Shifting anchor tenants in shopping plazas can make or break small businesses

Pigeons fly up from the parking lot at a strip mall at 4900 West Lone Mountain Road August 28, 2013.

Deteriorating Retail

Howard Rogers is the owner of Postal Express in a strip mall at 4900 West Lone Mountain Road August 28, 2013. Launch slideshow »

When Vons moved out of the Lone Mountain Plaza shopping center at Decatur Boulevard and Lone Mountain Road in 2010, Michael Bui expected the worst for his small hair styling and manicure shop, Persnipity.

The supermarket had provided him with a healthy flow of customers. Shoppers saw his storefront. His salon regularly welcomed several new customers a week because of the grocery store, he said.

“I’ve been here for more than 20 years,” he said. “I’ve always managed to hang on.”

But things changed when Vons left. Bui now sees fewer new customers. He doesn’t make enough profits to advertise.

How to protect yourself if you’re moving

Business owners beware: If you are considering moving out of a retail space before your lease is up, don’t make a move without first talking to your landlord.

That’s the advice several real estate attorneys offered.

The approach may sound like a no-brainer, but tenants frequently decide to cut their losses and run.

“The worst thing you can do is simply shut down and leave,” said Jeffrey Zucker, a real estate attorney with Lionel Sawyer + Collins.

Leases dictate a tenant’s obligations when vacating a space.

“Typically, moving out does not excuse paying rent, maintenance obligations or other obligations,” Lionel Sawyer + Collins attorney Matthew Watson said.

So what should business owners do to protect themselves before and during a move? The lawyers offered several tips:

• Incorporate rate reductions and escape clauses into your lease. For example, contracts should outline how obligations will change if an anchor tenant moves out of a shopping center.

• Hire an attorney who represents tenants to review your lease before you sign it. “You’d be surprised at how many business people try to do this on their own,” Zucker said.

• Negotiate with the landlord. “If the landlord is smart ... as long as you’re paying more than what the landlord needs to keep the lights on, he’s going to cut some kind of a deal with you because it’s better to have somebody in there and have the space physically occupied,” Zucker said. “Even if all you’re doing is helping to pay the mortgage, at least it’s something.”

• Consider filing for bankruptcy. There are certainly downsides, but filing for Chapter 11 can give a business owner a chance to reorganize his or her finances. It’s also typically a better choice than foreclosure.

So Bui downsized. He moved his shop to a smaller storefront in the same center to lower his rent and try to survive.

During the economic crash and its aftermath, scores of grocery stores and other big box stores closed in Southern Nevada plazas and strip malls, sapping a vital source of customers for the surrounding small businesses. Some of the centers eventually found new tenants, but in many cases, the big boxes remain empty. A number of them are beginning to deteriorate.

The valley was hit harder than much of the rest of the country because of the explosive growth that occurred here during the 1990s and early 2000s. During the flush years, new stores opened practically every week to keep up with the population influx.

When the recession hit, many of those stores closed.

Vons, a subsidiary of Safeway, started downsizing locally in 2004. At the time, Wal-Mart was expanding and adding neighborhood markets to its Supercenter lineup. Albertson’s and Lucky also scaled back stores.

By 2007, anchor tenants across Southern Nevada had abandoned their plazas.

Like many mom-and-pop proprietors, small business at Lone Mountain suffered.

Restaurants struggled. Franchises underperformed. They continue to do so today, even as the economy appears to be picking up.

Bui’s next-door neighbor, Post Express, is barely getting by, owner Howard Rogers said.

Rogers opened the postal supply and mailbox rental shop after Vons left, thinking the plaza was destined for a rebound. He figured that as the economy improved, a new anchor tenant would move in.

What he didn’t count on was price slashing by the U.S. Postal Service and competition from online shipping and stamp retail companies.

“I probably should have shut down a long time ago, but I keep trying,” Rogers said. “I feel like I have a responsibility to the people who rented mailboxes from me, and I don’t want to let them down.”

Most anchor tenants own the property their stores sit on. The space small businesses on the periphery house, however, typically is owned by a separate entity.

Vacancies by anchor tenants can trigger rent reductions for the rest of the tenants in a plaza, said Phil Baca, an agent with NewMarket Advisors, which manages Lone Mountain Plaza.

