Download as Word Processing File

---

Commercial Revitalization
Notes from Training Sponsored by Greater Miami United - 6/17/87

INTRODUCTION - These notes were taken by John M. Little at a training given by Charles Rial and Associates in Miami on June 17-19,1987.

I. THE DECLINE OF INNER CITY SHOPPING DISTRICTS

• Why did inner city commercial strips deteriorate? What were the market issues?
  

• Transportation systems changed. Malls developed because highways were developed.
  

• Because of the changes in transportation, populations moved to new locations. As a result, shopping centers were built in these new locations;
  

• Some of the more successful inner city businesses (i.e. the better merchants) moved to malls.
  

• Desegregation had big impact. People can now shop wherever the want to. The black dollar is now welcomed everywhere.
  

• Violence in ghetto deterred some businesses from locating there.
  
  

II. THE RISE OF THE MODERN CHAIN STORE

Chain stores are a new development. They moved mostly to the malls. They had a price advantage. They also had more sophisticated systems such as centralized buying, merchandising, advertising, personnel training, and profit sharing. In other words, these stores had all kinds of systems to make a store work (support systems). This makes it much tougher for the neighborhood merchant to compete against them. Chain merchants are perceived by the consumer as doing a much better job. The expectation of community support is not enough, in and of itself, to insure the success of neighborhood merchants.

Commercial areas used to be thin strips. Modern chain stores are being built on larger blocks of land. As a result, when you want to attract large chain merchants into an older neighborhood you have to assemble larger tracts of land. In the inner city this means that displacement will often result.

III. CONSUMER DECISIONS

Consumers make decisions based on such factors as:

• the merchandise,

• the "presentation",

• the quality,

• convenience (including location),

• price.

• Community loyalty" is not on this list because it not an important factor in consumer decisions (there are, however, important exceptions like funeral homes).
  

Don't put too many social objectives into a commercial revitalization project. The lenders don't want to make a social statements. An example of a revitalization project that was "heavy" on social objectives (without fully taking into account market factors) was the shopping center that was built in a neighborhood in reaction to a riot. The main marketing tool was ideology (i.e. loyalty to neighborhood). The shopping center failed. Consumers will not change patterns merely by saying "shop with the brothers". They will only change their patterns when you have attained a level of sophistication so as to give them a "great little place to shop".

Many time local merchants do not do a good job. They do not provide a quality product and service at a good price. The question then is how do you change this.

Franchising is creating more wealth in the black community than individual efforts because there are not the role models in that community. Franchises provides a system that merchants can plug in to. Franchises can make up for the fact that black business persons do not have parents or other role models in the community who can provide the training to insure business success.

Before the automobile and malls, a typical strip might support eight blocks. Now, with reduced population and market, the strip might only be able to support three blocks of businesses. It might make sense to "decommercialize" a number of marginal commercial blocks and turn them back into housing. In other words, concentrate the effort on just a few blocks.

IV. KEY VARIABLES IN RETAIL BUSINESSES

1 Product mix and merchandising flair.

2 location and its cost

3 ability to use wholesaler resources and services

4 gross profit

5 inventory turns e.g. if you keep an average of 50 pairs of jeans on stock and you sell a total of 500 every year, you have an "inventory turn" of 10.

6 supplier credit - Supplier credit is advantageous because there is no interest to be paid You can use supplier credit in a startup situation if you do your home work.

7 labor costs

8 control over of advertising - A lot of money is wasted on advertising.

9 In tune with customer base - is/should be, coupled with ability to respond to changes in the market demand, e.g. inner city stores who are able to adapt to a changing customer base due to gentrification.

V. KEY VARIABLES IN COMMERCIAL REAL ESTATE

1. Location - It depends on how much you are paying for it. e.g. bayside charges $40 per square foot (based on $120 per square foot construction costs) whereas in the ghetto you might be paying $4 per square foot (based on $40 per square foot construction costs). The more rent you charge the nicer building you can build.

Three types of commercial rent.

a. Base rent

b. common area charges

c. percentage rents (percentage of profits) -- This is gravy for the landlord because his bank has loaned money based only on the base rent and common area charges.

2 Credit worthiness of tenants - 70% of tenants in malls are chains that can provide their own financing It makes the mall developer better able to get financing from the bank In neighborhood revitalization you might look to a mix of chains and individual tenants.

3 Financing costs. - Amount of payment in relation to borrowing is defined by interest rate and the term of the loan Subsidies mixed with *commercial lending can lower the blended rate.

4 Tenant mix or anchor tenant

5 Operating costs

6 Land costs

7 Cost of construction relative to rent

8 Tenant charge in excess of rent.

VI. PUTTING TOGETHER A DEAL

1. Formulate a concept:

a. tenant mix
b. how big?
c. what site? (including site plan)
d. preliminary financing plan.
e. see below for more detail on concept formulation

2. Site control

3. Get commitments

4. Build

5. Operate

VII. NINE STEPS IN COMING UP WITH A DEVELOPMENT CONCEPT FOR COMMERCIAL REAL ESTATE

1. Define Trade Area.- Boundary from which you would expect customers to come from within. The area from which you expect 80% of your customers.

2. Collect Basic Market Data - Count number of people within the trade area with the amount of dollars that they spend, etc.

