What's the real cost of losing a small tenant?

The somewhat improved economic outlook hasn't done much to stabilize small retailers. While this past year's uptick in leasing is encouraging, the back story on small tenant sustainability is not quite as bright. Small shops continue to be vulnerable and that vulnerability can affect your center profitability and value.

Let's look at the real cost of losing a small tenant.

Best Case Rental Scenario

  • The tenant gives you advances notice and you quickly identify a new credit worthy tenant
  • The new tenant accepts your form lease (no legal costs)
  • Modest TI
  • Will accept space “as is” with no landlord work required

Assuming
1,500 sq. ft. space
Tenant paying $20/sq. ft.
NNN produces $30,000 in NOI

Replacement costs:

6 months of no income: $15,000
$10 sq. ft. TI: $15,000
$6 lease commissions: $ 9,000

Total Best Case Replacement Cost: $39,000

Center Value Scenario

If you can't identify a new tenant and have to sell the property without receiving credit for the vacant space, what is the cost of losing the tenant?

$30,000 NOI divided by a 7.5% Cap Rate =
Value loss : $400,000

Bottom line

There are fewer small tenants out there starting or expanding businesses
Even fewer good/experienced operators with good concepts
It pays to save every one of possible.

When is it time to make their business your business?

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