deal to deal, with the best locations having no
exclusives to the "C" sites giving The Gap/Old Navy everything they asked for.
While I was talking to these developers, I asked them why bend over for The Gap/Old Navy?
My logic being: it's not a unique tenant (I have five Gap stores within a twenty minute
drive and this isn't atypical of large markets anywhere); they pay good rents, but I've
seen primary lease terms for new construction as short as four years; percentage rents
kicking in at volumes of $500 to $1000 psf, $1+ million TI allowances and no radius
restrictions. The resounding response was that if they do a Gap or Old Navy deal that a
dozen tenants will play follow the leader and it makes leasing a hell of a lot easier.
However, I hear Simon is telling The Gap to take a walk when it comes to exclusives.
Leasing cookie cutter projects is easier initially, and yes, you'll meet your lender's
pre-leasing requirements, but long term there will be even more duplication between one
center and another. (Can tenant mix get any more boring?) Then the only way we'll tell the
difference is by the developer branding the center - like the customer really cares what
they call the center - or we can dominate the market by offering a unique ambiance or
experience. However, creating a unique environment requires an imagination, something
that's been lacking in the retail and real estate industries for quite sometime.
Another interesting situation I came across was the sale of a family entertainment center.
The facility offered everything from a sports bar to miniature golf. From a quick look,
the operation appeared to be a viable turnaround, but once the skeletons came out the
closet, it was obvious that the point of no return had arrived. The first investor dumped
$7.5 million into the building and fixtures. The second put in a few more millions. Five
years later, it's losing money, the equipment needs to be updated (about $1 million) and
the rent is in chronic arrears. The market is right, although the concept was a bit too
upscale for the trade area, but this could easily be massaged.
After looking harder, the consensus amongst the latest round of potential investors was
that too much money had been spent on the build-out, rent was above a market, much of the
equipment was beyond repair, and the food concession had to be licensed out since it was a
primary drain on cash flow. The only way to get out from under the build-out costs was to
put it into bankruptcy, but then most of the equipment would be removed by vendors (since
the operator couldn't afford to replace it, he went on a split with game vendors).
Needless to say, it will be interesting to see what happens to this building with a
castle-motif surrounded by race car tracks and miniature golf ranges.
I talked with a broker trying to sell a similar type property. The visibility to the site
is phenomenal, but he was having a problem finding a buyer. After he told me the grimy
details involving buying the business and the land, I understood the predicament. The
entertainment operator wasn't making money, therefore the price of purchasing the business
had to be meshed into the sale of the land since the operator couldn't understand that no
one was interested in the business. Even though the site was excellent and the zoning
allowed for almost anything that was legal, the asking price was high and equated to above
market rents. I told him about several "gentlemen's clubs" that could afford the
rent and he's talking with a few of them now at the numbers he needs.
These scenarios just go to show you that there's no such thing as an easy leasing
assignment, especially when the space has an element of uniqueness or entertainment. Until
next month.