Measure Twice, Cut Once - Accurately Assessing Size and Space for Retail Rent Reviews

Measuring Up in Rent Reviews: Key Considerations for Retail Tenants

In this episode of 'That Retail Property Guy,' host Gary Marshall discusses crucial aspects of negotiating rent reviews from a retail tenant's perspective. Emphasising the importance of carefully measuring and assessing retail spaces according to RICS, GOAD, and practical guidelines, Gary explains how comparable evidence and good neighbour relationships can influence rent negotiations. The episode also covers the significance of location, the physical layout of properties, and using methodologies in the RICS code of measuring like GIA, NIA, and ITZA to determine rental values effectively. Listeners are encouraged to seek expertise from property professionals who specialise in tenant representation. Tune in for valuable insights and strategies to help retail tenants maximise their potential in rent negotiations.

00:00 Reminder of Retail Property Insights

00:19 Understanding Size and Space in Rent Reviews 

00:51 The Importance of Comparable Evidence

01:43 Building Alliances with Neighbours

02:42 Analysing Rental Values

04:01 GOAD Plans

04:17 Measuring Usable Space Effectively

06.14 RICS Code of Measuring Practicing GIA and NIA

07:27 In Terms of Zone A (ITZA) Retail Space Valuation

10:40 Summarising Valuation Methodologies

12:22 Final Thoughts on Expert Advice

Related episodes:

Leases, Landlords, Location Location - Demystifying Rent Reviews for Retail Tenants

Every Retail Estate Manager's Most Important Tool - RTFL (aka Read the lease and know your liabilities)

