Small Retail Great Location purchase opp

15 Replies

I am still fairly new to the retail business.  I have built and sold a 10,000 sq. ft. building in the past.  I currently have 8700 sq ft divided into 4 stores.  I bought this as a value add that was half empty and only have one small space left to lease.

I am looking at a small 4400 sq ft building that is in the heart of downtown Scottsdale.  The building is old but it has been upgraded into a nice contemporary design with rusted metal trim and shade structures.  The roof is new and the interior finishes are nice.

It has been divided into five small spaces with hair salons in each of them.  The smallest individual space is going to be vacant soon.

The rents are at $18/sq ft and are low for the area. 

The play on this is simply the fact that it is in downtown Scottsdale.  I believe this will drive the value as rents are likely to strengthen faster here that in most locations.

Any inputs on this deal? 

Well, I am under contract on this as of tomorrow.  Seems that the salons like to have short term leases.  The positive about this is that is should be easy to bring them up to market rents.  Also, many of the finishes are already done up nicely.  The downside is potential turnover.

Any inputs?

Couple thoughts - 

how is the access? Can people easily get in and out from both sides of the street? 

Which side of the street is it on in relation to daily traffic flows? Is it a side that most people go home on or into work on? 

How big are the traffic flows? Is it a major street? What is visibility like when you are driving by? 

How far away are other major shopping that will bring people near your center? Major shopping would include centers anchored by grocery stores all the way up to a major box center. 

What sort of other retail is around it? What is missing from that retail? This will help you determine your potential tenant list. 

Looking at that surrounding retail, where the rents at the similarly sized and positioned centers near you? How do you compare to these? You shouldn't look at the inline rents as they will most likely be higher. 

How fluid are your units? Can you demise a couple down to smaller spaces or combine a couple to make larger units? 

How about parking? How many spots? 

And then as you mention, the typical structural and mechanical stuff. Roof? Power options (can get get more power in for a tenant like a tanning salon)? HVAC and electrical condition? 

That's my general thought process when looking at retail. We own a similar center and love it. 

Originally posted by @Steve Olafson :

Well, I am under contract on this as of tomorrow.  Seems that the salons like to have short term leases.  The positive about this is that is should be easy to bring them up to market rents.  Also, many of the finishes are already done up nicely.  The downside is potential turnover.

Any inputs?

 Steve:

One of the big complaints of stylists and aestheticians in this area, especially the younger ones, is that they end-up signing-on with a salon where they pay a hefty portion of rent/royalty to the owner/head stylist.   Very similar to a real estate agent signing-on with a broker, but even worse in some instances.

In addition, it seems though many of the head stylist/aestheticians are good at cutting hair, etc. they fall short at running a business.  Most salons never see their fifth birthday, many not even their third, and the stylists/aestheticians working there must move and re-establish themselves with another salon.

Another investor/developer here in town has opened his own "studio".  He has renovated the space and created ten private rooms/spaces around a common reception & waiting room.  He also provides laundry and janitorial services.    The stylist, in turn, rent their "chairs" (spaces) from him at about half the rate they would pay in the traditional salon setup. 

From the landlord's perspective, he is collecting more rent while simultaneously mitigating his risk of any one tenant's business failing ... versus having a salon as a tenant and the entire salon goes under.  He has a waiting list of stylists / aestheticians wanting space in his studio ... so much so, that he is looking a extending the space when a neighbouring lease is up.   The other salons in town are spiteful ... which means he's doing something right.

Thanks @Lee G.  

This is a unique situation.  It is not on a busy street.  Old Town Scottsdale is basically a tourist area/ major entertainment hub.  It is a hopping place with crowds and golf cart shuttles hauling people around.  It is impossible to park there on weekends day and night. 

This property is located and area just off the main road.  The main road has a lot of diversity with restaurants, banks, tourist shops, ice cream, etc...  But off the beaten path is mostly salons, spas, massage, hotels, million dollar condos, office,....

The space is fairly fluid.  It would be easy to add or separate.  It is actually setup as two separate buildings with a corridor in the middle.

The roof is new and two of the four ac's are new.  I am doing the inspection on Monday and will look at the power situation.

Most of the parking is street but there are spaces out back.  There is not a parking problem in this spot.

@Roy N.  

I like this idea.  My wife said that her salon is setup like this.  She is going to call her girl to ask specifics on her lease and space. 

Thanks

Some salons especially nail places underreport their sales and then try to hit up the landlord for a reduced rent. You have to stay firm with them and tell them to pound sand when they find out you are the new owner.

Also you have to look at what type of hair place is it??

Generic cuts are 15 to 20 bucks.

Where my wife gets her haircut styled and everything else is 200! lol

My haircut is 12 bucks from on old time barber I have been going to since I was a kid. The lower end haircuts it's a ton of volume to keep paying the rent versus an upscale salon there is more income for rental increases.  

These are more along the lines of upper end.  All of the salons are higher end compared to much of the city.  In fact, the ones behind this property are closer to $800/pop.  I don't know who pays that kind of money.  It is unreal.

I would be looking at this generically as I don't think you want to run a salon or rent spaces/stations. It's nice that the salons around this can charge so much but unless I'm reading your original post incorrectly, you are a landlord not a salon operator. These are two distinctly different businesses. I'd be trying to look at the strength of your current tenants, identifying prospective tenants for your other spaces and have a clear understanding of where your breakeven point is in terms of rents and gross income. 

