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Leasing to temporary retail tenants.

Leasing to Temporary Retail Tenants

There has been growing interest and attention within the shopping center industry in leasing to temporary users of space. This method of leasing involves the short-term use of any of the following alternatives: kiosks, pushcarts, four-sided glass showcase modules, wall modules (vertical units for corridor walls), and empty stores.

Temporary tenants can be used throughout the year. However, the greatest period of activity is during peak holiday times. Temporary lease periods may be as short as one day up to perhaps three months or more.

Advantage of short-term leases

The reasons shopping center owners and managers devote considerable time and energy to a planned program of leasing to shor-term users vary.

* Income. Income is the most obvious reason. Figure 1 first appeared in the September 1985 CARLSONREPORT. It shows the income from temporary tenants as reported by 14 major developers in a survey originated by Robert T. Newman of The Pyramid Companies in upstate New York.

Owners of large regional malls have added millions of dollars to their gross revenue through leasing to temporary tenants. Indianapolis-based Melvin Simon & Associates recorded about $9.5 million in temporary tenant gross income in recent year. And Simon's success is mirrored by many others. The Rouse Company, Corporate Property Investors, Equity Properties, The Cafaro Company, and Homart Development Company all created active inhouse programs and staff to implement temporary leasing plans.

* Variety. Temporary tenants can play a major role in a center's overall merchandise mix and profitability. They can add exceptional seasonal emphasis to a mall's promotional campaigns, providing variety and stimulating additional center traffic.

* Atmosphere. Small vendors help to create the atmosphere of a constantly busy, constantly changing marketplace. Merchandise sold by temporary vendors can often attract the casual, impulse buyer, who might not enter an in-line store.

* Testing. Short-term arrangements are ideal ways for center management to test new, first-time retailers in a lowrisk mode. Short-term leases are seen as incubators for emerging retailers with little capital or experience. Some temporary retailers go on to become permanent tenants. Others learn they do not have the right concept or the aptitude for retail at a minimum loss. Establish retailers also find short-term leases an effective way to test new ideas or new products.

* Empty stores. Vacant stores are never a plus, and usually they are a definite negative element in a mall. It is a rare center today that does not host one or more store spaces awaiting an appropriate tenant and use. A temporary user can assist in the permanent leasing efforts by creating a demand for space. When the store is occupied, even temporarily, there is the illusion of a fully occupied center. A temporary use may well prove to be successful enough to warrant serious consideration for a permanent in-line store in the center.

* "Fad" merchandise. An obvious strength of temporary tenants is the opportunity for quick turnover of fad merchandise. A product typically goes through a life cycle. If it is something new, sales may be strong for perhaps two or three weeks. Then, there will be a leveling-off. Gradually sales decline as the immediate popularity wanes. When a fad is no longer hot, the vendor closes shop or finds another item with merchandising promise.

* Competition. In almost every location, shoppers have choices. Consequently, the center that can create the most fun and most interesting shopping environment may be most successful. And what better way to add fun and excitement to the shopping experience than with a well-organized temporary tenant program?

Finding space for

temporary tenants

Locations for kiosks, pushcarts, and showcase modules can usually be found throughout the common areas of the mall. Appropriate caution and concern must be shown for the in-line, permanent tenants so as not to create either a visual block or a diversion that draws away from an existing store. The goal of a kiosk, pushcart, or other temporary unit is to attract the customer without competing with its surroundings.

Where space permits, some center operators will group pushcarts to create an exciting marketplace of topical merchandise. Blank corridor walls are appropriate for the vertical units called tall-wall mall stalls. These may also be used adjacent to columns in strategic locations within the center.

Other obvious locations are those stores that are not currently rented and thus sit vacant. Larger stores can also be utilized by placing appropriate barricades to reduce the depth.

Recently, far greater attention has been given in the specialty leasing field to getting more temporary tenants into available in-line store space. Malls and their common areas, either by virtue of their original design or as a result of remodeling and rehabbing, no longer have the space available for pushcarts. Common areas are more compact than ever and this often precludes their use for temporaries. But vacant in-line space is in plentiful supply in many national markets.

