Own or Lease
Retailers debate
the best
real estate setup
Doris Shanbrom-Ross and her business partner,
Cookie Koblin, spent nine-and-a-half years in rented space before they
were able to buy a building for their store, Bloomfield Keego Resale in
Keego Harbor.
 That
was 18 years ago, and they haven’t regretted their decision to purchase
- especially now that their building is completely paid off.
“We have not been sorry that we bought
this building,” said Shanbrom-Ross. “It has gone way up in value.”
Robert Butke, on the other hand, moved his
Laiti Jewelers store nine years ago from a building he owned in downtown
Hancock to leased space in the Copper Country Mall in Houghton. The move
boosted business significantly.
“Downtown hadn’t changed in decades,”
he said. “There was no parking; the storefronts were deteriorating.
When we had an opportunity to come to the mall, we increased our gross
[sales] by about 200 percent.”
Leasing has other advantages, Butke said.
His advertising budget is lower due to the heavy promotion done by the
mall, and he doesn’t have to worry about upkeep and snow removal.
Pride of ownership
MRA members are almost evenly split between owning and leasing their stores,
with 47 percent owning their property and 53 percent leasing, according
to a Michigan Retail Index survey in 2000. But a majority of retailers
- including many of the renters - swear by purchasing their own building.
“I would rather own than lease any day,”
said Gene Moutsatson, of Book Mark LLC in Mt. Pleasant, who leases all
four of his locations and is working toward buying one of them.
Like home ownership in the private sector,
building ownership seems to be the American dream of retailers. One of
the major advantages is building up equity in an asset that can eventually
be sold.
“I’d much rather own the building,”
said Jerry Brown, owner of Brown’s Pharmacy of Portland, who owns
one drugstore in downtown Portland and leases another in Lansing. “You
have something left when you’re done.”
That’s a strong enticement to retailers,
many of whom look forward to selling their building someday at a profit.
Some store owners sell the business upon retirement but keep the property
as a source of rental income.
Retailers also like having control over their
property rather than being subject to the whims of a landlord who may
decide to increase rent dramatically or fail to make needed repairs.
“I think you’re much better off
owning your own space,” said David VanMeer, owner of Arley’s
Firestone Inc. in Lathrup Village, who has owned his building for 37 years.
“It offers you more flexibility. You lose your liquidity, but you
gain your independence.”
It’s common for retailers who own their
building to hold the property and the business under separate legal entities
and have the store pay rent. That arrangement allows others to invest
in the building without investing in the business and provides certain
tax advantages when selling the property, said Mark Hooper, of Okemos
accounting firm Andrews Hooper & Pavlik PLC.
Why lease?
Though retailers tend to favor ownership, many real-estate professional
recommend leasing because it increases the amount of money available for
investing in the business.
 “Generally
retailers don’t want to own property and tie up their money in capital,”
said Robert Berlow, a real estate attorney with Dykema Gossett PLLC in
Bloomfield Hills and former executive vice president and general counsel
for Perry Drugs.
“Retailers should consider how much
money they have and whether it is better invested in inventory or something
else that will give them a better return [rather than real estate],”
added Craig Melby, of ITRA Realty Group in Palm Beach, Florida, which
specializes in tenant representation.
Leasing also eliminates the risk of purchasing
real estate in an area that may decline.
“If a location goes bad or a town has
retail collapse, you are not exposed to the consequences if you do not
own the property,” said Bruce Rogers, an MRA board member and retired
president of Bartling’s women’s clothing stores who has owned
and leased in malls, downtowns and free-standing locations in northwest
Michigan. “If you are not absolutely sure about the long-term upside
of your location, it is not worth the risk to buy rather than lease.”
Starting out
Even the diehard proponents of property ownership agree leasing is best
for a store just starting out. Besides the fact that a new business may
not have the capital to purchase, it’s unwise to make such a commitment
without first seeing how well the business will succeed.
Doug Dancer, former president of Mason-based
Dancer’s Inc., leased most of the locations for his 30-store apparel
chain.
“We felt it was advantageous to rent
rather than own until we got ourselves established in the community,”
said Dancer, who now works for Vision Real Estate in Mason.
Short-term leases with several options to
extend the term are recommended for both new and established retailers.
A shorter lease provides the flexibility to move if conditions change.
That’s essential since it’s almost impossible to break a lease
unless termination clauses have been included.
In fact, the burden of maintaining long-term
leases on closed stores was one of the factors that forced Kmart Corp.
into bankruptcy early this year. Bankruptcy allowed Kmart to reject leases
on 335 closed locations - leases that were costing the company $250 million
per year.
Robin Hoffman, of Kokopelli’s Gift Shoppe
in downtown Pentwater, has benefited from both the affordability and the
flexibility of leasing since she opened her store two years ago.
“It gives me an opportunity to get established
in business,” she said.
A one-year lease allowed Hoffman to move
from a side street to the main street quickly. She has had a good experience
with both of her landlords and intends to renew for a longer term this
year. Even so, she hopes to buy a building in a few years when her store
is more established.
Landlord hassles
Much of the retailer’s satisfaction with a lease hangs on the
competence and flexibility of the landlord. That’s why it’s
important to talk to other tenants and consult a real estate attorney
before signing a lease.
“I have seen fellow retailers lose everything
they owned because they were not properly advised in the beginning and
the shopping-center landlord took them to the cleaners,” said Rogers,
of Bartling’s.
Rebecca Aughton, co-owner of Bra~vo Intimates
in downtown Royal Oak, ignored her attorney’s advice to “walk
away” from a lease she was considering. As a result, she said, she
has faced constant battles over repairs and rent payments in the months
since she opened her store.
“It can make you concentrate so much
of your time and energy on that instead of on your business,” she
said.
Maintenance is one of the biggest issues
in both ownership and leasing. Many retailers like turning the work and
cost of repairs over to a landlord. Others prefer completing repairs on
their own timetable and to their own standards rather than depending on
a landlord.
Even in a lease situation, tenants are often
responsible for some of the most expensive repairs, such as upkeep of
the heating and air conditioning systems. It’s important to know
exactly what portion of maintenance is the tenant’s responsibility,
especially in an older building.
Moutsatson, of Book Mark, has had “some
very expensive lessons” on the cost of air conditioning repairs.
Other repairs have been simply inconveniences, such as when Moutsatson
discovered it was his responsibility to replace a double-pane glass door
after the interior seal broke, causing the glass to become cloudy.
Location, location
In the end, though, the real estate truism about “location, location,
location” applies whether retailers own or lease. A store that depends
on walk-by traffic may be better off leasing in a shopping center, while
a destination store can benefit from owning a stand-alone building.
Small retailers who need a high-traffic location
will likely end up leasing simply because that’s the only option
in a strip center or mall, said Bill Boettcher, of Huntington’s in
Lansing. He moved his upscale leather goods and gifts store from a building
he owned in downtown to the Frandor shopping center to take advantage
of higher traffic.
“My preference certainly would be to
own the property,” he said. “We just happen to be in a situation
where we felt it was beneficial to have the shopping center drawing the
traffic.”
Eric Pearson, of Bill & Paul’s Sporthaus
in Grand Rapids, made the opposite move six years ago, from a mall to
his own free-standing building. He found that his store was enough of
a destination that the mall environment wasn’t worth the high cost
of rent.
“People came just to see us, so we realized
we didn’t need the traffic [the mall] was generating,” Pearson
said.
Numerous software programs are available
to help retailers compare the financial costs and benefits of owning and
leasing, said accountant Hooper. Even more important, however, is the
quality of the location. Is the property likely to appreciate in value?
How easy would it be to find a buyer or sublease the building?
“Both [leasing and buying] are significant
financial obligations,” Hooper said. The main factor is how good
the property Is.
This article was written by Michigan
Retailer staff writer Rachel Whitaker.
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