It stinks to be a retailer in Phoenix, by and large, in these times. Disposable income is down, and leases signed years ago have annual rent bumps. Landlords are trying to be flexible, but the savvy ones have read their lenders’ security documents’ provisions about reducing their lease rates and the pain that accompanies lowering their net operating incomes. So often a landlord cannot lower the rent payment down to accommodate a tenant’s projected sales revenues without risking default, and certainly not until the landlord gets its lender’s consent.
But retailers are innovative sorts, and a few novel approaches to marketing are underway. Consignment merchandising of nearly-new, or valuable antique, goods lends itself to a variety of price points for retailers who are trying to maintain their appeal to cash-strapped consumers. When a tenant advises its landlord that it wants to sell second-hand goods from consigners, here are issues for the landlord’s consideration:
a. Does the center’s zoning allow for the sale of second-hand goods, and are there additional permits or licenses that the landlord or the tenant must obtain to operate legally? In Phoenix, for instance, a use permit is needed in several retail zoning districts for second-hand goods’ sales. In addition, there is a “separation of merchants” requirement that must be observed; if a proposed second-hand good merchant is too close to a pre-existing use, a variance may also be required.
b. Do the restrictive covenants for the center roadblock the intended consignment sales use? Some CC&Rs prohibit the sale of used merchandise altogether, or limit the number of such merchants or the permissible square footage devoted to such uses. Some limit the types of such merchandise to be sold. Does a prohibition against “discount retailers” include consignment sales?
c. Do lease “exclusives” granted other retailers prohibit consignment activities? Even if there is no such exclusive, an astute landlord will ask if the additional used-goods sales will adversely impact either the success of another merchant or the overall image of the center.
d. Does the deed of trust or assignment of rents prohibit the change in a permitted use clause within a lender pre-approved lease? If so, the landlord needs to request lender consent to the use change immediately. Sure there’s some chance that the lender will not become aware of what has happened; but if the landlord is struggling to make payments, there is some probability that there will be a site inspection of the center by a lender representative that will result in a hostile communication from a lender feeling ignored or disrespected.
Another interesting retailer innovation is the “flex-restaurant”; in this business model, the restaurant is fast food during the daytime and full-service for the evening meal. The genius in this approach is that it allows the operator to capture the limited-budget lunch crowd while permitting higher receipts for slightly more elegant menu items and a few upgraded decorative touches introduced in the evening hours. Given the difficult times restaurateurs face today, most landlords applaud nearly any creative approach – but:
i. Landlords have to monitor the zoning implications of certain dining embellishments like providing outdoor dining or live entertainment; again, there may be a requirement for a use permit or some other authorization – and care needs to be taken that the boundaries of liquor permit conditions are not exceeded (like turning a “neighborhood grill” into a bar by cutting back on food preparation and sales for the purpose of selling more booze with a higher profit margin).
ii. Do the CC&Rs for the center contain restrictions on the number or square footage of allowed “sit-down” restaurants that burden shared parking stalls far more than do their fast-food cousins?
iii. Is there a lease exclusive that allows one tenant to be the sole “Asian table service restaurant” in the center, while your “flex-restaurant” tenant wants to institute a Sushi-bar concept for its evening service? Remember that in many centers, full service restaurateurs want to be the only such food purveyors, to capture the neighborhood clientele and to avoid having to implement valet parking due to parking field chaos.
There are several other innovations in shopping center merchandising, and landlords should be as supportive of entrepreurial thinking as common sense and prior covenants permit. Landlords must see the whole board, however, and keep the other tenants and their own lenders calm at the same time as they are promoting a struggling tenant’s successful navigation of the current, treacherous retailing waters.