In some centers, the use of the parking lot or adjacent areas might be considered for temporary use. Such things as carnivals, farmers' markets, automobile sales and shows, recreational vehicle displays and sales, tent sales for furniture, sporting goods, and even flea markets add to the marketability of a center. Of course, not all centers warrant this type of merchandising, and discretion must be used.

The physical aspects

of temporary space

While a variety of sizes and types of temporary fixtures are possible, the following are those most frequently found in North American centers.

Pushcarts are usually 4' x 6' to 5' x 7' in size. They can be used singly or in groupings, which also might include supplemental risers, boxes, barrels, and baskets. Many center managers see advantages to buying their own retail carts for use by temporary tenants. The logic is obvious; the center wants a quality appearance in keeping with the image of the mall. Ownership of the carts ensures a consistency of display. At the same time, adapting the cart design to specific retailing uses will help attain the maximum impact for the temporary tenant.

Carts range in cost from $1,000 to $4,000 and with normal care should last up to five years. Specially designed units will cost considerably more. Horton Plaza in downtown San Diego spent about $15,000 apiece for their carts several years ago, but these are in keeping with the overall, upscale decor and design of that center.

Kiosks range in size from 10' x 12' to 10' x 15'. The Pyramid survey showed the following range in average kiosk size.
Up to 100 square feet 20%
100 to 125 square feet 50%
125 to 150 square feet 25%
150 to 175 square feet 5%


As noted previously, the move toward narrower malls and more compact common areas may mean fewer and fewer kiosks in many of the nation's centers.
Figure 1 Less Than 500000 to More Than
Average Income $500,000 1,000,000 1,000,000
per Center (*) Square Feet Square Feet Square Feet
$0-$25,000 42% 0 0
$25,000-$40,000 28% 43% 14%
$40,000-$60,000 14% 19% 18%
$60,000-$80,000 14% 0 1%
$80,000-$100,000 0 12% 37%
$100,000-$125,000 0 0 14%
$125,000-$150,000 0 0 0
More Than $150,000 0 25% 14%


Motivation modules are usually foursided glass showcases 4 feet square and of varying heights from 4 to 8 feet. These cases may be viewed from all sides, either as a full-dimensional showcase or broken up into separate areas by the use of backgrounds to separate the sections.

Tall-wall mall stalls may be 3 to 6 feet deep, 12 to 18 feet wide, and of varying height. They are generally designed to be set up against corridor walls or on columns in strategic locations. Stalls are generally constructed of quality materials for permanent use. Thus they avoid the impression of a last minute add-on or a county fair booth.

Empty in-line stores as large as 3,000 square feet or more can be utilized by the creation of a shallow depth unit going back 15 or 20 feet. Often a barricade module is built that doubles as a showcase/storefront as well as a block out to construction behind. These modules may contain windows, shelves, counters, and so forth. All code requirements usually must be adhered to and appropriate security and life-safety provisions should be followed.

A variety of conventional store fixtures can be used, either on their own as a unit or as supplemental to a pushcart. These might include folding screens, hang racks, wire or grid racks, and the like. Many centers make qualified design and promotional experts available to the seasonal specialty retailers, with excellent results.

Finding temporary tenants Just who are prospects for this specialized form of retailing?

Just as with a permanent leasing plan, it is imperative that the staff handling the temporary leasing activity be guided by market research, consumer preferences, proper merchandise mix, and compatible locations. The concentration of leasing to temporary tenants should be on impulse-type merchandise within the $15 to $25 price range.

Many managers believe the first option should be the center's permanent full-time stores. They may want to showcase specific product lines or to expand their seasonal offerings without eliminating staple lines of merchandise. They may want to test a new line or concept without the necessity of making a long-time or major commitment.

Other sources for prospective temporary tenants include:

*Craft, art, and food shows and local fairs. Involvement within the community enables the center's leasing team to identify local businesses and tenants that can enhance the mall's tenant mix.

* Wholesalers and distributors. Contact them for suggestions and ideas. They know their product lines best.

* Trade associations. Associations are usually eager to assist their members in promoting business.

* Service-related tenants. Real estate sales, tax preparers, financial products, automobile leasing, insurance coverages, home improvements, health maintenance organizations, credit-card solicitors, and educational booksellers may all need temporary locations.

Place signs in the windows of vacant stores indicating the availability of the space on a temporary basis. Or consider advertising in the local newspapers, possibly in the classified section. Cold calling from the phone book is another way to generate prospects.

