For First-Time Developers: Shopping Center Pre-leasing And Site Planning Guidelines
Reprinted With The Permission From The Real Estate Finance Journal
By Richard J. Brunelli
Site planning that disregards the retail tenants’ needs will probably not succeed in today’s environment no matter how expeditious such a strategy may appear. A pre-leasing approach has become more critical as anchor tenants are forced to stretch rentals to their limits.
The past few years have seen many residential and office developers enter the shopping center business for the first time.
Office developers have diversified as a result of the generally overbuilt conditions in the office market, while a number of major home builders are building planned unit developments (PUD) which require commercial sections as part of an entire package to be approved by a municipality. Often, the municipality, seeking tax ratables, will condition the approval of the residential portion of a PUD on the prior construction of the development’s retail or office sections.
When taking the retail plunge for the first time, these otherwise sophisticated businessmen, rapidly discover that developing a shopping center is worlds apart from building an office or residential project.
As retail leasing agents, one of the most common situations we encounter is the first-time developer who brings to the table a fully-engineered and approved site plan. In all too many cases, these plans—which were created at great expense—are not acceptable to anchor tenants and, likewise, do not meet the needs of the satellite tenants who actually support the economic viability of the center. Imagine the disappointment when we advise them that they will have to go through an excruciating approvals process all over again because their site plan is not “leasable.” In New Jersey, this process could delay their project for years.
Unlike an office park or a residential development, shopping centers require that end-users be active participants in the site planning process. That interaction results from a professional marketing program which usually follows a market feasibility study to identify the nature of the center to be built. Once this has been determined, a preliminary conceptual site plan must be drawn and proformas prepared so the developer can negotiate rentals when his leasing professional presents the site to potential anchor tenants.
After several months of presentations and site inspections, the developer should know if he has enough anchor tenant interest to proceed with more detailed plans and engineering. As lease negotiations evolve, the anchor tenants’ building footprints will be presented to the developer, along with their plans, specifications and parking field requirements. This data will direct the developer to prepare site plans for the potential anchors to review and, hopefully, approve.
With the site plan approved by potential anchor tenants, the developer is now ready to approach the appropriate governmental authorities for a “workshop” or informal hearing. Unfortunately, in some townships in New Jersey it may take six months to one year just to get on the agenda for an informal review by the full planning board or zoning board. This terrible inefficient procedure makes shopping center development very risky for the developer and the retailer. Under a typical pre-leasing scenario, the developer-after tedious negotiations and numerous conceptual plans-finally reaches agreement with the anchor tenants on the acceptability of the site plan. Business terms have been agreed upon and leases are under review by the parties’ respective attorneys.
During the course of these negotiations, developers frequently discover that anchor tenants are very reluctant to sign leases that lock them into a certain site until they know the site plan approval is imminent. Too often, they sign a lease conditioned on the developer delivering an acceptable site plan approval and, after two years, the developer fails to deliver. The retailer has been tied up and, meanwhile, his competition has secured a site in the next center or town.
This seems to be an unavoidable “Catch 22” in center development today in New Jersey. Faced with this dilemma, inexperienced developers often decide they are better off getting a site plan approved first then try to find anchors who will conform to that plan. But such a strategy can backfire if they discover that these approved plan makes no sense for the retailers they’re trying to attract. And, in come cases, the costs and time consumed in attempting to rectify such a problem can prove fatal to the project.
Experienced developers will carefully line up the anchors and pre-lease based on a conceptual site plan prior to submitting detailed engineered plans for governmental approvals. In many cases, the key to this approach is having relationships with the anchors’ representatives under which lease commitments can be obtained conditioned upon an approvals process that has been well researched and planned.
Simply put, it is a matter of gaining the retailers’ confidence that approval of an acceptable site plan is highly probable and will occur in a specified period of time. Developers must be able to prepare approval feasibility schedules for the anchors identifying all of the various governmental agencies and permits which will be required for the site, as well as how and when they plan to get through the maze.
Another key element is to retain an attorney who specializes in land use. Too often, the “local” attorney may not be the best choice. He or she may jeopardize the economic viability of the project by agreeing to numerous municipal demands for off-site work and contributions without careful proforma evaluation of how those costs will impact the project’s rent structure.
In summary, site planning that disregards the retail tenants’ needs will probably not succeed in today’s environment no matter how expeditious such a strategy may appear. A pre-leasing approach has become more critical as anchor tenants are forced to stretch rentals to their highest limits. Physical plans and parking fields must be planned to meet their requirements so that they, and the satellite tenants, can proceed to do the highest sales volume possible in an increasingly competitive marketplace.
Brunelli is owner of retail leasing specialists R.J. Brunelli & Co., in Old Bridge, NJ. The firm has served as leasing agent on more than 25 New Jersey properties with a combined 3 million square feet of retail space.