Winter 2012 Ancillary Opportunities

The vice president of property management for Phillips Edison & Company abides by the management principles of abandoning what’s not working and focusing on innovation. That approach has yielded rich dividends.

Eric Richter, vice-president of property management for Phillips Edison & Company in Cincinnati, OH, maximizes temporary revenue from the parking lot to the rooftop—with nary an RMU in sight.

Prior to 2008, Phillips Edison’s leasing professionals handled both permanent and temporary leasing deals. With permanent deals generating the majority of income they were naturally the main focus. At that time, only a handful of Halloween deals constituted temporary inline accounts, and sales in this category were not tracked. Even the Halloween deals they executed were ones where retailers called the company, not the other way around.

Richter says the move to more well defined and categorized temporary deals resulted from customer demand. “Property managers were getting calls requesting temporary opportunities and we didn’t have a department 100% focused on that,” he says. In the fourth quarter of 2008, Richter put in place a temporary, or ancillary income program that today generates sizable revenues. In the first full year, Phillips Edison & Company brought in over one million dollars worth of temporary tenant revenue (temporary deals were not separately tracked prior to this). In 2010, sales doubled. According to projections for sales in 2011, the sales are expected to double yet again. “We created over 2 million dollars in volume out of nothing,” says Richter. Some of the first programs we implemented included carnivals and firework stands. We visited local carnival owners and asked them if they wanted to set up in our parking lots when they weren’t at the local fairs. We also networked with national fireworks operators to leverage our portfolio size with their need to have multiple retail outlets.

“The ancillary income program [was created] in response to a challenge to help increase income during the most recent economic downturn. Our regional managers are on the ground daily so it made sense to use them to source deals,” says Richter. “This gave them a way to earn additional income, as well as help draw customers into their centers.”

The ancillary income program differs from those at traditional, enclosed shopping centers, mainly because the portfolio at Phillips Edison differs. Phillips Edison owns and operates 250 open-air shopping centers nationwide, with the typical center averaging 120,000 square feet of retail space with a strong grocery anchor component. Other tenants at a grocery-anchored center typically include a pharmacy; value retailers; small restaurants such as a deli or other local operator; services such as tax preparation, nail salons, dry cleaners; and perhaps a gym or tanning salon. Because the centers are open-air, standard kiosks that are located in malls cannot be utilized. For this reason, Phillips Edison uses their vacant spaces and common areas to generate their ancillary income.

Each one of the approximately 20 regional managers in the Phillips Edison Property Management department oversees 15-18 properties, with management and temporary leasing responsibilities. Richter oversees these regional managers and their leasing efforts and generates several national leads as well.

The team makes deals with seasonal stores on a national level where it makes more sense. “If it is easier for us to meet with reps and present our portfolio on a national level versus regional managers calling and setting up individual meetings, we do so,” he says. An example of such a deal was a lease with TNT Fireworks. There are instances, however, where deals crafted on a local level make more sense. For example, car lots will often rent a parking lot for a special show or sale in an area where they don’t have a presence to generate traffic to their long-term location. This deal could be crafted in Florida, for example, but not in Ohio where it is not allowed.

“Local managers are more successful in selling the local one-shop user on the value of establishing their use in our centers,” says Richter. “We’ve also learned that our traditional leases are intimidating to these tenants, so we use a Periodic Tenancy Agreement, which is a much more scaled down version of our full lease document,” Richter says. Terms or conditions that do not apply to a short-term user are not included. “We have also learned that being able to get a document into the tenant’s hands quickly is the key to success. Our local managers can request an agreement and have it back to the tenant in about 24 hours.” According to Richter, this is only possible because of a superior in-house team of paralegals and attorneys.

Novel opportunities

“There is a lot of opportunity in the grocery-anchored center,” says Richter. Seasonal uses—including Halloween, fireworks, Easter candy and Christmas toys—are big income generators. Sometimes furniture and electronic stores who otherwise might not have a presence in the area will rent temporary inline space or set up a tent in the parking lot and have “blow-out” clearance sales.

Other uses include bookstores, tent sales, Christmas tree lots and carnivals in the parking lot. They are also working with solar companies to generate rooftop income from solar panels and telecommunication deals for cell towers.

Temporary leasing provides tenants with an opportunity to transition to long-term leases as well. “We might execute a temporary lease with a tenant that doesn’t meet all of our financial requirements for a permanent lease or wants to try an emerging concept. For example, a potential tenant wanted to open a sub shop but didn’t immediately qualify for a permanent deal. After a temporary ‘as is’ lease for 12 months with a 30 day right to recapture, we knew his business plan worked and signed him on a long-term lease. If a potential tenant has a low credit score or wants to try an emerging concept, temporary leasing provides a way to establish credibility,” Richter says.

When large spaces go unrented, utility expenses for the space are the property’s responsibility until the space is leased. Once leased, responsibility for utilities is transferred to the merchant. “With spaces of up to 50,000 square feet becoming available, temporary leasing also offsets vacant unit utility expenses and insurance liability,” Richter says.

Craigslist is a good source to generate leads for spaces of any size, according to Richter. Another noteworthy source has been the Ad Hoc Leasing Committee, a peer group that meets once a year, giving 8-10 companies an opportunity to network and share leads. Richter joined in 2011. One lead generated from this group was an additional clothing recycler. That type of business might pay between $200-$500 a month to place its bin in a center’s parking lot, with the goal of being in as many parking lots as possible.

Richter says the group has been great because everyone is involved in the Committee in order to share leads. “Every major landlord across the country has a goal to generate ancillary income and has assigned a team or group of people to accomplish that task,” Richter says. “Everyone comes together and shares information and leads so that others will share leads with them.”

Richter networks at trade shows throughout the year and uses cold calling as another way of generating leads.

Creativity pays

Richter complements his extensive experience at Phillips Edison with a creative approach to his endeavors, resulting in initiatives to keep the ball rolling. To motivate property managers, Richter created a “Spin the Wheel” program. “We pay our property managers a commission percentage for every deal they execute. In addition, we offer monthly incentives if you lease space for 12 months. You get to spin the wheel and land on a number of other perks. For example, gift cards or a paid day off. We added an incentive to push a little harder so we could extend 6-month leases to a 12-month term,” he says.

Richter and his team get their inspiration from a number of sources, most recently from a book distributed during Leader to Leader workshops this year. The book, The Five Most Important Questions You Will Ever Ask About Your Organization, (Peter F. Drucker, 2008, Leader to Leader Institute) provided them with three important words they not only work by, but offer as advice to fellow professionals: abandonment, concentration and innovation. Abandon what’s not working, concentrate on the things that are and innovate to find the next great thing.

The ancillary income program has been the result of this focus and it has in essence become “the next great thing.” Creating it came with an added bonus, notes Richter. “One of the really surprising results that came out of this initiative is the collaboration and appreciation that has grown between the leasing and property management departments. Now that a portion of the property manager’s time is spent leasing, there is a greater rapport with the leasing department and appreciation of the effort it takes to source, negotiate and execute deals.”

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