Sunday 25 September 2016

Key money returns for retail as tenants improve

Donal Buckley

Published 18/06/2015 | 02:30

Darragh Cronin of Savills said he had been seeking €100,000 in key money for this property on Wicklow Street in Dublin
Darragh Cronin of Savills said he had been seeking €100,000 in key money for this property on Wicklow Street in Dublin

One of the signs of that the economic recovery is rippling out to the retail sector is the re-emergence of key money whereby a retailer will pay an amount to a departing tenant in return for a leasehold interest in a property.

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This contrasts with the situation as recently as two years ago when landlords not alone had to reduce rents but also had to offer rent free periods to attract retailers into their buildings.

Indeed there was at least one example during the crash where an existing occupier offered to pay a premium to any retailer who was willing to take over the terms of the upward only lease that was in place.

The tenant was trying to save money as the rent was proving too expensive.

However despite the recent pick-up, opportunities for existing tenants to sell off and receive key money are limited.

"Not every retailer can expect to get key money," says Hugh Markey of Lisney.

"It's mainly seen in Dublin 2 and there have been some instances recently in Wicklow St," he adds.

Darragh Cronin of Savills has recently been involved in two properties off Grafton St involving key money. The latest of these is the Lacoste store on Wicklow St for which a deal has been agreed.

Mr Cronin declined to say the terms agreed other than to say he had been asking for €100,000 in key money and a number of fashion retailers had offered him more than that amount.

The annual rent is €99,000 whereas rents in the area have risen to between €125,000 and €140,000 a year for an equivalent property.

So with more than four year until the next rent review and depending on the key money, the new tenant may make a considerable rental saving compared to what they might pay for a new lease.

Savills' second off Grafton key money deal was €200,000 paid by a restaurant operator.

"Because of the planning restrictions on opening new restaurants in the Grafton St Conservation Area and many parts of Dublin 2, restaurant operators are willing to pay key money to take over an existing restaurant," he adds.

Increased competition is also emerging between international fashion retailers to get a leasehold interest on a shop near Grafton St, and these are among the other factors which have led to the re-emergence of key money.

However Mr Cronin also found that some international chains are precluded by their boards from offering key money.

"They were willing to pay a higher rent rather than pay key money," he adds.

He also believes that some retailers who took leases between 2009 and 2014, or negotiated rent reviews during that time at the lower rents then prevailing, are now finding that they may have opportunities to cash in on offers of key money should they wish to move on.

Restaurant and take away operators are also paying key money for premises in busy locations even in the suburbs. In their case however two other factors are influencing the trend of them deciding to pay key money.

Firstly they may wish to locate in a premises with existing planning permission for a food business as they can open immediately without having to run the gauntlet of the whole planning process.

These operators may also be willing to pay a premium for restaurant fixtures and fittings and in some cases an additional premium if these existing business are in a busy location and operating profitably.

"Goodwill is also a factor where retailers, such as pharmacists, are taking over a leasehold business as a going concern," explains Philip Owens of Owens Commercial.

Valuing the goodwill can be difficult but when a business is profitable it can be valued as a multiple of the EBITDA figures - earnings before interest, tax, depreciation and amortisation etc.

He says that key money is not confined to the Grafton St area and instances a coffee shop in Middle Abbey St, off O'Connell St, where he secured €75,000 in key money.

It was sold as a going concern and about €45,000 of the key money was in good will with the other €30,000 covering the cost of fixtures and fittings. In that case the annual rent was €45,000 a year.

Usually for tenants who are closing down or moving on, fixtures and fittings can be problematic because lease terms usually require their removal, not along a costly exercise but a painful one for a marginal business.

So for departing tenants even if the key money does not cover the full cost for fixtures and fittings, a deal can save on the cost of their removal. On the other hand some landlords will be quite happy to retain such fixtures in helping to attract a new tenant.

Hairstylists are another retail sector where fixtures can be expensive to install one in the busy area of Temple Bar is currently seeking €60,000 in key money. Agent Rory Penrose of Hibernian Auctioneers says the business at 1 Scarlet Row, is for sale as a going concern. Its annual rent is €15,000.

In Dublin suburbs key money is currently being sought for eateries ranging from a Burdocks in Phibsboro to a restaurant in Monkstown.

Peter Owens is asking €170,000 in key money for The Victoria Asian Cuisine, at the The Crescent, a parade with a range of restaurants, food and wine shops at Monkstown. Its rent is currently €70,000 a year.

The Burdocks , is located at Unit 1 , Phibsborough Shopping Centre , Dublin 7, and key money of €180,000 is being sought. Recently refurbished, this 100 sq m unit has seating for 40 customers and a fully fitted kitchen.

Its current annual rent is €60,000.

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