There are a myriad of factors leading to high rates of retail vacancy in our cities. However, one issue that has come up in our conversations with business owners across the country over and over again is the lack of financial and technical resources to renovate and fit-out vacant storefronts that have fallen into disrepair over the years.
Painting storefront façades, fixing signs, replacing awnings and windows are one thing. But fitting out an entire 2,000 SF store can become a large line item for the already struggling small business owner. Fortunately, some cities and downtown associations have begun to address this issue directly by providing incentive tools, or tenant improvement programs (TIP), that facilitate the occupancy of unviable vacant storefronts.
Tenant improvement programs bridge the financial gap between property owner and tenants by offering much-needed grants or forgivable loans for the interior improvement of ground floor, commercial spaces. Funding for such programs can come from a variety of sources including BID assessments, private donations, and Tax Increment Financing funds.
In a quick survey of eight different tenant improvement programs across the country, I found that each had been uniquely structured to address hyper local challenges or to leverage existing business opportunities. While there is no one sure fire way to establish a tenant improvement program, here are some things to take note in structuring your downtown’s very own TIP:
Think about program objectives
Depending on your current downtown business environment and tenant mix, your TIP may be designed to attract new retailers or retain existing ones. Thinking about your objectives right off the bat will help guide other elements of the program such as applicant eligibility, target areas, and types of improvements. Some questions to consider early on:
Are you looking to attract new retailers to your downtown?
Are you trying to expand businesses to second or third locations downtown?
Are you hoping to shuffle locations of businesses to a core area to create a critical mass of storefronts?
Are you trying to get downtown buildings and storefronts up to code?
Determine a geographic boundary
Many TIPs determine target areas to ensure tangible results of the program. These typically correlate with areas that suffer from a high concentration of ground floor vacancy or that already have a strong anchor and destination but need a little support with complementary stores and activities.
The size of the target area can be as small as a single block downtown or as large as the entire downtown. Starting your program off with a successful single block transformation may help build a case for wider program expansion in subsequent years.
Specify applicant eligibility
Regardless of whether the TIP incentives are offered to property owners or business owners, the applicant should always be able to demonstrate their commitment to staying downtown for a longer period of time. With tenants, in particular, a three to five year lease is often used as a pre-requisite for being able to apply to a TIP. In addition, tenants should provide property owners’ written commitments to indicate cooperation throughout the construction process. Working these rules into your program guidelines help ensure improvements being funded are followed through and are optimized by tenants for a good stretch of time.
If your downtown is also hoping to preserve older structures and storefronts amidst rapid redevelopment, defining the age limits of buildings in which eligible storefronts are located can help you achieve this goal.
Prioritize tenant types
A deep understanding of what the market can still accommodate, as well as what new and incoming customers are expecting downtown, should help drive the prioritization of successful applicants to your TIP. Even if a shortlist of priority retail categories for the program is not made public, it should inform the internal evaluation process of applications.
As a result of the rise in experiential retail, many existing TIPs have been reactive to the market and are hyper-focused on attracting anchor entertainment tenants and food and beverage-based businesses, including restaurants, cafés, specialty food stores, breweries, cocktail bars, bowling alleys, art house cinemas, fitness studios etc.
Be mindful, however, that as the retail industry changes, there are increasingly new retail concepts emerging and the TIP should not be so rigid to exclude such potential applicants. Also, if there are no other ground floor active retail/ restaurant tenants interested in leasing up and improving vacant storefronts, office tenant applicants should not be overlooked. In some cases, creative offices can be as good a ground floor commercial tenant as any other retail store. Some activate windows with creative art or sub-lease a portion of the space to a small café operator to keep the storefront active. At the very least, the formerly vacant and decaying storefront is fixed up, and occupied and maintained by a tenant.
Define types of improvements
Often, TIPs focus eligible improvements on structural, utility, and code compliance work, and equipment installation (in the case of restaurants or breweries). These types of improvements ensure that the bones of the storefront are fixed and sufficient for a tenant to move into the space and begin business. This is, after all, a key objective of TIPs. Other eligible improvements may include interior decorative work such as installing ornamental wooden beams, commissioning murals, or building a new bar top, however, more often than not these are not prioritized by TIPs due to the limited funding sources.
Of course if the structural conditions of the buildings in your downtown are not dire, interior decorative improvements may be exactly what retailers need to do to be able to create a new experience for customers, and to draw new customers from afar.
Now we get to the nuts and bolts of administering the program. There are a number of ways that TIPs can be carried out, each with its own limitations. In some downtowns, funding is provided to successful TIP applicants as loans that are forgivable after a specified number of years. In others, the funding is provided simply as reimbursable matching grants upon completion of the work.
Although the forgivable loans incentivize businesses to stay open downtown a minimum number of years, it may be difficult for small business owners to take on the burden of paying back loans should they fail to stay open through the agreed upon period. At the same time, reimbursable grants require that businesses front the cost of improvements and this can sometimes be extremely difficult for smaller business owners who lack capital.
Through the survey, I also found that amounts awarded for tenant improvements could vary between $5,000- $30,000. To maximize the impact of grants awarded, some TIPs also require a match from the applicant of about 50% of the total construction cost, or determine grants based on other key factors such as location of storefront, size of storefront, and lease length of tenants.
Ensure high participation and success rates
Although funding is a key ingredient for tenant improvements, technical assistance is also often much needed amongst small business owners who are less knowledgeable about store design and layout, construction, and building permitting processes. To guarantee that improvements funded through TIPs are completed well and on schedule, many cities have required that applicants engage licensed contractors and designers prior to applying to the program. This keeps applicants on track by having them complete drawings and get project cost estimates well in advance. In other cases, a pre-approved list of contractors and architects/ designers is provided to applicants to ensure the smooth completion of improvements.
Getting applicants to the finish line will absolutely change the physical environment of your downtown and change perceptions amongst customers. However, these successful projects should also be widely acknowledged and used as marketing tools to promote and expand your TIP. For example, in Waterloo (WI) all TIP participants are provided with a sign that indicates the businesses/ properties’ participation to be displayed in storefront windows. Simple window decals promoting the program and the efforts of the tenants and property owners can go a long way.
To look at sample tenant improvement programs guidelines, visit: