Any proprietor wants to know if his property – his shopping center, office complex, or warehousing installation – is helping to bring in the maximum possible income for its tenants. Is everything running the way it should? Management must demonstrate a certain amount of ability and professionalism in creating a stable and economically viable situation for the tenants of his business or retail facility. But often the question of keeping good tenants on the property is not so simple to answer.

The reasons why tenants decide to cancel or just not to renew an old lease may be varied: problems with the building design, unsatisfactory efforts by management, inability to keep up with the competition, rising leasing costs, and of course many others. The proprietor’s methods of keeping his tenants might also be varied. Putting property on the market and running it poorly is silly. That’s why we might say that policies of “tenant retention” should be adhered to every day. “Retaining tenants is always a part of a managing company’s work,” says Marina Velikoretskaya, генеральный директор Colliers International FM. “When we speak about a retention program, we speak first of all about proper mutual cooperation between management and the tenant.” The deputy director of development for Gildin, Marianna Kuchumova adds that, “Retaining tenants is an art, actually. It is the creation of both an atmosphere around and a bond between the tenant and his landlord. It’s all very simple. If the tenant is offended even once, then any future working with him will be harder, and no reduction in the rent is going to help.”

Methods of Keeping Them

Experts have outlined a whole range of methods by which management can to support and, ultimately, hang on to its tenants. They include of course the advantageous placing of advertisements on the facade or within the property, the arrangement of supplementary notices about tenants around the vicinity of the complex, and other active assistance in promoting the tenant’s business.

In some situations, the proprietor must be ready to alter financial conditions for a tenant: lowering the leasing rates, accepting a percent of the tenant’s profits in lieu of a fixed rent, offering of short term “holidays” from the lease, or otherwise increasing the tenant’s profile as well as that of the proprietor’s enterprise – if we happen to be talking about a retail center. This enhances and strengthens the competitive position of the retail or office center and in the end this improves the situation for the tenant as well as for the proprietor. The reasoning is that if a property is successful and well-known – why leave? “One of the basic means of keeping a tenant on the property at a shopping center is the skillful promotion of the shopping center’s profile,” believes the president of Gildin and managing partner of the AB Group, Yuri Borisov.

In fact, there are diverse means of encouraging a tenant’s loyalty that are not directly connected to revenue, including public relations help, the positive and appropriate presentation of the managing company and/or proprietor of the building, and the occasional sign of attention and respect – congratulations, gifts, putting up a Christmas tree during the holidays in the business center, periodically remodeling the interior, or perhaps organizing an information booth and stand for newspapers and magazines. These simple gestures help the tenants to feel that the proprietor is oriented toward the development of their business as well.

Delicate Games

If this or that company decides to discontinue a lease, the property’s management must attempt to correct the factors which lie at the root of this action. Quite often the basic motives behind the decision lie with a decrease in revenue on the part of the tenant. “If the tenant decides to leave the property, it follows first to analyze the tenant’s business and that of the shopping center as a whole,” explains Elsa Rosenthal, vice president and commercial director of Torgovyi Kvartal. “The tenant’s financial situation must be studied and their business plan must be accommodated by the complex. All sides must understand why the problem has arisen, and what can be done to solve it.”

Often the desire to abandon the site of the unsuccessful property arises from this or that mistake that slipped by during the shopping center or office building’s planning and design phase. In this event, the task of the managing company is not just to increase the loyalty of the tenants through specialized actions, but to try to correct the problems. A drop in the operator’s revenues at a shopping center may stem from the shop’s unsuccessful positioning – for example, at the end of a cul-de-sac. “Countermeasures may include supplementary advertising, directing consumers along the right path,” says Elsa Rosenthal. “If these steps do not help to revitalize the dead zone, more radical solutions are available – architectural reconstruction.”

Design mistakes inevitably bring bad results and a souring of the relationship between the tenant and the shopping center. For example, one vendor may end up cannibalizing the business of another and stealing his flow of customers. This will result in a tangible loss in revenue. Often the reason for dissatisfaction lies with a shopping center’s inability to target a single, coherent demographic band in the market. “If a given retailer’s business plan does not mesh with the center’s own strategy, then the retailer has to make changes,” continues Rosenthal. “Local operators as a rule pay attention to the management’s advice and are ready to change their product and provided service mix.”

Naturally, the reasons for a tenant’s weak showing in the market may lie with the property itself or with bad decisions by the management. Is the property being advanced properly on the market? “In that event, the situation’s solution may depend on the individual circumstances,” says Rosenthal. “They have a lot of options: offering special conditions for tenants or specialized publicity among consumers.”

Naturally, the management’s efforts to support his tenants will not always have the necessary effect. A property’s economic attractiveness is the central goal of any tenant when choosing a location. “If the property is obsolete, then the goal changes, naturally – from supporting the tenant to generally re-conceptualizing the property,” explains Yuri Borisov. It’s not a secret that mistakes on the part of management result in a property’s becoming less attractive. This may cause tenants to start packing their bags. In this event the proprietor may need to find more professional management.

Generally any company leasing any amount of space in even the most modern or professional shopping center or office building encounters a wide variety of difficulties. Management must find a common language with the tenants in even the most unusual situations, even when the problems are by no means the result of the management’s activities. Alexander Novikov, director of office real estate for Prime City Properties, is certain that, “Whatever happens a tenant must be aware that management is always ready to start a dialogue and will not leave him without support. This is how management cultivates a positive image, which may even rub off on the property they manage. Specifically, if a tenant needs supplementary space, he ought to be able to reserve an area of the property that may become available in the future. If the tenant needs supplementary services, something must be worked out with the providers – to say nothing about the thousands of little technical problems which have to be solved as quickly as possible.”

