What are the most important elements of completing a successful retail project?

Lynn De Marco

There are many important elements that come together to make a successful retail project. Throughout the development (or redevelopment) process there are many critical decisions to be made and each will have an impact but, the measure of success is realized at the execution of an exit strategy. The exit strategy may be to hold and finance long term or sell and invest the profits in the next project. We will call the most important element in a successful exit strategy "the next guy." The next guy could be you, your children or grandchildren, a potential lender, or an investor with an appetite for quality retail and money to invest.

The next guy is often not given enough thought until you are ready to sell or finance your project. In the current market punctuated by constrained capital and flight to quality, the impact of his influence should not be underestimated or ignored. Both lenders and buyers have narrowed their definitions of a class A or core retail property which has been reflected in stricter, more disciplined underwriting.

If you are the next guy (or want to think like him)-what do you want to see? Certainly, a top location within the property's submarket goes without saying as well as good demographics characterized by strong population density and income levels, easy access from multiple ingress points, traffic signals to facilitate flow, prominent signage and visibility. Well-constructed improvements, efficient layout and excellent curb appeal are also important factors. Let's focus on two elements from an institutional next guy viewpoint-leasehold ownership and tenant leases.

Many opportunities to control development sites are created through leasehold interests. But how will they be viewed by the investment world? First, they need to be financable. That entails making sure there is sufficient term and extension options, a rent stream that can be calculated and leasehold mortgage lender protections-right to notice, right to cure, right to a new lease, etc. In addition, The next guy is weighing the length of his hold period and the impact of the ground lease on his future exit strategy-"will there be enough time on the ground lease at the end of my tenure for another owner to finance?" or "will I be able to refinance at loan maturity if I decide to keep it?" Make sure that you have sufficient term, control of your renewal options or are involved with a ground lessor that is flexible.

Getting a new project leased or an existing project re-tenanted quickly is one way to get to your exit fast, but there are some important institutional next guy questions to keep in mind: Do the tenants have strong corporate credit and the number one or two market share in their sector? Is the project merchandized in response to the demographics? Are there good synergies between the tenants? Are lease expirations staggered or am I set to have a large percentage of leases rolling in the same year?

Many institutional investors and lenders also want to see leases that are drafted to monitor how well the tenant is operating and to allow for ease of operation, financability and resale. The first questions we will get when marketing a property revolves around tenant sales-do the tenants report sales, what are they, what is the trend? If possible structure leases with sales reporting or performance reporting requirements, especially for anchor tenants.

Clean lease structure is also very important. Pitfall clauses to avoid include termination options, excessive co-tenancy, go-dark clauses without rights to recapture, first rights of refusal to purchase and minimum parking requirements. Be aware of lease terms that can (negatively) impact the future cash flow such as allowing reimbursement caps that will cause slippage, flat rents and below market renewal options.

Think like the next guy as you make decisions in your project and try to stand in his shoes. Understanding how various elements of the project could be viewed by the next guy when he is evaluating your project as an opportunity can be the difference between just another deal and a home run.

Lynn De Marco is the managing director at Staubach Capital Markets, New York, N.Y.