Five things to know before opening a shop in an airport
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Posted: 10 October 2018 | Marcy E. Hamilton | No comments yet
As small businesses look to develop and expand their customer base airport shopping facilities can look like an exciting opportunity to expand. However, there are often pitfalls that any business wants to avoid, Marcy E. Hamilton explains.
From the collapse of Sears, Toys R Us and too many familiar shop storefronts to count, it’s no secret that brick-and-mortar retailers are in a fight to stay relevant. You wouldn’t know it, however, if you spend all your time in airports, where sales from retail shops and other concessionaires continue to increase worldwide.
As retailers struggle in the digital economy, airports can represent a rare refuge where a captive audience of travellers is more willing to spend. Yet, as it is on a city block or in a suburban shopping centre, there may be trouble getting a foot in the door, especially for small businesses.
Airport shop leases, while similar in many respects to those used in run-of-the-mill suburban shopping centres, are a different animal. Owners of retail businesses need to consider a number of factors when negotiating these contracts, and the airport setting comes with its own special challenges.
Have an exit plan
Let’s say you own a small-but-successful ice cream shop, your friends and family are encouraging you to expand, and suddenly you’ve got a one-year lease in your local airport. Four months later, however, you’re offering the same favourite flavors, but aside from some regular customers, sales are slow.
In this case, a tenant who negotiated a kick-out clause may have a way to stop the bleeding. This allows tenants or the landlord/shopping centre developer to terminate a lease early under specified circumstances, including if sales don’t reach a certain threshold within a certain period of time. This way, tenants aren’t stuck in a lease and can cut their losses early. For the developer, it can make room for a more successful business without having to wait out an under-performing one.
A relocation plan
Location is important in retail, but a visible position is even more essential in an airport, where some terminals may be busier than others, or a space near a security checkpoint is heavily trafficked. In a lease, however, the developer always wants the right to relocate a tenant. Typical lease language requires that the tenant comply with the relocation and the landlord pays the tenant’s moving expenses.
But what if the relocated space is not a desirable location for your business? A tenant may want to negotiate up-front a right to reject the proposed relocated space and terminate the lease. That way, the tenant is not forced to operate in a location they feel won’t be good for business. The tenant may also negotiate a right, in the event of a termination in lieu of relocation, that the landlord will pay the unamortised portion of the costs the tenant incurred to build out the leased space.
Alternatively, the tenant could accept the proposed relocated space, but negotiate a reduction in rent until sales reach the level they were at before the tenant was relocated.
Prepare for the unexpected
Airports are typically owned by a governmental entity or authority that may choose to lease out the retail/restaurant space to be developed as a shopping centre to a separate entity. When that entity is a developer (as opposed to a concessionaire that will operate the entire shopping centre), the developer acts as a landlord of the shopping centre, dividing the space and subleasing individual spaces to tenants. But what happens if the developer breaches its lease with the airport owner? Before spending a significant amount of money, time and resources building out a retail or restaurant space in an airport, a tenant will want to obtain a non-disturbance or recognition agreement with the airport owner that says the tenant can continue to operate its business in the airport under the terms of the lease, even if the lease between the airport owner and the developer terminates.
Another aspect specific to negotiating airport leases is a clause that would adjust a tenant’s rent if enplanements fall. Enplanements pertain to departing passengers and are part of how foot traffic is calculated in airports. Lower traffic equals lower sales, so this is especially important if an airline cuts routes or if an airport that was a hub for a particular carrier loses that status.
Know logistical and security procedures
Airports are settings unlike most other retail spaces in that they are hyper-focused on security and, therefore, have certain logistical hurdles to cross concerning supply and even the products you can sell.
With space at a premium, not every store has an equal amount of square footage. This may be especially limiting when it comes to storage, so tenants should understand their space needs and negotiate additional storage space if needed before signing a lease. As for getting goods into the airport, there’s not a simple backdoor to the street behind the countertop. Tenants should understand how they will be required to take deliveries of merchandise and supplies. There may be a central distribution system for tenants to use, as well as specific procedures to get products and even employees through security checkpoints. Tenants need to be clear on these processes before opening for business.
Security is obviously one of the top concerns in airports, and that has a major impact on how tenants can operate their businesses. For instance, operators of newsstands, drug stores and gift shops must sometimes vary their product offerings (e.g., no nail clippers or pocket knives) and restaurant owners must comply with rules and regulations that do not apply to a non-airport location (e.g., handling of knives to prepare food and open flame to cook food). These differences are further complicated by the fact that airport regulations and restrictions can change frequently. A tenant must understand not only the lease provisions but also the rules and regulations governing operating a business in the airport.
Think about your business structure
The Department of Transportation’s Airport Concession Disadvantaged Business Enterprise (ACDBE) programme links federal funding for government-owned airports to nondiscriminatory hiring practices. To create an even playing field, airport owners may task the shopping centre developers to meet a specific percentage of ACDBE-qualified businesses. Prospective tenants may be able to structure their business in such a way to take advantage of this programme. It’s an avenue worth exploring if a business is having trouble getting in the door.
Once inside the airport, the environment is ripe for success as more people take to the skies across the globe. Given the unique setting, there are important factors to consider when negotiating a lease and even after signing it, but a careful and knowledgeable attorney can guide business owners through the process. Then, it’s time to take flight.
Marcy E. Hamilton is a partner in the real estate and lending group at Pittsburgh-based law firm Meyer, Unkovic & Scott. Her practice focuses on commercial real estate transactions with an emphasis on office, retail, and industrial leasing, as well as land use and zoning, rights of way, acquisitions and dispositions, and eminent domain. She can be reached at [email protected]
Airside operations, Economy, Non-aeronautical revenue, Passenger experience and seamless travel, Retail
Airport Concession Disadvantaged Business Enterprise (ACDBE)