How to attract a National or Franchise Tenant

Question

I own a single tenant commercial building ... in front of a large but aging strip mall with a BiLo and Babcock across the street from a Subway, DQ and a new Verizon.  Also about 2 blocks from a Home Depot and Walmart.  My lease with tenants is ending in 18 months and I wanted to start looking for a new tenant.  It is an old Good Year building with 7500 sf.  How does one even start to find a new single tenant?  I have another small multi-tenant building that small businesses lease but this is something different I think.  What should my strategy be?  Thanks for your help and opinions.

Joel Owens · Answer

You need a tenant rep retail leasing broker. Lot's of them out there.

Joel Owens · Answer

It can be a bonus to have a national tenant at below market rents when you sell later. A concern with national tenants is often that the owner/developer spent and gave heavy TI credits in exchange for the tenant agreeing to above market rents on the lease.

The owner does this to try and sell for more on the back end. Problem is if the national tenant goes out you are then looking at a cap rate drop on value.

When analyzing a national tenant you have to be careful on their credit and their current debt load and future expansion plans. Additionally it makes a difference if the national brand parent corp. is guaranteeing the lease, subsidiary of corporate guarantee, large franchisee, or small franchisee. All these things affect value along with any early termination rights of the primary lease term, rental increase amounts, and if rent increases are annually or every 3 or 5 years when they go up.

I see some owners just try hard to get a national tenant in thinking they will never sell it later. Then when they need to sell they have all of these negative items in the lease that really affects being able to sell the property and financing for the buyer. So an owner when crafting a lease to put a tenant in really needs to think about the long term exit versus just the immediate benefit in the short term. Once the tenant signs the lease it is very hard to get them to change anything and generally they are in the driver's seat.

How much leverage you have against a national tenant will depend on your area and location of your dirt. If the tenant has multiple choices for site selections in the area and they are all about equal in terms of traffic counts, sight lines, access to the site in and out,etc. then tenant will be tougher to negotiate with. If you know the area and know your site is the superior site and the tenant has limited options that match their search criteria then multiple national tenants might be interested in the dirt and you can play them off of each other to craft the best lease possible for yourself. You need to know at what cap rates certain tenants bring in value to your site and how much rent they pay. Some food places now want a larger area for land parking and a smaller actual building as most sales are going through the drive-thru. The problem is they are paying lease rental rates per sq ft on the building and if your smart also the patio space as that is a revenue sales generator for them depending on the weather.

Latoya Cheeks · Answer

Everyone above gave solid and good advice. If you are still in need of Landlord representation feel free to reach out to me. We have a retail shopping center for sale in your area and specialize in in the sale /lease of Triple Net Investment. nnnig.com

David Gerlt · Answer

I am a commercial lawyer here in Southern California and one thing I have seen lately at least in the western states are redevelopment of older strip malls. Sometimes it is just a face lift and other times a complete scrape and build. It really depends on what is happening in the area. You might want to consider what the trends are in the area so you can make sure you are in step with those since these leases are typically 20-30 years.

We have development companies in our area that either purchase outright or lease out-parcels and demolish the old building and will build a new shop building with multiple tenants. For example your parcel might be able to handle several 1,000-2,000 square foot shops like Starbucks, Wingstop, AT&T, or other chains that will compliment what is already there in the area.

Good luck with your project.

Adina McCollough · Answer

Thank you, I absolutely will.

Adina McCollough · Answer

@Michael Knudsen

I too have a few commercial properties I think may be very attractive to a national tenant. Would you mind looking at them for me?

William Tong · Answer

Thanks again.  What a great resource this BP is.  I have been asking local commercial realtors and getting blank stares.  I may still go with demising and leasing with smaller mom and pops but finding a larger franchise or national company is something I will try first.

How to attract a National or Franchise Tenant

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