April 30, 2017
A few weeks ago, we addressed the major differences between retail and office leases. While retail leases across categories have more similarities than differences, there are distinctions between retail leases in enclosed centers and retail leases in open air centers.
Some may be obvious – there are no enclosed malls to heat and cool in open air centers (though sometimes you may have an outlet center or open air mixed use or festival center that has public restrooms or a food court component that is heated and cooled). However, many of the differences are attributable to the way centers are operated (and can vary greatly based upon market conditions). We’ll address a few of these:
CAM – In the late 90s/early 2000s, mall leases had begun a transition to fixed from prorata. Today, the majority of enclosed mall leases are fixed CAM wit increases. Where they are not fixed CAM, it is typically property specific, where the majority of leases in those centers are prorate. We’ll use a later blog to talk about the pros and cons of fixed vs. prorata. Where there are malls still on prorata CAM, there is one mall distinction in the calculation of prorata CAM – it is much more likely that management fees are included in CAM billed to open air center tenants. Many of the leases for mall tenants define CAM to include the 「costs of managing…」 the common areas (or shopping center), but, while allowed, landlord typically do not bill management fees.
Denominators – When tenants do pay a prorate share of a charge (taxes, CAM, insurance), it is much more likely that inline tenants in regional malls will be billed based upon 「leased」 area, while more likely that open are tenants will pay based upon 「leasable.」 There has been an ongoing shift since the early to mid 90s for open air centers to bill based upon 「leased,」 but it is a slow transition. (Based upon the 8-10,000 leases we review a year, I would estimate that 85-90% of inline regional mall tenants pay based upon leased, while only 20-25% of open air tenants are billed based upon leased.
Excluded areas – In open air centers, it is fairly common to have a few defined excluded areas – separately assessed premises, supermarkets, outparcels and perhaps premises greater than xx,xxx sf. However, if regional malls, it is not uncommon to have eight or nine different categories – department stores, variety tenants > xx,xxx sf, non-fronting premises, restaurants with exterior entrances, mezzanine areas, theaters – the list can go on with creative landlords.
Percentage rent – While percentage rent may be the single most material distinction between retail and office leases, and almost every retail 「standard」 lease contains a percentage rent and gross sales reporting clause, the requirement is much less likely to remain in open air leases than in regional mall leases. Regional mall leases are 90-95% likely to have the requirements, while open air leases are probably closer to 50-55%. While percentage rent may get deleted, landlord are much less likely to give on the sales reporting requirement as it can be used to determine the health of the tenant and help to establish any renewal rent.
Exclusive uses – While exclusive use clauses exist in almost evert retail property, they are much more prevalent in open air centers. And, where the exclusives do not exist outright, it is not uncommon to see 「springing」 exclusives in open air centers. A springing exclusives would read something to the effect of 「Landlord warrants that no tenants in the shopping center has been granted exclusive rights. However, if the landlord grants an exclusive to another tenant within the shopping center, then tenant shall have the exclusive right to sell…」
Security deposits – In a 125-150 tenant regional mall, there might be a handful of security deposits. However, in strip centers, where there are many more mom-and-pops, it would not be unusual to have a security deposit for every tenant that is not a national or regional tenant.
While these do represent a handful of the differences between enclosed mall leases and open air leases, remember that there are no absolutes. You will find differences and similarities in all categories of commercial real estate leases.