“We know that it’s way harder for tenants when you don’t have some kind of a draw to bring people into the center,” Baca said. “Tenants generally like to be around a grocery store because of the traffic it generates.”

When Vons moved out of Lone Mountain, most of the tenants anticipated that another supermarket would replace it. Several companies considered the space.

WinCo looked at the plaza but opted to settle near a bigger traffic generator – the 215 Beltway about 3 miles north on Decatur in a center occupied by a Target. Emil Khalili, of EFK Holdings, which owns the 60,000-square-foot anchor site, said WinCo needed a bigger footprint, about 100,000 square feet.

Other supermarkets also kicked the tires at Lone Mountain.

Then, earlier this year, the Vons space was filled with a Sears Outlet.

Some plaza inhabitants were glad to see a new neighbor.

“The good thing about Sears is that the center is filled again,” Baca said.

Others balked about the type of store that moved in. They complain that an appliance outlet attracts far fewer customers than a grocery store.

“People go grocery shopping every week,” Bui said. “But how often do you need to go out and buy a washer and dryer?”

Rogers said business at his store was slower this August, after Sears moved into the plaza, than it was last August when the anchor space was empty.

“Sears isn’t going to make a difference for me,” Rogers said. “But I guess it’s nice to have something here. Maybe I can go put some of my business cards on the cars that are parked by the store.”

Rogers said he feels worse for Sears’ next-door neighbor, Mattress Plus. Both stores sell mattresses.

A manager at Mattress Plus said he isn’t concerned – the added competition will push both businesses to be stronger.

Khalili said most of the tenants he has heard from are happy that the big box is occupied.

As tough as it is to thrive as a small business in the post-recession economy, things could be worse for the tenants at Lone Mountain. The owner of their plaza kept the vacant Vons in good working order. At many retail spaces, stores abandoned by big box outfits have fallen into disrepair.

There’s little that a periphery tenant can do when that happens, said real estate attorney Paul Larson, of Lionel Sawyer + Collins. Lenders can secure and clean up properties only after new owners buy them or banks foreclose on them.

Municipalities can order nuisance abatements, but it’s a lengthy process.

Code enforcement officers in Las Vegas, North Las Vegas, Henderson and Clark County say most of the nuisance abatement complaints they receive involve homes. Only occasionally do they handle complaints against commercial property owners.

When they do, code enforcers visit the property and try to track down the owner. Firefighters and police search for safety hazards and illegal activity.

A call or letter usually gets the owner’s attention, and the problems get resolved. If they don’t, code enforcers can deem the property a public nuisance and initiate the process to secure and clean the building. The county pays for the work but places a lien on the property so taxpayers aren’t saddled with the bill.

“It’s definitely a win-win because the property is properly secured, which makes the neighboring businesses happy, and the taxpayers don’t lose out on it,” said Clark County code enforcement supervisor Dave Pollex.

Pollex said the county received 11,500 nuisance abatement complaints last year and maybe five a month involved commercial buildings.

In North Las Vegas, there were 21 commercial and residential abatements in July.

Frank Fiori, the city’s director of community services and development, said the average abatement costs about $300.

Some community members want government to take more action against property owners who fail to keep commercial sites in order.

Clark County Commissioner Chris Giunchigliani said government ordinances should have more bite to deal with community eyesores, particularly buildings that are chronic problems.

“Just look at the building that housed the Key Largo,” Giunchigliani said. “It took two fires over seven years for something to finally be done on that lot.”

In some parts of the city, she said, nonprofit groups have worked to develop public-private partnerships to occupy vacated structures and bring deteriorating commercial buildings back to life.

Retailers at the Lone Mountain Plaza have other ideas about how local government can help them. They want municipalities to relax some of the codes that prevent them from posting banners and signs advertising their businesses.

“Some of the businesses around here have tried to put up small signs and banners closer to the main streets that pass by the center,” Rogers said. “Letting some of that drive-by traffic know that we’re here would help.”

Rogers also complained about what he sees as the Las Vegas City Council’s singular focus on downtown. He said business interests in other parts of the city are getting the short end of the stick.

“I’d love to see Councilman (Steve) Ross come by here,” Rogers said. “This is his district. He’s my councilman. I’d like for him to see how tough it is to make it under these circumstances.”

Tags: Business