Tactic 
to fill leasing
 space

By Rachel Tobin Ramos

The Atlanta Journal-Constitution

In a sign the renters’ market is far from easing, some of Atlanta’s most prominent developers are going to extraordinary measures to reel in retailers.

Ben Carter Properties, developer of the Streets of Buckhead, and Sembler Co., developer of Town Brookhaven, each are redoubling efforts to lure tenants by giving more financial aid to shops and eateries.

The tactic reflects the continuing stress on developers, who must use every tool – including their checkbooks – to fill up retail projects.

As consumers trade down from Williams-Sonoma to Wal- Mart and credit remains tight, developers are finding it easier to bankroll tenants than to wait for banks to do it.

The downside: the developers also assume more risk if the deals go bad.

“Retailers when they expand usually are using their own profits or bank loans,” said Carter, who is currently developing 375,000 square feet in the Streets of Buckhead, a luxury development he says was inspired by the famed Rodeo Drive in California. He values Phase I of the development at $800 million.

“What’s happening in the last year is that banks are very reluctant to let retailers borrow from them. Even with a line of credit, they don’t want to give out new money,” he said.

In the past, he would price out the store design and layout and give the tenant about 20 percent of the cost to customize it. In this market, that’s increasing to
35 percent or more, he said.

New York restaurateur Rick Wahlstedt, owner of Japonais, a large sushi restaurant planned for the Streets of Buckhead, wouldn’t build the restaurant without the help.

“We are in a very conservative mood and have to take care of what we have,” he said. “I would not build the new restaurant without the additional support.”

His restaurants typically cost $350 to $500 per square foot to develop. In the Buckhead project, construction costs on the 8,300-square-foot restaurant would be roughly $3 million to $4.5 million — something no bank was going to invest in this year, he said.

Developer assistance is not typically offered to large national retailers like Costco or Target, whose leases are often tied to a shopping center’s mortgage.

But developers use a form of “micro loans” as incentives to fill smaller spaces with independent boutiques and eateries. Carter said the interest tenants pay on the micro loans over the term of the lease is part of the developer’s return on investment.

Meanwhile, at Town Brookhaven, a giant mixed-use development on Peachtree Road, Sembler president Jeff Fuqua is giving incentives to the eateries and shops that draw foot traffic.

Retail experts say some developers go as far as bankrolling store inventories. These kinds of extraordinary measures haven’t been seen for two decades.

Phil Skinner, a partner in the real estate practice of Arnall Golden Gregory, said he last saw developers’ subsidizing inventories in the 1980s in Atlanta, when retail space was overbuilt.

“It comes and goes in cycles,” Skinner said. “I can remember transactions for major regional shopping centers in 1980s where the developer in essence had to put the tenant in business. They would build the store, stock the store, and give them the keys. Then if it all worked out, it was wonderful, and if it didn’t, it was an incredible failure.”

David Birnbrey, chairman of The Shopping Center Group, a retail brokerage, said one spectacular failure of this financing model was Steve & Barry’s, an American apparel company that developers bankrolled into hard-to-lease locations. The company filed for bankruptcy this year.

But then there are stores like Bass Pro Shops and Cabela’s, he added. These destination outdoor stores often are subsidized by developers and local governments for their regional draw.

Birnbrey said bankrolling inventories isn’t “rampant,” but can be done by “the landlords that have deeper pockets, are more risk tolerant and want to proactively make things happen.”

Developers offer bigger incentives, he added because they have agreed to “co-tenancies.” In other words, anchor tenants pay less rent – and can even terminate their leases – if a retail project doesn’t have a high enough percentage of other tenants to help drive traffic.

“So landlords are looking at a potential debacle if they don’t fill space,” Birnbrey said.