By: Peter D. Morris SCLS, SCSM, SCMD

It doesn’t take a business degree to know that to improve operating returns at the corporate or property level means revenues must increase, expenses must decrease or a combination of the two. Aside from the obvious question of occupancy, we’ll explore some other aspects to improving returns.

At the company/enterprise level removing waste, eliminating redundancy and cost containment are all common sense ways to add value. As is a serious review of the debt structure and financing options. Another avenue to explore is to examine the company’s sacred cows – policies and processes that have been implemented over time. Some may no longer be needed or the methodology may be outdated. Challenging the status quo may reveal hidden opportunities. For example, I once challenged the way our service was delivered to our clients and their tenants. The end result was a realignment of some staff duties that resulted in a 15% decrease in our cost of serving our accounts. As an added bonus quality went up because we now had specialists properly aligned.

The way leases are structured and the mechanics of them can also improve value. In the early 1980’s Cadillac Fairview, a leading mall developer and owner, instituted an across the board HVAC basic charge. It was a sinking fund established to pay for the replacement of roof top units, air handlers, central plant equipment, etc. The concept was drafted into the company’s standard lease form and used for all  future new leases. There are many other items in the way a lease is structured that can have a positive impact on returns; such as how renewal options are treated, how the space is used and measured, and how amortization costs are handled. These are just a few areas of more than a dozen lease refinements I’ve developed over the years.

One of the biggest lifts in return and value is to change the way lease rates are determined. Many owners and leasing agents still rely on comparable analysis. This is a mistake. Rent should be a function of sales – not to be confused with the concept of percentage rent. Using sales as the method for determining base or minimum rent I was able to create an incomparable market and increase the average rent for real estate under my direction to 35% more than ‘comparable’ properties. There is a specific methodology to achieve this. It starts by understanding the market potential in the trade area served and relies on obtaining sales information from each tenant, even if they do not pay percentage rent.

There are a number of opportunities at the property level too. For example, I’ve developed and implemented over 20 different ancillary income streams at the property level. Some produced significant revenues while others did not; but collectively the effect was the same as adding two or three rentable store spaces to the property– without the infrastructure costs.

An area of additional income from retail properties is through creative densification. The land-mass for retail properties, is very large as compared to the vertical nature of office buildings. Much of this is dictated by parking ratios mandated in zoning requirements. The typical 5 stalls per thousand square feet of GLA has been in use for more than 40 years, yet the nature of retail has changed dramatically over the same time. In the 1970’s evening shopping was usually confined to one or two nights a week and virtually no one shopped on Sundays. That parking ratio may have made sense then but does it make sense with the expanded shopping patterns of today?

I convinced a municipal council to adopt a new micro stall designation to accommodate the new ultra small cars, such as the Smart car. Decreasing the average stall size allows for more stalls on the same piece of land. Even with the existing stall ratio, the increase in the number of stalls permits further development on the site. In another program I was able to increase the site densification that resulted in an $8 Million lift in the property value with no additional infrastructure cost.

On the expense side of the ledger there are many opportunities to reduce expenses. One that is not widely practiced but that can pay significant dividends is lean maintenance, a concept borrowed from lean manufacturing practices. In lean maintenance there is an understanding that some common maintenance practices have diminished value through the lifecycle of the physical plant. Correcting this is the same as reducing the waste that was inherent in older manufacturing processes.

Repositioning and remodelling can have a positive impact on the revenue and expense of a property. Curb appeal determines customer attraction and what tenants perceive as a desirable location. So I never advocate trimming expenses to the point of harming the impression of the property. This includes capital expenses. However, the timing of a remodeling program is critical to obtain the best returns. It is also important to conduct a complete cost benefit analysis and judicious value engineering. Sometimes, just as in theatrical staging some inexpensive changes can have a dramatic impact on the look and perception of a property allowing for better quality tenants, more sales and higher rent.

Improving returns and value is what we do. Contact me to learn how to transform your investment returns in retail real estate.

 © 2011  Peter D. Morris SCLS, SCSM, SCMD

              pmorris@beyond-the-building.com