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Visits to malls in India

June 26, 2017

This is not the typical lease admin blog that I write because I do not have any Indian retail leases to review. For ICSC, I have taught in the US, Canada and China, and I have had students from countries around the world. Many of them have provided me with their standard lease forms so that I could learn about their lease requirements and incorporate that info into the ICSC classes.

As a true shopping center geek, I really do enjoy visiting centers when I am on vacation. So, I was excited to visit a couple of properties in Ahmedabad, India. The first one I visited was Alpha One (or Ahmedabad One) Mall about 2-3 miles outside of the main part of the city. No freeways in site with easy access for cars. Rather, this opened around 2009 in a very dense area. I don’t know the history of the site, but I have to imagine demolition of existing structures was involved. I was in a rickshaw getting there and, as easily as they manuever, it was still very difficult getting there just to the volume of people and cars and motorcycles and scooters and rickshaws and carts and trucks clogging the roadways immediately around the center.

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Once there, you pass through security to get in to the center – metal detectors followed by a wand pass while standing on a raised platform. Women to the left (with modesty screening) and men to the right). My immediate impression was, yes it’s a mall. A mall that could have been in the US. But, what immediately hit me was the presence of so many doors. There were a handful of stores that had disappearing storefronts, but that vast majority had doors to enter the space. Air conditioning is a very precious commodity here in India, so I can only imagine they do not have the 「tenant shall ensure that the air pressure of the premises will be balanced with that of the common area」 type language. (When I mention AC being precious, my son is shadowing doctors over here, and AC is switched on for surgery, or just portions of surgeries, and restaurants add an AC charge).

The other thing that really caught my attention while walking through the mall was their use of kiddie carts. They looked similar to what we might find in the US, but without a handle for pushing. Rather, the parents have a radio control and steer the kids through the center! I believe that must have been the reason for posting guards at the top of escalators!

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I would have loved this for my kids when they were younger.

And, related to that guard at the top of escalators. From what I have seen, escalators are motion detected. If no one is around, they are stopped – in keeping with precious commodities.

The other mall I visited was CG Central Mall, not far from where I am staying. No different that multi-level malls in the US that have just one anchor, this mall may have seen better days as the first level was probably 60% full, dropping by 10-15% per floor as I went up.

So, while there appeared to be a successful mall launch in 2009 while we were deep in a recession in the US, it appears that, from my sample of two, C malls are suffering the same fate in India as our C Malls are suffering in the US.

I hope to be back to the normal lease administration blog next week.

Comments | Posted in Malls, Shopping Center, Uncategorized

So a cow walks up to a drive thru… Operating hours and liquidated damages

June 18, 2017

This week’s (and next’s) post will be a bit shorter as I am in India with my son. This picture reminded me of Chick-fil-a which reminded me of a clause I ran across earlier in the week.

Most retail leases have operating hours requirements which provide for default if the tenant does not maintain the required hours. However, some leases have liquidated damages specifically identifying a penalty to be applied if the tenant fails to operate all hours and days. The liquidated damages can often run in to 100% of the daily rent for failure to operate – so the tenant has paid rent, but then there is a 100% penalty agreed to in advance because the tenant’s failure to operate affects the landlord and the other tenants in the property.

Therefore, sophisticated tenants will specifically address not opening on Sundays, or not opening on weekends, or not opening certain months of the year (think tax preparers in the off season or my favorite purveyors of water ice (a Philly thing) during the winter or even the ability to close once or twice a year for inventory.

If you are a tenant, don’t just hope the landlord doesn’t bill you for liquidated damages – negotiate. And, if you are a landlord, put some teeth in your operating hour requirements.

Comments | Posted in Malls, Retail Leases, Shopping Center, Uncategorized

The value of radius restrictions

June 11, 2017

This week, we were working on a mall in the Rocky Mountain States. One of the food court tenants had a precipitous drop in sales – from north of $2m to under $1m from 2014 to 2016. I looked at the monthly sales, and sales had been running about $200k per month almost regardless of time of year. Then in May 2015, sales dropped to under $100k and never recovered. I did a search for the tenant name and the town and May 2015. Lo and behold, less than a mile down the road, the tenant opened a freestanding location on April 30.

It’s not often that obvious. But in this case, a tenant that was well in to percentage rent, had a sales drop of $1m due to opening another location. The landlord lost all of its percentage rent. And, to make matters worse, the tenant had a cap on CAM based upon a percentage of sales.