3. Inventory the existing retail establishments and interview merchants.

4. Rank priority tenant types (e.g. Drug stores vs. ladies retail etc.). See below for more detail on how to do the ranking.

5. Consumer survey. You ask questions like "what kind of stores do the customers shop at now, etc. Many times merchants do their own study, so this survey only needs to be the basic information. You will use it to catch the interest of potential merchants.

6. Develop a tenant mix. (see below for more detail)

7. Review sites and prepare site plans.

8. Early financial projections.

9. Seek preliminary commitments from credit worthy tenants and banks.

VIII. PUTTING TOGETHER A DEVELOPMENT TEAM

The following is a list of the types of people that need to be put on a development team. Not all of these need to be on the team for every development. It depends on the circumstances.

• Developer

• Architect

• Engineers

• Cost Estimator/Builder

• Legal

• Financial Analyst

• Market Analyst

• Appraiser

• Management Company (sometimes)

• Leasing Agent

• Broker (site negotiator)

• Banker (don't invite to all the meetings)

IX. TRADE AREA

The factors that determine where and when people shop.

• Competition - size and quality

• Traffic Flows

• Racial/Demographics Shifts.

•  Man-made and natural barriers

How to determine trade area:

• Map the area and mark where the competition is.

• Mark the traffic flows.

• Map the natural and man-made barriers.

• Map the demographic distribution.

•  Then determine how easy or convenient it would be for residents to get to your potential site.

Besides defining trade area by demographics, competition, barriers ect, you can also define target area for existing businesses using INTERCEPT SURVEYS where you ask people on the street where they live. You then put dots on the map and draw a circle around the 80% closest to your center and you call this your trade area.

X. RANKING POTENTIAL BUSINESSES AND DEVELOPING TENANT MIX

Call computer service in Los Angeles (Urban Decisions Systems) and they will give you information based on census tracts. This service costs about $100.00-$200.00. They get this information from such sources as the Census of Retail Trade, sales tax data, economic studies based on regional differences in spending patterns and economic studies based on racial differences in spending patterns. This data answers questions like "how big a drug store will our trade area support?". Contact Urban Decision Systems Inc., P.O. Box 25953, Los Angeles, Calif. 90025. The telephone number is (213) 820-8931. Call up United Decisions Systems and give them the census tracts or zip codes (or portions thereof) that you are interested in. Say to them that you want a store summary, population report and some individual reports.

The "Store Report" will tell you The annual sales potential for different types of businesses in your target area. It tells you the aggregate volume of sales for that store type, the per capita expenditure and the gross supportable leasing area.

With this information you can estimate the potential market share of a particular type of store for your target area.

If a business would have to capture an excessive share of the market, it should not be included on the list of good potential businesses for a target area. As a rule of thumb a "convenience goods" store should not have to capture more than 30% in order to break even and a "shoppers goods" store should not have to capture more than 15%. If the actual business would have to capture a greater percentage than this the business would not be feasible and should not be included on the list of potential businesses for your target area.

You can estimate the market share as follows:

• Data from Urban Decision Systems (based on the estimated per capita expenditure for each type of retail store in that particular target area) shows you what percentage of the market a merchant must capture in order to support a typical sized store.
  

• You then check this percentage with the rule of thumb listed above. Example: If the UDS data shows that you would only have to capture 14.9% of the women's apparel market to support a typical sized store in that particular target area, the business is probably a good choice (i.e. it is less than 15% "rule of thumb for "shoppers goods").

• Dollars and Cents for Shopping Centers by the Urban Land Institute has a lot of good information on statistics for different types of stores. This will also help you to identify tenants that might feasibility locate in your shopping center or strip.

Once you have determined, in a general way, what types of stores might be feasible, you might then want to do a consumer survey in order to really focus.

At this point you should have your tenant mix.

Use these market studies to determine which tenants to talk to. Market studies can get you beyond merely using politics to talk banks and potential tenants into participating. You are not asking them to make a decision based on politics but on market factors.

XI. COMMERCIAL REVITALIZATION ACTIVITIES

• Promotions

• Merchant associations

• Retail training

• Revolving loans

• Physical improvements-facades & streetscapes

• Business packaging for merchants

• Public space improvements

• Tenant recruitment

• Commercial real estate development

• Developer recruitment and arranging subsidy

• Crime and security programs

• Special service districts (special tax assessments) Merchant technical assistance

XII. THREE CYCLES OF REVITALIZATION

1. Your first focus is to stabilize the businesses that are already there.

2. Then, create a climate for investment.

• e.g. street improvements
• facades
• trash cans
• trees

3. Then, Re-commercialization

If you don't do the preliminaries, the Winn-Dixies of the world won't be interested in coming in.

XIII. REVITALIZATION PROCESS

1 Physical Improvements

a public improvements
b facades
c interiors

2 Business Assistance Services

a revolving loan funds
b. rebate (e.g a county program to reimburse facade improvements)
c loan assistance
d merchant education

3 Coordination of Public Resources

a local government
b private sector
c educational resources (e.g work-study in the urban planning department).
d law enforcement
e ordinance enforcement

4 Organizing Component

a merchants
b property organizing
c customer base (e.g block clubs)

5 Marketing/Promotion Component

a cooperative advertising
b newsletter
c promotional events when facade completed, when tenant moves in, etc.