Find the Right Commercial Tenant for Your Association
By Andrea Brescia
For associations that have designated commercial space, finding the right tenant is critical. While there are a lot of retail stores that provide convenience, not every commercial tenant is necessarily a good fit for your community.
The right tenant can be a revenue stream for your association, improve owner satisfaction, and create a vibrant hub. The wrong tenant can be a nuisance, making extra work for your board and creating a disruptive environment for your members. So how do you make sure that you lease your space to a business that will add to your community and not detract from it?
We spoke with David Restainer, managing director of commercial real estate at Douglas Elliman Real Estate in Miami, Fla., to get advice on finding the right tenant for your association. “In Miami, the financial district is the most dense neighborhood south of Manhattan, and our zoning requires that we have retail space in every condominium,” says Restainer. “I’ve seen it done well, and I’ve seen it done incorrectly.” At its most basic, he says, you must understand the type of business that would be complementary to your association and disallow everything else.
Solicit the Right Tenants
Set aside the excitement of the incoming revenue, and with your board, brainstorm a list of questions and potential concerns that need answering. What kind of tenant would you like for your association? Ultimately, you want a tenant that will match the identity of your association. Don’t wait until you’ve found a potential tenant to ask questions. Gather your questions and use them as you speak to tenants that might align with the kind of business you’d like to see in the space.
“It’s really important to control the tenant and understand what it’s doing with its business,” says Restainer. “Understand the retail space where its business operates, and the identity of your association, and ask yourself if the business matches that identity.”
Also, you’ll want to find out who is at the helm of the business, Restainer says. It’s very important to have a seasoned operator, someone with entrepreneurial skills, who has had a proven track record of success. Ideally, you’ll want a business with a previous location or multiple locations. Obviously, a tenant needs to be financially sound and have a good reputation within the community where it is currently or has previously operated. It’s important to know the company making the proposal—get its business plan, and make a board field trip to another location of the business, if possible. In many cases, he says, you have to assess the potential tenant by feel as well as by gathering the facts.
Practical Pointer: Hire an experienced retail commercial broker who understands the marketplace. This person will be able to help you navigate the process, find the right tenant, and negotiate the terms of the lease. He or she should also be able to advise you on the competitive landscape and trends in the surrounding area, as well as on setting a price per square foot.
Find the Best Tenant—Not Necessarily the Highest Paying
Even if retail rates are skyrocketing around you, you’ll want to consider the type of business that will best serve your association. Think of the commercial tenant as an amenity, which might also help you choose a tenant based on how it will fit into your association rather than price. For example, if you’re hoping to get $100 per square foot, you still might consider a potential tenant that can afford only $75 per square foot if it would add an attractive amenity for the members—that is, you might rather have an upscale coffee shop paying $75 per square foot than a cigar shop paying $100 per square foot. Also, beware of trends like vape shops, the latest gourmet donut shops, etc. They may be here one day and gone the next. You want a tenant with staying power. Additionally, Restainer points out that you want to be friendly to the tenant in creating the terms—you want its business to succeed.
Negotiate the Lease
Since all parts of the lease are negotiable, it comes down to getting the right language in the lease that will protect the association and stipulate conditions like hours of operation, noise, signage and awnings, nuisance, access (so the access to the residential space is separate from the access to the commercial space), maintenance, utilities, and insurance. Here is where you need to work with an attorney with significant experience in retail commercial leases who will work in conjunction with your association attorney. Experienced brokers and attorneys will have seen it all and will know what type of language you need in the lease to best protect your interests.
Repairs or improvements to the space can also be included in the lease. But sometimes it pays for the association to shore up the space ahead of time to attract a tenant. Restainer cites an example of a building that had 1,000 condo units and unused space near its loading dock. The association was using the space, which was under the parking ramp, for storage. The board thought about ways to repurpose the space. It had enough room for a dog groomer or a wine store, but the space had no air conditioning or electricity. The association didn’t want to spend the money to install the AC or electric, and against advice, spent time and money trying to find a tenant that would come in and take care of the installation. But the association couldn’t find a tenant that was willing to take on those expenses not knowing the future profitability of the space. In the end, the association relented and made the upgrades. The space was then easily rented to a liquor store that’s currently very successful. The moral: Sometimes a little expense upfront can secure the desired outcome and make it profitable for both parties.
Length of Lease
After all is said and done, you want long-term stability in your commercial space, especially if your association is in a desirable location. Restainer uses a bank branch as an example. If you have a branch that wants to open in your space, you’ll want it to sign a five-year lease with three five-year options to renew, he says—having a bank as a tenant will ensure that the business is quiet, and the hours of operation, typically 9 a.m.-4 p.m., provide minimal interruption to residents. If you’re located in a neighborhood that’s changing, you might not be able to attract a tenant like a national bank, but you might consider leasing to a mom-and-pop store on short-term leases that you can replace with a more desirable long-term tenant when the time is ripe.
Practical Pointer: If the business has to make significant changes to the space, you’ll want it to sign a five-year lease with a five-year option—and if the tenant doesn’t stay for the full 10 years, your lease should require the tenant to reimburse the association for the costs of restoring the space or of the unamortized costs of improvements, if the improvements do not benefit the association in any way. If the unamortized costs of improvements do bring some benefit to the community, you’ll need to consult an accountant to determine the amount that each party should be responsible for.
Andrea Brescia is a New Jersey-based editor who writes for housing-related publications and organizations.
David Restainer: Managing Director, Commercial Real Estate, Douglas Elliman Real Estate, Miami Beach, FL; David.Restainer@elliman.com.