Managing International Retail Leases – Similar but not the same

More and more retailers are looking offshore for network growth than perhaps ever before. There may be many factors that drive this – the world is smaller, technology is better, stronger currencies, others have succeeded, overseas competitors coming in and domestic market ‘saturation’.

In addition to the numerous operational issues involved in expanding internationally one significant component often overlooked is the many differences in managing an international network of real estate leases.

Some say that it’s simple right? You find a site, sign the lease and then negotiate the renewal in 5 years time.

Well, if only! Quick quiz, do you know these terms:

  • Plus Percentage Rent
  • Warranty of Fitness
  • CAMS
  • Co-Tenancy
  • Estoppel
  • Desktop Audit
  • Step Rent
  • Triple-Net
  • Kick-Out
  • ROR

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Carbon Tax Kicker for Aussie Retail Leases

Retail leases in Australia are commonly indexed to CPI on annual basis, sometimes even CPI plus a fixed percentage – I recently heard from a client that Westfield are now spruiking +2.5%!!

So the effect of this for a retailer is that Base Rent, Promotions Levies and sometimes even Outgoings (CAMS) will escalate each year regardless of performance. Take out a seven lease at 5% stepped increase and that’s 34% plus increase total – and its not like there was a discount upfront.

The significant majority of Australian Prime, A Grade and even B Grade retail space is owned through large investment funds and managed or owned by major landlords such as Westfield, GPT/Lend Lease and Colonial.

As blue-chip investment grade vehicles there is a need to ensure income from these funds grows so that investors in the funds achieve the kind of returns they expect. The CPI benchmark becomes a minimum for the fund such that the above this threshold ‘real’ returns are delivered – better than the increase in the cost of money.

The linking of CPI to retail rents is particularly flawed for the retailer as an increase in prices (wholesale and retail) most often has an inverse relationship with the performance on the shop floor – it costs more to buy and more to sell so while GP erodes consumer demand slows also because it costs more. So a larger increase in occupancy cost is basically a triple whammy for a retail business.

So with each week seemingly forcing another retailer into administration it should be frankly terrifying that today the retiring Reserve Bank board member Mr Graham Kraehe has highlighted inflation as “more of an issue”, suggesting that the introduction of the Federal Government’s Carbon Tax was “almost certainly understated”.

With the Government’s current estimates to be 0.9% then could we see an impact of 1.5% or 2.0%, on top of the board’s 24 month predicted limit of 3.0%?

What would the impact of 4.5% be on every CPI indexed retail lease in Australia? With retail sales flat and external influences on revenue like online sales and on costs, such as flexible IR regulations, we are seeing a nightmare scenario for retailers. But Wayne Swan tells retailers at COSBOA that its their fault and the Carbon Tax will be good for them.

What can you do about your Australian retail leases?

  1. Don’t accept CPI as the benchmark for rental increases – there is no law to say you can’t
  2. Renegotiate with your landlord – its that or a vacancy and release scenario
  3. If you do have a CPI indexed review always make sure the right Index is used

 

Posted in Landlords, Lease Administration, Retail Issues, Retailer Real Estate, Uncategorized | 1 Comment

Top 5 Tips for Smarter Lease Management in 2012

Virtually every retailer has one, just about every retailers hates them but wants another one and most retailers know very little about them. What is it? A real estate lease of course!

A retail lease is the fundamental contract that underpins a retailer’s entire revenue. There can be tens, hundreds or even thousands, and without them there is no business, no sales and no profit.

It is also true that in most cases the annual cost of this contract is the second largest expense in a retailer’s Gross Profit, behind wages – equating to as much as 20% of total sales.

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Capitalizing Leases – “Taking Longer Than Y2K”

How long will it take?

Whilst open to vehement defence, most of all by the participants, it might be hard to argue that a team of professional services experts could meet a project deadline, without the influence of their client.

That is NOT to say that intentional dawdling is at play, nor could you suggest an ‘timesheet harvesting’ at play. No, primarily the professional services experts are there to make sure it is absolutely 100% correct, whilst the client is keenest to drive a result – “We have a deadline you know!”

So what pray tell can you expect when the professional services experts are left unsupervised or without ‘Client X’ to keep the timesheets in check?

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Why aren’t you and your CFO freaking out about FAS & IAS changes?

To be updated….

That’s actually the detail on a set of minutes I recently saw from a retailer’s Real Estate Meeting with regard to the upcoming changes to FAS 13 / IAS 17 / CICA 3065 – the lease accounting changes that will result from treating real estate leases as Capital and not Operating leases.

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The Answer for Retailers is Disclosure

I was nearly alone in my submission to the 2004 Productivity Commission inquiry into Retail Leases in Australia when I suggested the provision of sales figures was not the largest issue affecting the imbalance of lease negotiations with major Landlords.

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Get Smart: Spreadsheets Just Lead You to Kaos

Get Smart

For a multi-store retailing business operations are, by its very nature, distributed across multiple locations and involve numerous individuals.

The fragmentation of a retailer’s information under this distributed model is one of the greatest businesses risks they will face.

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Carbon Tax – Economic Pollution for Mall Retailers

Carbon Tax Pollution for RetailersThe Australian Federal Government is only weeks away from introducing the largest Carbon Tax anywhere in the world. For retailers facing declining sales, onerous IR conditions and the impacts of an over-valued Aussie dollar the introduction of the Carbon Tax may well be the toxic tipping point of economic pollution.

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