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Transcript

0:00

Welcome to that Retail Property guy with your host, Gary Marshall. In each podcast episode, we delve into topics from the perspective of a retailer as tenant sharing stories and insights through Gary's unique lens. We hope you'll be entertained, enlightened, and may be a little inspired. In other episodes, we discuss reading the lease because a lease is the sum of its parts and that sum points towards its value. And this is never more true than a rent review, which we discuss in another, another episode. But there are two aspects to negotiating a rent review. The lease based terms and assumptions are one part, but the other is the physical survey, measuring up, establishing the usable areas. Noting the less usable ones and then searching for comparable evidence. Indications of market value in the locality, drawing a comparison or lack of it between that comparable and your property location is important. Comparable evidence from a nearby property is generally more relevant than information from a deal 20 miles away, and recent evidence is generally better than information from a deal two or three years ago. But I say generally because the analysis of all available information may suggest why something older or more distant is still relevant. A good way to establish rental values in the location is by asking the neighbors the. In my experience, local independent traders are often skeptical about sharing what they see as sensitive data. But mutual back scratching, pays dividends. Getting on good terms with the neighbors can help form an alliance, a united front against landlord rent rises. The bigger chains of retailers recognize this. There's a common practice to share comparable data analyzing deals, helping to ensure that nobody creates a rogue deal that seems to negatively impact everyone else. I. Landlords hate this collusion, and they might argue that what seems to be a rogue deal is in fact a clear indication of what the local market will pay as a distinction from what values for the bigger multiple retailers might collude to achieve. But a counter argument could be that a local and perhaps poorly advised retailer might unwittingly pay over the odds and maybe not survive as long as expected. So it's in the best interest of all tenants to liaise, to share info, to be cooperative. The good deeds will come back around like good karma and the physical survey of any property for rent review valuation generally starts with visually appraising those neighboring properties, especially any that we already know will provide the comparable evidence. A valuer needs to be able to distinguish a good comparable from a bad one. Are there any specific reasons why a rental deal is relevant or not, or worse or better than the building we are valuing? Is it closer to local facilities like parking? Is it a spectacular building with the best location in the street or retail park or parade? By comparison is our subject building overshadowed in a pokey corner, masked by an advertising panel blocked under a staircase. Location, location, location. It's a genuine rule and the differences should impact the value. I. When checking out the local neighbors ahead of asking for supporting comparable information, and also to help set in our minds the physical layout of the location, it's often a good idea to sketch out the street scape a quick plan, showing which shop is where, who's next to who, where the parking is, where the visual obstacles are. In fact, for many locations, these plans already exist compiled by Experian, known as God plans. If you aren't familiar with these, Google Gold Plan, GOAD, they're clever stuff and very helpful in rent review negotiations. But back to the main point, size matters. The dark science behind negotiated rent settlements at rent review or lease renewal requires a good understanding of those comparable properties and the means to apply that evidence to our subject property. But let's be clear. The evidence from an open market letting is generally considered the best evidence, but not always, and in some cases, that open market letting might seem unusually out of kilter with the established evidence I. For example, two small shops in a high street parade might both let in the open market for the same rent, whether one is a thousand square feet and the other is 850, or one is 20 feet wide and the other is 18 feet wide to an acquiring independent trader. The distinction is negligible at the point of agreeing that initial rent. So some tolerance or flexing is required in the analysis. But time is a great leveler. Sometimes open market deals, especially to independent retailers who maybe didn't have professional advice. Don't stand the test of time. New ventures come and go. Short leases are less of a liability than long leases. Poor financial credentials might nudge a higher rent. The analysis of the deal and the reason behind the deal is crucial when we attempt to analyze those open market deals, or indeed, any negotiated settlement like a neighboring rent review, size, and physical layout are paramount. So we need to measure up, draw a plan, check our dimensions before returning to the office and realizing we forgot something. Measuring up professionally is a skill when we're talking about high rental locations. A few square meters can make a difference of thousands of pounds. Many leases might include a reference to the RICS Code of measuring practice. This is a useful guide produced by the Charter surveyors organization, but it's a guide, not a statute, and not all leases refer to it. The code of practice helps us to be professional, to understand how and why some space should be measured and valued, and maybe why other space shouldn't be low. Headroom is a good example. And in practice there are a few ways to assess the floor areas of usable space. Valuers often use terms like G-I-A-N-I-A, and its at a, these are explained in greater detail in the RICS code, but a very simple version is that GIA is gross internal area. All of the usable floor space, ignoring any low headroom, but including all the stairwells, corridors, toilets, plant rooms, the spaces that actually seem unusable, NIA is the net internal area where those unusable bits are excluded. It is NA means in terms of zone A, and this is particularly relevant to many retail leases. This traditional practice assumes that retailers put their best products, their most enticing offers on display near the shop window, so they can be seen by passers, by who are then tempted to step inside. I say traditional. This practice was established well before we went metric. So the origins are defined in feet, but easily converted to meters. The common assumption was that passersby could easily see the first 20 feet inside the shot window. So this first zone up to 20 feet back from the window was the most valuable, and it became known as Zone A. If the shop extended back more than 20 feet, maybe 60 feet in total. Then the second zone from 20 to 40 feet was known as Zone B and was traditionally ascribed half the value of zone A. The next zone from 40 to 60 feet was known as Zone C and was half the rate of zone B. So a quarter of zone a. If the shop was very long, there might even be a zone D. It's an eighth of zone A and so on. In terms of usable space, anything with low headroom might be excluded or have a lower value for storage. Stairs, corridors, toilets, even boiler rooms might be excluded as having no commercial value for sales purposes. Now, why is this important? Surely sales space is sales space. Well, maybe not. Let's consider two shops, both a thousand square feet, but shop A is only 20 feet deep, but 50 feet wide. And that could be well, like a triple shop frontage, a fabulous window display area, offering those valuable goods to the passersby on the street. We've all seen movies and Christmas cards of shoppers gazing into brightly lit shop windows. That initial sales space is valuable. Meanwhile, neighboring shop B. Also, a thousand square feet is only 20 feet wide, but 50 feet deep. It has a much more limited shop window display, and instead relies on customers having to be enticed into the premises. In the movies. These shops are often perceived as musty and intriguing adventures. You have to be brave or curious, or both to step into the unknown. So it ZA is an attempt to deconstruct the physical space into a comparable rate per square foot of the valuable display friendly sales space, the good space, not the dingy space. If a retailer's challenge is to present goods to passers, by then surely the triple fronted super shop window is more valuable than the Labyrinthine tunnel. They're both a thousand square feet, but one is tangibly more appealing, so more valuable. And once we can analyze the rate per square foot of that zone A in any retail location, we can apply it mathematically to any odd configuration of space. The valuable space at the front, the cheaper space at the back, or in the basement, the under stairs cupboard of little or no value. We can compile a valuation of the components of a building to arrive at a sum of those parts. Well, in theory, let's summarize whether we're looking at supersized properties probably best valued on an overall basis using gross or net internal areas. Or typical high streets and butcher baker, candlestick maker, local parades, which are probably best valued on an, its at a zoning basis. We can now see our basic methodology, measure the space carefully, probably in alignment with the RICS code to establish what is usable space, what's less usable space, and the all important, most valuable space near the display window. Capture the upsides and downsides of the subject and the comparable properties. Location, location, location, visibility or the lack of it. Proximity to footfall generators like the parking, the bus stop, the big brand attraction, collude with the neighbors to get their rental info. Analyze it in the same way we appraised our subject based on floor area layout, location. When was it done? Was it an open market deal or a negotiated settlement? Is there any specific reason why it was done in case it doesn't align with the other evidence? Special circumstances can include precious, unusual user clauses or short-term flexibility, and so much more apply logic and experience to arrive at your valuation. Consider the terms of the lease, including all the hypothetical assumptions that we discuss in that other episode, and be aware of the tenant's rights to refer the negotiations to an independent third party if the landlord is reluctant to accept the right outcome. So there we have it in a nutshell, a brief journey through some of the points to consider when approaching a rent review. Tread carefully and be prepared, but a key factor in all of this is experience. If you feel that you need any advice in this sector, seek expert guidance from a property professional with suitable experience in this sector and with a specific quality of representing tenants, not landlords. Thank you for listening to that Retail Property guy. I hope you enjoyed today's discussion and found it both entertaining and insightful. Don't forget to explore more episodes and if you have ideas for future topics, feel free to share them below. Be sure to like, share and subscribe so you can never miss an episode. For more information, visit that retail property guy.com. Thanks again for tuning in.