Extracting value from an exclusive

There is no question that a tenant benefits from being granted an exclusive use in a shopping center. More often than not, an exclusive ensure that no other tenant in the shopping center shall have the same use as tenant granted the exclsuive. (Occasionally, an exclusive shall read something to the effect of 「There shall be no more than two other jewelry stores…」 Still something of an exclusive, it is a little less burdensome on the landlord.)

Traditionally, the tenant benefits from the exclusive, and the landlord has yet another restriction, limiting its leasing options. It 「costs」 the landlord. However, there is language that we see occasionally that does, to a certain extent, assign a value to the exclusive.

It will read something to the effect of:

As long as tenant is operating as a ______, there shall be no other ______ in the shopping center. If landlord wishes to lease to another _____, landlord will notify tenant. Tenant shall have 10 days to notify landlord whether it wishes to enforce the restriction against another _____ from operating in the center. If the tenant elects to enforce this restriction, tenant’s Base Rent will immediately increase by $5.00/sf for the remainder of the term and landlord will not lease to the another _____. However, if the tenant does not respond within 10 days, or the tenant elects not to require the landlord to enforce the restriction, this exclusive shall no longer apply and the landlord shall be permitted to lease to another _____.」

Beautiful language turning a typically non-financial covenant into a financial covenant!

Shopping Centers – 「Bring out your dead!」 「I’m not dead!」

This particular blog in not the Sunday blog addressing lease administration issues. It is an opinion piece. I’ll be back to the regular blog on Sunday.

If you’ve clicked, you probably know the Monty Python reference. If you don’t know it, I’ll try to explain dry (but incredibly funny) British humor. The Dead Collector is collecting dead bodies and hauling them away.  A guy drops a 「body」 on the cart and pays a fee. The 「body」 says 「I’m not dead.」 And then there’s an argument about it being against regulations to take someone who is not dead. The 「body」 argues that he’s getting better. Then a 「No you’re not. You’ll be stone dead in a moment.」 (Here’s think link if you need a quick laugh –

That’s what I feel like we have been seeing for years – no decades – and continue to see today. The media waves its banner that shopping centers are dead, and the industry repeats that it is not.  But, the media continues to argue that it is dead, until finally, one day, the Dead Collector will take out his club and whack the industry over its head one final time.

But, for some perspective, the sky has been falling since I got into the industry in 1987.

This morning, I saw yet another article on The News Funnel – The Death of Shopping Centers. It’s actually a pretty good read and not nearly as negative as it sounds. But, it does present as absolute – 「about 400 of the country’s 1,100 enclosed malls will fail in the upcoming years.」

The number and the timeframe changes from article to article, but the headlines scream:

Dying shopping malls are wreaking havoc on suburban America – Business Insider, March 5, 2017

A Third of American Malls Will Close Soon – Money, May 12, 2016

America’s Shopping Malls Are Dying A Slow, Ugly Death – Business Insider, January 31, 2014

Birth, death and shopping – The rise and fall of the shopping mall – The Economist, December 19, 2007

The earliest article I have listed above is from 2007. This is a blog. I am lazy. I am not going to a library to go back further. However, I can tell you that in the late 1990s, then-ICSC (International Council of Shopping Centers) President John Riordan was already responding to 「death of the mall」 discussions. I wish I had access to those presentations. But, the gist was that the then-universe of online sales was still less than the sales from one regional mall (I think the specific reference may have been Roosevelt Field Mall). But, he presented, matter of factly, that online sales were here to stay and would continue to grow.

Around the same time, there were sessions at ICSC events addressing 「alternative uses for regional malls」 and 「alternative uses for department stores.」 This was 1997/1998. But, the so-called death of the center pre-dates online sales.

I worked on project at Savannah Mall in 1992. It had opened in 1990, about five miles from the then-leading mall in the area, Oglethorpe, and was absolutely beautiful.  It was built where a new perimeter road/bypass was to have been built and was to have been the nail in the coffin for its competition. But, the funny thing is, Oglethorpe dug in its heels, renovated (and succeeded), the bypass didn’t materialize, and within that two year period, Savannah Mall was struggling. I was fairly young and green at the time, so I did not have much of an opinion. However, I believe the general consensus at the time was that Savannah should not have been built.

