by Elizabeth Angyal

As laws requiring green building codes get on board, here's a primer on what to look for in your leasing agreement and where.

City ordinances and landlords are mandating green building materials and operational materials with increasing frequency. If you rent retail space or are planning to lease a new one, you'll probably need to conform to new green requirements.

Many of the green requirements that landlords include in their retail tenant leases are borrowed from the LEED (Leadership in Energy and Environmental Design) rating system, which is a nationally recognized third-party green building certification program. Until the last few years, LEED certification was achieved largely by single-purpose buildings such as libraries or office buildings. In response to increased demand by developers, tenants and various consultants such as architects and engineers, the USGBC (United States Green Building Council) has produced a more diverse group of certifications. One example of this is "LEED for Commercial Interiors." This certification can be obtained by tenants who lease space (but don't own or control the building) in a shopping center or office building. It deals primarily with interior build-outs, such as walls, lighting, painting, carpeting/flooring.

Many cities are starting to include green building requirements in their municipal codes and are starting to offer incentives such as reduced permitting fees or shorter processing times for projects that achieve at least a base LEED certification. For those new to LEED, the LEED system has four increasingly more demanding levels of certification: LEED Certified (base), Silver, Gold and Platinum (the highest rating). The more green building "points" you achieve, the higher the potential rating. It is likely that in the future, LEED or other types of green requirements will increasingly become the norm, as communities raise their expectations and standards regarding what constitutes a sustainable development or business.

Green building requirements

Some common lease green building requirements that tenants might be obligated to meet are:

• The use of water conserving fixtures (for example, low-flow toilets).
• High efficiency HVAC equipment (in retail centers installation of the HVAC equipment is often the responsibility of the tenant).
• Energy efficient lighting (including the ability to control lighting levels to minimize electrical usage, and the increased use of daylight).
• High "R" value (resistance to heat loss) insulation materials (walls and ceilings), which results in increased energy use efficiency.
• Low "U" value (thermal transmission) rated windows/storefronts.
• Energy use monitoring (to verify performance).
• Use of sustainable finishes, such as renewable floor materials (example: bamboo floor boards or linoleum) and low-VOC ("volatile organic compounds") finishes. Low-VOC paints, which are now available in many colors, perform very well.
• Storage and collection of recyclables.

Read the fine print

Make sure to read all landlord and municipal requirements carefully and understand the capital and operating cost implications, as well as the corresponding impact to the "look and feel" of your space. Look for these requirements in different documents that you sign:

• The main lease document.
• CC & R's (Conditions, Covenants and Restrictions) that are private operating covenants mandated for all tenants. These are common if you're part of a shopping center, and can cover items such as advertising displays on the sidewalks, outside seating and rules for trash disposal and collection. They have a similar purpose as private covenants you may have in your residential subdivision.
• Landlord's "Design Guidelines." This document sets design standards for the shopping center and could include at least some green building elements. Signage colors and styles, awnings, and storefront design requirements might be addressed in this document.
• The Tenant's Work Letter (space build-out requirements that the tenant is obligated to perform). Examples of items typically covered in this document are HVAC units/systems (heating, ventilation and air conditioning), insulation and storefronts (example: type of storefront glass that is required to be installed).

Worth the investment?

While improvements such as energy-efficient lighting and HVAC may require a larger capital investment, many retail tenants pay their own utility charges and will realize significant savings over the term of their lease. You can reduce any "green premiums" (the difference in cost between a green/sustainable material and traditional materials) by seeking out sustainable substitutes early in the design phase of your space.

Selecting an architect or space planner who has experience in designing sustainable retail spaces, as well as experience working with your municipality, is advisable. An experienced professional should also be knowledgeable about potential green building rebates, tax credits or other cost savings that may be available from your state, county, city or various local utility companies. Dsireusa.org is a comprehensive online database of state, local, utility and federal incentives that are available as a result of public policy efforts to promote energy efficiency.

A green indoor environment is becoming increasingly valued by customers. It may not be the reason someone initially visits your store, but it might be the additional motivation they need to become a loyal, repeat customer. The use of sustainable materials also creates a real opportunity to educate your customers. Whatever green elements you choose to incorporate, make their presence known as part of what makes your products and/or services special. This can be accomplished through a comprehensive in-store signage program that points out your energy saving features and use of sustainable materials and practices. This is a feel-good service, appealing to both adults and children. At the same time it will promote your business as a responsible member of the community.

How to Target Your Trade Area

An article I wrote for the IAFD a couple of months ago focused on the importance of distinguishing between your trade area (geography, demographics, mixed uses) and site attributes (such as type of shopping center, access, parking and co-tenancy).

How do you develop your customer profile so that you locate your business in a trade area with a significant number of your customers? If you're buying a franchise, you'll be given the customer profile so that you can target the right trade area as well as the most desirable site characteristics for that type of franchise.

