Growing up in the 1970s, as the son of a Shopping Center Developer, I became acquainted early in life with leasing terms such as Percentage Rent, Natural Break Point, NER and so forth.
My father spoke highly of his tenants and took a genuine interest in helping them succeed in their business. When a tenant had trouble paying rent, he would spend time with them trying to understand the reasons, and when possible, made concessions such as rent reductions.
In close collaboration with his tenants, my father appreciated that his success was dependent upon theirs. This is a contrast to the manner in which landlords operate today.
It takes me back to 1978, when I was a 10 year-old boy, watching my father prepare for the grand opening on the first expansion wing of what was, at the time, one of Western Canada’s first regional shopping centers.
He would walk the corridors of the mall with a bullhorn, directing construction workers, ensuring that the opening would be on time. Located in Red Deer, in the Province of Alberta, a town of 50,000 and a trade area of a quarter-million consumers, the mall was comprised primarily of local retailers who generally made a prosperous living.
The day before the mall was to open to great local fanfare, my father noticed that the new optometry store had almost no inventory, as their expected shipments had not yet arrived.
He immediately went into action, contacting optometrists at other locations he owned, and asked them to forward as much of their excess stock as possible. In return, my father gave them various concessions, such as future rent reductions.
By the end of the evening, over 40 boxes of frames, glasses and other eyeglass products had arrived at the new mall, and the optometrist was able to open his store, fully stocked. My father understood that a retailer never gets a second chance to make a good first impression.
Unfortunately, several years after the mall opening, in June 1982, Canadian interest rates similar to those in the United States had risen to 21.5%1,2. These higher interest rates were the result of the Bank of Canada’s and Federal Reserve’s attempts to contain spiraling inflation, which over the same period, had risen by more than 13 percentage points in both countries1,2.
Sadly, my father was unable to cope with the rising costs of operating the shopping centers, hurting his malls, his business and his pride. As visionary as he and many other developers at the time were, they were unable to foresee the business-altering impacts of inflation and the consequent rise in interest rates.
Tenants as Commodities
Today, malls, strip centers and medical/dental buildings are primarily managed by institutional owners, where tenants are viewed not so much as collaborating business interests, as they are commodities, where they are bought, sold, discarded or traded in favor of the mall owner’s and mall stockholder’s bottom-line.
When the costs of operating malls and other commercial properties unexpectedly and quickly began to rise as a result of higher inflation in the early 1980s, the mall and property owners were forced to absorb the additional expenses, thereby cutting into their profit margins. Many properties were foreclosed and resold to other interests. The new owners applied the lessons they had learned from their bankrupt predecessors, and redrafted their lease agreements to transfer inflation risks to their tenants through the “net lease” or Triple Net Lease Agreement (NNN).
This will make managing through the next inflationary period considerably more difficult for retailers and other tenants. Next week, I’ll explain why some dental leases can be so tricky.
1 US Business Cycle Expansions & Contractions (undated)
2 Bureau of Labor Statistics, Consumer Price Index, All Urban Consumers – (CPI-U)