Reductions

It is worth pointing out that a reduction leasing rates is always the most radical means of retaining tenants – and it’s not something every proprietor will agree to do. But when should it be considered, at least? Discounts can be offered to tenants only when all other means of settling the problems have been exhausted and the tenant is absolutely essential to the proprietor of the real estate business strategy. “Reducing the rates on any lease should be considered only when the tenant is considered a long-standing partner of the proprietor, when the tenant himself brings something to the table, essentially attracting a certain segment of the property’s clientele – and only when the reduction is agreed to be temporary,” according to Maria Tepikina, head of the leasing division at PTM Management.

This situation is perfectly easy to explain. It is not secret that a property’s attractiveness as an investment depends not only on the construction’s quality, but also to a lesser degree on the “quality” and “qualities” of the other tenants. Often a well-known brand can do what it pleases when it comes to negotiating its lease with the proprietor. “Sometimes it is more profitable to hang on to a well-known tenant with lower rates, sales, or supplementary advertising, than to lose him,” says Elsa Rosenthal. “Additionally, empty space in general creates an undesirable climate within a shopping and entertainment center and can cause other tenants to start thinking about lowering their leasing rates. In these situations, a center’s general revenues might suffer from their own reduction.”

According to Alexander Novikov, the value of a tenant depends not only on his reputation, but on the amount of space he’s using (for example, an international corporation using 5,000 sqm might be able ‘to write its own ticket.’) “The responsibility that management has to support a tenant is directly proportionate to the percentage of the property he occupies. You see, if a large tenant leaves, the bottom line is that this space simply has to be filled as quickly as possible,” says the expert.

Reducing the leasing rates for one company is always a risk for the functionality of the whole property. “These measures relate to individual circumstances and depend on the general climate in a retail entertainment center,” says Elsa Rosenthal. “The risk is that the drop in rates for one tenant will begin to snowball - that is, all the others will want something similar.”

The ‘leasing holiday’ is likewise to be considered only for a particularly well-known tenant capable of raising the property’s profile with investors or attracting a greater flow of consumers to the retail center. “Such big tenants most often use their own equipment for their shops and require time to set up their full installations,” says Maria Tepikina. “This ‘holiday’ period may take from one week to two months.”

One specifically negative feature of the Russian real estate market is the lack of flexible mutual cooperation between tenant, management, and proprietor. A system of composite leases has become very popular in the West – the proprietor receives a fixed rate of the earnings. The idea behind such a system is that the process might become profitable for all participants, working to guarantee an atmosphere of mutual responsibility. The more the tenant earns, the more the proprietor earns – and likewise. “This system has been proven by decades of detailed working and reworking,” says Elsa Rosenthal. “Its effects on revenue in every format are known, and this is naturally a major factor for tenants.”

The payment scheme by which an operator might pay the minimum fees and most widely maximize his sales has not yet become very well known in Russia. The use of the composite system is certainly complicated by the fact that actual cash amount at the bottom of ‘a cut of the profits’ will always vary. “As for the leasing holiday, this practice is virtually never used in Russia. It’s simply not any sort of panacea,” concludes Yuri Borisov.

Nonstop

But does management really have to support its tenants when property demand is already outpacing supply anyway? According to Alexander Novikov, a goal-oriented policy of client retention is already a part of our business world. “A significant segment of tenants in both retail and office sectors are made up by foreign companies, who are naturally accustomed to a certain level of cooperation with the management of their properties. Regardless of the deficit of high-quality properties, the owners who don’t pay enough attention to this aspect of their business risk losing their tenants – and the foreigners first of all.”

Marina Velikoretskaya believes that our market has not yet mellowed to the point where Russian management organizations can understand the point of view of their western colleagues. “But already the application of these techniques is being called for; these policies of client retention have become a day-to-day part of every manager’s work,” says Velikoretskaya.

If a tenant still decides to leave the property, then the task of the manager is to do make the process of replacing the tenant as painless as possible. To this end every professional manager must keep the waiting list at hand at all times. “In a retail center, one of the essential goals is to keep an eye on the tenant’s sales volume, in order to predict any departures ahead of time and take appropriate measures in searching for a replacement,” explains Yuri Borisov. “In our experience as managers, in the first year after opening one of our projects, we did three overnight replacements, not only without a major loss in rents – but actually managing to increase the rates in the new contracts.”

But if it is a painful process, who will ultimately pay for losses incurred finding the replacement? “The expenses encountered while replacing a tenant are usually going to be born by the proprietor. This includes the broker’s fees as well as the loss in profits resulting from the empty area,” explains Maria Tepikina. “This can all be avoided, however, if three to four months ahead of time searches and talks begin with potential new tenants.” In this event, the new tenant will already have been located by the moment the old tenant leaves and be prepared to move into the facility with very little time lost. If the tenant decides to tear up his contract before the natural conclusion, there are usually very clear penalties mandated as a part of the agreement, which will insure that the tenant cover the proprietor’s losses. “The lease must be written so that tenants understand the termination process. Ideally, at least two months notice should be given, if not more. If the tenant decides to leave a shopping center, according to the conditions lease he must notify the management in writing at an appointed time. During this period the management must examine his waiting list and begin talks with potential new tenants, choosing the most worthy contender for his newly freed up area, hoping not to lose too much money in the process.”

We note once more in conclusion that the task of retaining tenants is an uninterrupted process. “Any investor wants to get the maximum revenue out of his property,” asserts Yuri Borisov. “The management is required to maintain the tenant pool, and this includes finding the right balance of appropriate tenants and appropriate rates.”