Evaluating Building Types for Franchise Tenants

Author: DaleWillerton@TheLeaseCoach.com

Date: MAY 13th, 2014

Topic: Industry Experts

Whether you are a prospective or current franchise tenant, you should know that not all buildings or properties are created equally. Each property has unique aspects that you must factor in. Because the perfect property or site only exists in a fantasy, the challenge for the franchisee is to lease a space with the most advantageous set of criteria possible.

Here are a few advantages and disadvantages of different properties:

A retail strip plaza, many exist with or without anchor tenants (large, well-known, heavily trafficked business). Unanchored strip malls are those consisting of small, “Mom-and-Pop” stores. Sometimes several strip plazas are clustered together. Neighbourhood plazas typically have a well-rounded mix of tenants, but it’s not uncommon to see just four or five tenants in a small strip plaza.

Many franchisees situate themselves in enclosed shopping malls. Neighbourhood shopping malls may have 100 or more tenants with a couple of anchor stores (including a grocery store). A regional shopping centre may have 200 or more stores with four (or more) anchor department stores plus a movie theatre. Most of the tenants in a shopping mall are national and regional chains (including franchisees). Independent tenants are much less common because the landlord wants to lease the space to high-volume tenants who will not only pay their base rent, but also a percentage rent on top of that. Due to the additional amenities and maintenance that come with an enclosed shopping mall, the operating costs of such malls are typically higher than retail strip plazas.

Rental rates can vary by as much as 300 percent in a shopping mall, depending where each space or unit is situated relative to entrances, food courts, anchors and so on. Shopping centre tenants typically are required to report their monthly sales to the landlord, who then calculates the average annual sales for any specific category. The higher the average annual sales, the more popular the mall and, often, the higher the rent.

A stand-alone building can be situated on a single parcel of real estate or located on a multi-tenant piece of land. Leasing opportunities exist for stand-alone buildings on these pad sites where the landlord has designated certain pad areas for stand-alone tenants. Many quick-service restaurants are built on pad sites. They may be leasing the land on a pad site and/or the building itself. Some franchise tenants lease a pad site for a 20-year term and construct their own building – essentially paying rent on the land only.

In a factory outlet centre, larger, often well-known name brand stores to sell both current and discounted or last season merchandise. A handful of developers own and control most of these factory outlets which is why you often see the same chain and franchise stores in these centres all across the country.

With our busy speaking schedules, we are on the road a lot and we are very accustomed to spending money at airport malls and restaurants. Specialty tenants, especially those in the food service, are often interested in space for lease at airports. Airports, however, can be an extremely difficult opportunity to crack for a franchise tenant, especially in larger airports. With limited space available, the airport authority can pretty choose its own mix of tenants. Just because an airport appears to have a captive audience of shoppers or diners doesn’t always mean that these locations are licensed to print money. Your physical location within the airport mall or food court is just as important as in any other property. We remember one franchise tenant who told us that his first quick-service restaurant (QSR) failed in his airport location. So be cautious in locations where it is difficult to control your destiny. No amount of advertising will make anyone drive to the airport to shop or dine unless they are flying somewhere.