Management is frequently concerned about the negative reaction to temporary tenants by the mall's full-time, permanent occupants. Permanent tenants are logically concerned about the potentially adverse effect of temporary tenants to their own businessess. This is one reason why it is recommended you always solicit permanent tenants first for temporary and seasonal uses.

Bear in mind that there is a fine line between healthy competition and overlapping or duplicating merchandise. But centers should be in the business of offering the shopping center's customer the best choice in goods and services, not just pleasing the retailers.

It may be appropriate for the center to share some of the temporary tenant revenue with the merchants' association (or the advertising fund). Of course, the center should be charging fair rents for temporary uses and should either allocate some portion of the rent toward common area maintenance costs or charge for these costs separately. Invoking an advertising requirement or contribution toward the center's overall marketing fund is also wise.

Specific agreement provisions

for temporary tenants

Many center owners and managers have to use a license agreement with a temporary tenant rather than a lease. While laws vary somewhat, generally it is conceded that a lease conveys an interest in the real estate whereas a license provides only for the use of the realty and does not convey any other interest in the space.

The agreement should be short and simple, but must also cover all important details. In North America, the following topics are usually a part of a license agreement.

* Term. The length of time the license is in effect may be as short as one day or a weekend, but more often the minimum will be a week. (The center generally wants to give a customer the opportunity to return defective merchandise.) The length may be for as long as three or more months.

The Pyramid Companies survey notted the following limits on the length of temporary tenancies:
One month 30%
One to three months 50%
Three to six months 0%
Six months to one year 20%


* Use. This clause should describe the specific use and goods or services. Considerable care should be used when writing this clause, and both parties must understand what is acceptable. Not all lines of merchandise are appropriate for temporary vending. Single-item, single-theme merchandising is essential. The vendor should offer a limited assortment, but in volume and depth.

*Location. An exhibit detailing the exact size and placement of the merchandising unit should be included in the agreement and initialed.

*Right to relocate. The right to relocate the tenant must be retained to minimize potential problems for center management. This may require a rent adjustment should the alternative location beless desirable.

*Rental rate. Usually the license specifies a fixed or minimum rent based upon various factors such as the going rent for comparable space, the size and attractiveness of the location, the product's sales potential, and the length of the agreement.

Cart rents may range from 150 weekly to up to $300 during peak seasons, both usually against a percentage rent of 15 percent, more or less. Kiosks and tall-wall mall stalls might rent for $700 to $1,200 monthly, against 6 percent to 10 percent of sales or more.

Percentage rents are usually included along with a provision for regular sales reporting (daily, weekly, or bi-monthly). The agreement should then include the center's right to audit the sales. Payments toward utilities, common area maintenance, and advertising are also appropriate. Security deposits in advance are a wise precaution.

*Operating aspects. The management should seek a quality presentation from temporary tenants. To assist them in this aim, the agreement should include appropriate language describing the dress code, the housekeeping standards, the acceptable techniques of selling, the return policies, the operating hours, evidence of adequate insurance protection, signage, and advertising.

Other clauses of the license agreement might include the right to approve the space design in advance, indemnification and insurance clauses, prohibition against assignment or subleasing, and an escape or cancellation clause by center ownership.

From center management's perspective, the key to a good license agreement is to enforce it fairly, but firmly. Stick to the payment schedules, and move rapidly if a tenant fails to make timely payments. Get a 24-hour phone number and the name and relationship of the person who will answer it. It is imperative to monitor these temporary operations daily, paying particular attention to the merchandise being offered and the use clause.

Conclusion

An informed temporary-tenant strategy, coupled with a qualified and specialized leasing group, will allow many shopping centers to convert the liability of vacant space into the asset of a profit center. The bonus may be the ultimate conversion of a temporary into a permanent, full-time, in-line tenant.

PHOTO : If center passageways are wide enough, a glass wall stall will create the sense of a permanent shop in an otherwise unproductive space and generate new income.
COPYRIGHT 1989 National Association of Realtors
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Copyright 1989 Gale, Cengage Learning. All rights reserved.

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Author:Carlson, Harold
Publication:Journal of Property Management
Date:Jul 1, 1989
Words:2524
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