Retailers opt to own, rather than lease, space

Lynne and Al Dunton did not really intend to become owner/occupants of a retail enterprise. What they wanted was the building at 233 Linden St. in Old Town Fort Collins.

“We had looked at it for years, and loved it,´ said Lynne Dunton, now owner of Centennial Galleries of Fine Art. “Our son Eric who lives in Taiwan was looking for an investment, and so together we bought it from Bob Coonts in 2003. We hoped that Jean Wilson would continue with her gallery, but she was prepared to retire.”

Having leased the second floor to another company, and finding themselves with a space already set up as an art gallery, the Duntons made a logical choice: They opened an art gallery. They now own an appreciating asset that brings in income from one tenant and adds predictability to the fixed expenses of their own business.

The Duntons’ foray into owning both the business and the space it occupies might serve as a case study for what motivates buyers to purchase small retail spaces. Their son’s interest was in finding an investment property, an impulse that has repeated itself throughout the real estate market ever since the stock market turned sour in 2000. The investment opportunity turned into a retail opportunity for Lynne and Al Dunton. If they tire of being gallery owners, they can sell or become landlords. This represents a bit of a sea change in American retail sensibilities.

In other parts of the world, owner-occupied retail businesses are commonplace. Ownership lends stability to the enterprise by removing rent increases – but not tax increases – from the equation. U.S. retailers seem to prefer the flexibility associated with being tenants. If leased space becomes too small or too big or too risky, a tenant can just move. Moreover, U.S. retailers have historically preferred to use extra capital for expansion. Dealing with higher rent is just a part of doing business.

“Few people can do the whole nut,´ said Ed Stoner, owner of Old Town Square Properties. “They usually invest their money in inventory. I would say that about 95 percent of retailers are tenants. The exceptions in downtown Fort Collins are The Cupboard, Garwood’s, Nature’s Own and some of the businesses in the Galleria. But I expect in the next 10 years that more retailers will own their own space.”

As a recent story in the New York Times pointed out, it is relatively rare for retailers other than big-box chains like Wal-Mart and Home Depot to own their real estate. But as neighborhoods undergo conversions and developers put ground-floor retail space on the market, investors and foreign-based retailers used to owning are buying it up.

Retail condos for sale

While the details of owner occupancy in New York City are unlikely to repeat themselves in Northern Colorado, the spirit of retail occupant ownership is actively making its way into this market in the form of new construction. In partnership with Brinkman Partners, Everitt MacMillan Development Inc. is creating a retail condo project on Timberline Road just south of the Horsetooth Road intersection, the only new project in Fort Collins being offered for sale to users. The partners expect that both investors and retailers themselves will take advantage of historically low interest rates to lock in the cost of space.

“There are several advantages to being an owner occupant,” David Everitt said. “Financing is usually more favorable because both the property and the business serve as collateral for the loan. Unlike a tenant’s improvements, an owner’s improvements are not lost because the occupancy doesn’t change.”

Everitt added that owner occupancy is not a panacea, but it is good for some kinds of people.

“The retail sector in the U.S. is dynamic, and when you add in the certainties that ownership offers, you give up some flexibility,” he said. “But even that can be worked with. If something happens to the business, the owner/occupant can become a landlord to a tenant.”

Patty Spencer, a broker with Realtec who specializes in commercial properties in Old Town, said that one of the drivers for the retail condo concept is the availability of investment money in the market right now.

“When the stock market is not doing well, people ask, ‘Where can I put my money?'” she said. “Real estate is perceived not to be as volatile as the stock market, and with interest rates still at historic lows, the opportunity to invest in retail space without having to buy an entire retail center is attractive.”

Spencer pointed to the Opera Galleria in Fort Collins as an example of a building that has been successfully “condoed” for retail.

“Mary’s Mountain Cookies, Bella Bambino and Europa Spa Store are all owner- occupied,” she said. “Homefest is a tenant for an investor.”

Spencer pointed out that another type of individual retail opportunity occurs when pad sites are put up for sale around a project like a Super Wal-Mart.

“The prices for these properties are high,” she said. “As a result they tend to go to bank branches and quick-serve food chains.”

Having a Wal-Mart as an anchor has an undeniable appeal for complementary retail that can afford the pleasure of the giant’s company. By contrast, the Timberline project offers a dense, southeast Fort Collins residential neighborhood, underserved by retail as an incentive to those who would be owner/users or investor/owners.

“This project was designed for retail and service that accommodates a certain lifestyle,” Everitt said. “It may have a specialty clothing store, but more likely it will be retail oriented to convenience, designed to serve a small geographical area.”

Included in Everitt’s list of convenience retail are hair salons, dry cleaners, postal services, medical offices, veterinarians and quick food like a Fazoli’s Italian restaurant. He added that insurance agents, stockbrokers and banks also like to locate where there is retail traffic.

“When you have these services close to neighborhoods, it’s good for the environment,” Everitt added. “You don’t have to drive for basic services. We’re excited about it and hope it will be well received in the market.”