Retail Revitalization

Use these tips to increase the value of shopping center investments.

by Jim Conway

Increasing a retail property’s value is what investing is all about. And, today’s savvy investors aren’t waiting for inflation to push up the value of their properties –- they are seeking creative ways to improve their assets’ financial health. From cost-effective upgrades to reducing common expenses, these tried-and-true tips can help to improve a retail property’s value in any market. 

Upgrade Zoning. Investors can utilize market lulls to investigate rezoning options. For instance, I applied for and received rezoning approval for land my company owns in suburban Atlanta without having a potential user in-hand, a process that took about nine months. The property taxes won’t increase because they are based on the land’s usage, not the zoning. As a result, I now have a piece of land available for a potential developer that otherwise would have been held up in the rezoning process.

Maximize and Maintain. Take advantage of all available signage and consider implementing other head-turners such as murals to draw attention to the property. In addition, ensure the property is meticulously maintained. For recurring maintenance items, keep an annual calendar and follow up regularly. Keep in mind the basics, such as making sure your property has the market’s nicest and neatest landscaping. These small details are very important to tenants.

Tackle Tenant Needs. Take a proactive approach by meeting with tenants, listening to their concerns, and providing reasonable improvements to increase their satisfaction with the property. Requests may be as simple as increasing the size of the Dumpster or paving space for another few parking spots. Retaining an existing tenant is almost always more productive than getting a new one.

Seek High-Quality Tenants. Consider this example: If a property has a well-respected bank tenant and a nearby property has a local restaurant with identical rents and terms, more than likely the bank tenant-occupied property will be given a higher market value. Why? The bank is perceived to be a higher-quality tenant with lower perceived risk. Property renovation -- even at a substantial cost -- almost always becomes cost-effective because it allows the property to obtain higher-quality tenants.

Evaluate Rental Agreements. If tenants are successfully increasing sales, consider installing a percentage of sales rent clause that kicks in above a specified sales level. Three percent of additional sales is typical. Ask for periodic sales reports to gauge the tenant’s financial health. If a tenant vacates, past sales reports can be very useful when working to obtain a replacement.

In multitenant retail buildings with chronic vacancy, take a closer look at tenant improvement allowances and rent concessions. As much as 50 percent of the expected rents received would be reasonable for TIs and RCs on a short-term lease to land a good-quality tenant.

Plan to Expand. Single-tenant buildings with unused land on either side may be ideal for an adjacent build-to-suit tenant. Of course, lease terms and competition clauses for both tenants must be considered. Yet with proper zoning, land, and paved parking in place, costs to add new space will be much less than all-new construction. Price the rent for the new space to more than cover the cost of the addition, thereby increasing the value of the original investment. In most cases the additional foot traffic will benefit the original tenant and result increased sales.

Consider Cell Towers and Billboards. If your property meets a cell tower’s needs and the tower doesn’t cause a problem for existing tenants, tower operators can provide steady rental income of $800 or more a month. Though permitting for billboards usually isn’t easy, these additions typically pay the land or property owner about 20 percent of expected lease income through a land lease after installing the billboard. Investors can opt to own and rent billboards as well. A billboard costing $75,000 to build can command $1,500 per month or more on each side in high-traffic locations.

Appeal Taxes and Refinance. With property values declining in nearly all parts of the country during the last three years, tax valuations should have decreased as well. If a property’s taxes haven’t gone down, consider appealing them. Appeals are usually scheduled for the early spring and may result in multiyear reductions. For example, tax valuation reductions in Georgia resulting from an appeal are locked in for three years. If a property is performing well, owners can also explore refinancing. The economic downturn has resulted in a decline in loan demand for most lenders. Some are actively looking to take borrowers away from competitors, so it may be cost-effective to shop around for the best deal.

Jim Conway of Jim Conway LLC in Roswell, Ga., has more than 30 years of commercial investment real estate experience.

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