Real Estate Blog – Electric Forecourts – The Retail of the Future? Part 2

 

Key Considerations

In the second of our three articles on electric forecourts, we look at key considerations for those looking to get involved in the development of such schemes. The industry is currently at an embryonic stage and operators, investors and funders are still getting to grips with the requirements and with the legal and commercial issues that need to be addressed. Here is some food for thought.

 

• Connectivity is key: No project can proceed unless it is possible to secure an adequate grid connection to provide the requisite amounts of power to the facility. This is a process that can be both uncertain and time-consuming and has to be factored into the overall timeframe for delivery. Allied to that, because of the business model that electric forecourt operators run, planning permission is required for a variety of different uses.

Accordingly, it is common for operators to seek to negotiate land options with landowners so that they can resolve issues such as the availability of an adequate grid connection without having to unconditionally commit to the purchase of land.

• What’s in store?: In terms of the facilities provided, there will normally be a building that will provide retail and fast food uses, as well as lounges for internet use and possibly more specialist facilities including certain elements of leisure. In the future, the roll out of these facilities could offer something of a lifeline to the struggling retail and hospitality sectors if ultimately electric forecourts become destinations in their own right rather than just an essential one-stop service.

• Lease terms: In a forecourt deal that we recently concluded with Gridserve, the operator took a 30-year ground lease, under which it was responsible for providing all of the charging equipment and a building to house the proposed retail and catering offerings.

Generally, some of the key issues that the parties need to address when negotiating a lease include:

• Duration – What is the optimum term for the operator?
• Rent review – At the moment, rent is typically index-linked to RPI with caps and collars of between 2% and 4%. However, the increasing trend towards turnover rent as a consequence of the COVID pandemic, particularly in the retail sector, means this could change in the future.
• Uses – As mentioned, operators require considerable flexibility in terms of use. This could cause issues for landlords and institutional investors, particularly where an electric forecourt forms part of a larger site or business or retail park.
• Reinstatement – The operator will be responsible for decommissioning and removing all of the electric facilities, but questions arise as to what happens to any buildings constructed for the retail element at the end of the term.
• Insurance – Given many of the leases are likely to be ground leases, and because of the specialist nature of the operations, the likelihood is that operators will require the ability to insure the forecourt, the equipment and buildings, which is something that traditionally institutional property investors have resisted.
• Forfeiture – This is always an area of sensitivity in relation to a ground lease, and is likely to be of particular concern to funders of operators of electric forecourts in the future.

If ultimately electric forecourts are to become a new real estate asset class, then operators must be able to create viable business operations based on a multiplicity of uses that make them places people want to go, not just make use of whilst passing through. Given the unique challenges and opportunities, it’s likely that a new specialist real estate class, different to that which has existed with traditional petrol forecourts, will start to emerge (and we will look at this in more detail in our third and final article in this series next week).

If you missed it, take a read of our first Electric Forecourts Blog, which looked the first bespoke electric forecourt in the United Kingdom, which was opened at the beginning of December at Braintree in Essex, by Gridserve.