A real life example of the value of a radius restriction! A radius restriction specifically prohibits a tenant from opening another location within a certain radius of a property. The radius can be down in terms an 「as the bird flies」 distance, or a driving distance, or often even specifically prohibiting a certain competing location (「Shall have no other operations within 5 miles or at Maggie Mall…」). The negotiated distances can range from as little as a half mile to as much as a full 100 miles. With strip centers, 1-3 miles is typical. With regional malls, 3-5 miles is typical. With outlet centers, 25 to 50 miles is fairly typical. (There may be exceptions to outlet center or regional mall leases allowing the operation of the other category within the radius – Something like an outlet center lease stating that 「the tenant shall have no other outlet locations within 25 miles. However, this restriction shall not prohibit tenant from operating its regular, non-outlet operation provided the location is more than 3 miles …」

It may seem odd to think a tenant would agree to a hundred mile radius restriction, but, in cases where a landlord is providing significant financial incentives to a tenant (perhaps bringing a new anchor not currently in the region and fully building out a space, requiring little to no rent, and perhaps even offering something like the first round of inventory), the landlord must know that its investment is protected – at least for a while.

That 「for a while」 means that tenants will sometimes negotiate an expiration of the radius restriction – essentially enough time for a landlord to recoup its investment.

Radius restrictions will often exclude 「then-existing」 locations (i.e. already operating within the radius at the execution of the lease) or those locations a tenant subsequently acquires via something like a merger. And, the clause will typically address remedies other than just default – most typically a requirement that the sales from the violating location be included in the reported gross sales for the landlord’s premises (but in cases where there is no percentage rent requirement, it may address an increase in minimum rent).

Not to be one sided, radius restrictions are not always just limited to tenants. It is not unusual for a supermarket or theater lease to restrict a landlord from allowing another supermarket or theater on property controlled by the landlord within some negotiated distance.

Believe it or not, we worked on one trophy regional mall where the operating agreement between the partners actually restricted one partner from developing or acquiring another property within a 25 mile radius of the property.

A radius restriction can be a very powerful tool to protect a retail investment.

(Unfortunately, the lease in the Rocky Mountain States Mall did not have a radius restriction!)

Comments | Posted in Malls, Retail Leases, Shopping Center

Common area taxes and liability insurance

June 4, 2017

In the majority of retail leases (and in a smaller portion of office leases), we have sections in the leases that address how to calculate the tenant’s prorata share of real estate taxes as well as tenant’s share of property insurance. This can be a little confusing if you do not read leases regularly because often, when reading the Common Area or Operating Expense definitions the lease will define taxes and insurance as part of reimbursable CAM or OPEX.

This is not giving the landlord the right to 「double dip,」 billing those expenses twice. Rather, when this language exists in leases, it is requiring that the common area portion of real estate taxes and liability insurance be billed through CAM or OPEX. This insurance issue is typically simple and straightforward (but occasionally does require what we will describe in taxes next). When there is a separate insurance section describing a tenant’s prorata share, this separate section is for the property insurance – insurance covering damage and destruction to the physical building (think something like a fire). The portion that most typically goes in to operating expenses is for the liability portion of the insurance (think something like a slip and fall). Confusing the issue a little further is that most leases require tenants to carry insurance – both property and liability on their premises. In the majority of instances, the insurance required to be carried by the tenant is for damage to its improvement and inventory within its premises, as well as liability within its premises. (In the other instances, the tenant may be on a ground lease, or constructed its own building improvements, and is required to insure no only the interior improvements, but the building itself).

With real estate taxes are addressed both in CAM or Operating Expenses as well as in a separate tax section, it is the common area portion of real estate taxes to be billed through CAM, and the taxes on the leasable areas of the property billed separately. In honor of National Donut Day this past Friday, picture a Krispy Kreme donut sitting on a plate. The plate itself is the property. The donut is the leasable area. The portion of the plate not covered by the donut is the common area – so outside of the donut may be the parking area and the hole inside the donut may be interior mall walkways and corridors. So the donut gets billed separately, and the uncovered portion of the plate gets billed through CAM.

There are countless justifiable ways to calculate the common area portion of taxes – enough to cover multiple blogs. So we won’t cover that at this time. However, there are a few thoughts to leave you with if you have these types of leases in your portfolio:

  • When caps on increases in expenses exist in leases, it is much more common to see a cap on CAM than a cap on real estate taxes. If the landlord is not billing taxes as required, they may have some exposure for overbilling if the tenant has a cap on CAM but not taxes.
  • The donut issue can sometimes be required for insurance.
  • As leases are converted to fixed CAM, the conversion must address the common area portion of real estate taxes. It may be the landlord’s intent to bill all taxes as a separate charge, but if common area taxes are still defined as part of CAM and CAM is fixed, only the taxes on the leasable areas may be billed.

Comments | Posted in Malls, Retail Leases, Shopping Center, Uncategorized