Originally posted by @Lee G. :

I would be looking at this generically as I don't think you want to run a salon or rent spaces/stations. It's nice that the salons around this can charge so much but unless I'm reading your original post incorrectly, you are a landlord not a salon operator. These are two distinctly different businesses. I'd be trying to look at the strength of your current tenants, identifying prospective tenants for your other spaces and have a clear understanding of where your breakeven point is in terms of rents and gross income. 

 Lee,

Until recently, I would agree with you, but after walking through the setup another local investor has operating {discussed in my post above}, renting out stations to individual stylist appears to be a win/win setup:

- the stylist keeps more of their earnings than if they were renting a chair in a traditional salon (which usually means paying a percentage of your billings to the house);

- the landlord brings in more rent than if s/he were letting the entire space to a single {salon} business.

In addition, the landlord has mitigated the risk associated with a single "salon" tenant failing {salons have a high failure rate, even for a small business}.  If any one stylist "fails" and defaults on her/his rent, the overall impact is small and the station is easily relet (there is a waiting list).

We have a couple of student rooming houses where we rent individual rooms to {international} students, as opposed to renting the entire house or unit on a single lease.  While it is a little more administrative work - a lease per room; collecting rents from individual tenants, etc. - there is also more revenue (30%).

The situation of renting individual stations to stylists is no different - yes you have to deal with more "individual" tenants, but you will also be paid for it.  The local investor/landlord who is doing this is not running the salon, he simply rents individual stations versus the entire space and is being paid well for the effort.

problem is you are now in the hair business. You need to attract talent because people tend to associate the name of the place with good or bad haircuts. You will get more rent but you must manage it like a business.

Client I worked with tried to sell her salon space to me. I passed when getting all the details of the setup

I do not like centers where the strip is centered around all one type of business.

I like centers that have say 10 units. Putting 25% down you can have about 4 vacant and still have enough income to service the mortgage without coming out of pocket.

I like good tenant mix and lower breakeven occupancy.

It is very important what a tenant makes in sales. The is especially true for mom and pop types. You want gross sales at generally 10% ratio or less to rent for most businesses. Of course there exceptions for everything which I why I look at each property on a case by case basis.

So if a tenant is 100,000 annual sales then rent no more than 10,000 a year. It's better is sales were at 150,000 annually and 10,000 for  a 5% ratio. It depends when you review the lease if the tenant has to report audited sales or not.

If it's a corporate pizza hut then I do not really care about sales. The store for that location could lose  20,000 a year but is backed buy thousands of other stores.

I break down five levels best to worst on guarantee.

Parent corp

Subsidiary of corp.

Large franchisee

Small franchisee

Mom and pop unknown startup

You can still rent to mom and pop but the strength of the liquidity and net worth of the borrower is key with the other assets they are guaranteeing on the lease. Typically you give rent credits versus TI so if they take a bath and go out in six months you the landlord didn't spend money on the TI. For a large national tenant with staying power TI makes more sense.     

Originally posted by @Eric Bowlin :

problem is you are now in the hair business. You need to attract talent because people tend to associate the name of the place with good or bad haircuts. You will get more rent but you must manage it like a business.

Client I worked with tried to sell her salon space to me. I passed when getting all the details of the setup

Eric,

I disagree ... you would not have to be in the hair business.  

The landlord provides the common areas (waiting room and reception) and a space for each stylists' comprising a vanity, sink, electrical and lighting ... I do not not know if the chair is provided with the space or if the stylist's supply their own chair (I'll inquire this week).

Speaking with the landlord, he has nothing to do with the daily operations of the business.  The tenants function as a collective when it comes to staffing the reception, ordering supplies, etc.   I was also told that the first 3-4 stylists recruited the other working there and there is such a waiting list for a space that the landlord is renting them all month-to-month: if someone is not working out, they can be replaced quite easily.

I have not idea how well or far this would scale.  The "salon" has been operating for 2+ years now and all seems to be going well.

@Roy N.  I absolutely see your point. I only know the info from another person I know who has done this and didn't do so well. I know it isn't my cup of tea but obviously that doesn't mean that it can't work for someone else!

This person I know, she bought the place and the best talent left with the former owner to a new location. This left the not-so-good people behind... I guess clients often follow their hair-stylist?? (I go to a barber so I don't know how those things work) so most of the clientele left. Word quickly got around that they gave bad haircuts and the whole thing went south quick.

The best people are often established somewhere and don't want to move..and if they do move they want to go to a good place with good customer base. You can see how this creates a redundant problem and becomes difficult to stop. I don't see how you could stop this unless you have good connections in this industry and can really attract that talent away from your competitor. Anyhow, how do I test you to see if you are good or bad? I don't know the first thing about hair cuts.

This is why I say you are now in the 'hair business'. Should these problems occur they then become your problems. If everything is smooth then obviously no issues and great money. 

Again this isn't my story so who knows what thousand things she may have done wrong. Maybe this particular one is just in a bad market for stylists..? Again, I wouldn't know that because I'm not familiar with that market. For me...too many unknowns.

@Eric Bowlin  

It is true the best are often established in a traditional salon and, perhaps, are feeling they are carrying more than their share of the operation ... around here they tend to pay a percentage of their billing to the salon (kind of like a tithe).   My understanding of this local space is the original 3-4 stylists are very good and left the salons where they were working - taking their clients with them - because they were tired of paying so much to the salon each month.

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