That was likely the case with hundreds of malls. My numbers are going to be off a bit, but I believe the number quoted around 1995 was somewhere in the neighborhood of 1,800 regional malls in the US. Today, the number quoted is between 1,100 and 1,300. So, in 22 years, we have 「lost」 a third of what may have been our peak number of malls. I put 「lost」 in quotes because many have kept their retail characteristics. It’s not necessarily that they are dead (and, yes, some really are dead), but that they have evolved and continue to evolve.

My entire geography of the country is based upon regional malls. If you can tell me where you shopped growing up, or shop now, I have a pretty good feel for where you are from. But, home to me is Atlanta (Northpoint Mall) and Philadelphia (Neshaminy and Springfield Malls).  Lenox Square and the King of Prussia complex are two of the more successful properties in the Atlanta and Philadelphia markets, respectively. Both of these properties began their existences as open air centers before becoming enclosed. Both had supermarkets when they opened.

As you are probably aware, supermarkets were one of those uses that became 「prohibited uses」 in regional mall leases because they were parking hogs. Along with other uses like health clubs, education and residential, landlords, department stores and inline tenants did not want certain uses in the center. But, look at where we are headed today.

Natick Mall in suburban Boston incorporated residential  a few years back, and now has Wegmans replacing a Penney. Uses that had once been strictly forbidden are being welcomed. Supermarkets are being incorporated into malls around the county. It’s not death, it is evolution.

I go to many ICSC events, either as an attendee or as faculty. The education, advocacy, connections, experiences and opportunities facilitated by organization are invaluable. At ICSC’s Spring Convention (RECon) in 2015, I attended a breakfast roundtable led by Bill Taubman, CEO of Taubman, an owner that owns many of the best malls in the country. My takeaway from that roundtable was that Taubman was working on generating value from retailers because studies continued to show that online sales were much higher in areas where tenants had a bricks and mortar presence than in areas where they had none. And at this year’s University of Shopping Center, I had the benefit of sitting with Dia Lim, a manager in the Philippines. Her company is a leading owner of malls – really mixed use properties – in the Philippines. (As she proudly put it, not 「a」 leading owner, but 「the」 leading owner!) Because the Philippines retail environment developed decades after ours, they had the opportunity to learn from our mistakes and were able to develop more master planned properties (malls, office, residential, education, etc.) rather than focusing exclusively on the tenant mix within the properties. It seems now that we have the opportunity to learn a little from them.

I have rambled. But, in my opinion, just as the television did not signal the death of the theater, online is not the death of bricks and mortar. Pulling a word from my high school biology class, online and bricks and mortar have something of a symbiotic relationship. Each may benefit from the other.

It truly is not the death of malls or shopping centers. It is a continued evolution.

Why should you care about the definition of the 「Shopping Center」 in the lease?

This past week, we were working on a sizable shopping center acquisition in the Southeast. Part of the center had been a mall that was 「de-malled,」 while the balance was developed in two additional phases. The original mall became a series of big boxes, some traditional small shop retail, a few restaurants and a bit of service type retail now often found in shopping centers (dental, doc-in-in-a-box and the like). The second phase added a discount department store and some other big boxes, and the third phase added a supermarket and small shop retail. More recently, some big box space was converted to a nice health club, a theater was added and a group personal training facility lease had been executed.

We knew 「shopping center」 was going to be an issue for this acquisition. We just did not realize how much. Many of the leases defined shopping center as 「(Name) shopping center as reflected on the Exhibit A site plan.」 Others defined the center as Phase II or Phase III, or Phase II and III. Other defined the center as 「(Name) shopping center as described on Exhibit A,」 with Exhibit A being a two page metes and bounds description. There were about 10 different iterations of the term 「shopping center.」

Why would that matter? Because some lease prohibited health clubs or theaters. Others granted exclusives in the shopping center defined in their lease. While yet others extended the exclusives and restrictions to adjacent parcels controlled by the landlord or its affiliates. This mish-mosh of definitions caused our client to wisely have the seller seek waivers on certain existing uses prior to closing, and created the need for an almost Venn diagram type site plan for what can go where. Without the waivers, without a clear picture of restrictions and exclusives, a new owner could have some exposure.

There are other financial implications of the definition of shopping center that we will hit in a future blog, particularly as it relates to whether a particular space is included in the definition of the shopping center and then defined as an excluded area, or whether it is excluded from the definition of the shopping center to begin with. But, be clear about how you define the shopping center in your leases!

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