There are franchises that focus on attracting customers during particular day parts. For example, fast-casual restaurants that cater to customers in early morning and during lunch will recommend locating in trade areas with a nice mix of residential and employment centers. They will recommend picking sites that are perceived as convenient by the target customer, such as being within a short distance (due to time constraints such as a limited lunch hour), good access and sufficient parking.

Some uses are "mass market" businesses. By definition, a mass market business is one where the majority of people in the trade area are potential customers, such as fast food establishments or florists. And while some demographic segments might provide more customers than others, these businesses depend on being in areas with a lot of activity to bring customers to their door. Here the trade area demographics might be less important than the quality and number of competitors and the particular site location characteristics.

A franchisor will (or should) provide you with both a customer/demographic profile as well as recommended trade areas, types of shopping centers that are better for the franchise, recommended site characteristics and space requirements (size, dimensions of the space, required utilities, etc). 

 If you're buying into a franchise that has other national competitors (and most do), go online and research what the competition is recommending with regard to trade area and site requirements. It's often listed under "real estate" or "submit a site" sections on their website. 

Compare it to what you're being told by your franchisor and ask questions if the requirements differ. A franchisor should be able to explain differences, and this will be a good double check on the quality of the franchise concept.

Franchisors will often have a few franchisees (likely the most successful and happy franchisees in the system) that they refer to prospective franchisees as examples of the business operation, location and potential. 

It's good to spend time looking at a few of the higher volume locations for a variety of reasons:

(1) Talking to an experienced franchisee who's willing to discuss the pros and cons of their business is always worthwhile
(2) It will give you an opportunity to review their trade area and site characteristics so you can see how it conforms (or differs) from the franchisor's recommendations 
(3) You can then take what you learned and apply it to your target trade areas.

It's good to visit at least one average store and one poor performing store so you can see what those look like as well. Sometimes you'll notice weak operations (spend some time observing, on different days and at different times), or you might observe problems with the site (such as limited parking) or other issues with their trade areas. This will be time well spent.

If your franchisor doesn't provide trade area, site and space checklists, develop them for yourself using the information from the franchisor as well as other tips you've learned from the competition. 

When looking at different locations, it's easy to get confused so making notes and using a checklist will allow you to keep track of your observations so you can review them later. 

And it goes without saying that reviewing the sites of your potential competitors is critical. Be honest with yourself regarding their strengths and note their weaknesses. This will help you to position you franchise business for success.

"Location, location, location" is the oft-repeated mantra meant to emphasize the importance of the right site to the success of any retail business. 

But what are the key factors for you to understand with regards to your location choice?

The three most important real estate-related drivers for any type of retail business are:

(1) the size and quality of the trade area served;

(2) number and quality of your competition and;

(3) the type of shopping center and other site-related qualities.

A common mistake is to ignore the distinction between a trade area and a site within that trade area. A trade area is the market area that will be served by your business. The trade area has geographic boundaries and consists of a mix of uses (home, work, shopping, entertainment and public facilities). 

Tip: a good mix of uses tends to provide higher sales potential mainly because there's activity in the trade area for most of the day and 7 days a week. The demographic profile of the residents of the trade area is critical, too. 

The demographic profile should match your customer profile (if you're a franchisee, your franchisor should tell you the target customer profile in detail). A large population base is good only if there are a lot of your customers.

The precise size of a trade area is determined by community affiliation, travel and shopping patterns, and natural and man-made barriers. 

Think of the difference between the trade area and your site in this way: the trade area is the market area you hope to tap, and your site is the location in that trade area that will determine how much of that trade area you'll reasonably be able to serve.

Your type of business and the location of competitors are key elements that determine your reach into the trade area. 

For example, a dry cleaner is largely a convenience business, and there tends to be a lot of competitors. Unless you offer particularly unique services or your competitors are poor operators, you'll be cut off by other similar businesses that are more convenient to customers in the trade area. You should seek to "out-position" your competition, so pick a site that's defensible, both now and in the future.

Your trade area reach is also determined by the type and location of the shopping center your chose (neighborhood, community, power center) as well as the center's site characteristics (such as sufficient parking, ease of access and signage). 

A traditional grocery store in a suburban area tends to pull 2-3 miles, and the other tenants in those centers tend to be convenience tenants that also have limited reach. 

If there are tenants that have a larger draw, such as specialty grocers or other "big box" tenants, you'll have the opportunity to draw from 5 miles or more into the trade area. That's why it's important to locate with co-tenants that will serve as generators for your business.

All things equal, you'll want to be in a strong shopping center with co-tenants that provide generators for your business. But remember that no matter how strong the shopping center and your space within that center may be, you will always have an uphill battle if you're "fighting the market". 

I've seen stores with even poor site characteristics do strong sales, and this was largely attributable to the strength of the trade area for that tenant. 

Make sure you'll be serving the right trade area before focusing on any specific site. A strong location in the right trade area makes a winning combination. 

Written by: Elizabeth Angyal for the IAFD website.