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Bring back my favorite retail real estate memory of the 70s!

April 28, 2019

Space_Port_01

Neshaminy-Mall-Freedom-Wall

I was born in 1965. As much as I loved Space Port (an arcade) at Oxford Valley Mall and the wall of history dioramas at Neshaminy Mall (which I understand are still on display), I did not discover my favorite thing about 1970s retail real estate until I started reading department store leases and shopping center REAs (reciprocal easement agreements), OEAs (Operating and Easement Agreements), COREAs (Construction, Operating and Reciprocal Easement Agreements) and many similar documents.

Back in the 50s, 60s and very early 70s, in the  infancy of regional mall development, the anchors had certain rights and approvals – which other department stores could come in to the center, what type of stores could be in the center, and, often, especially in their own mall courts, absolute rights over which specific tenants could be nearby. It was common to see a long list of tenant names, so many of which are lost to the ages, that could or could not be located in mall or courts. And, there was regular correspondence  regarding those approvals.

Almost every department store in the country sent unilateral agreements to their landlords rescinding these approval rights

Then, in 1973 or 1974, apparently in response to some anti-trust legislation (feel free to chime in if you know the specific case), my favorite part of 1970s retail real estate occurred. I can’t say for certain that it was every, but I can say almost every department store in the country sent unilateral agreements to their landlords rescinding these approval rights. No use of the rescission as leverage to get something else from the landlords. For the good of the health of the property, for the good of a healthy tenant mix, landlords were then free to do their best to create a tenant mix that would maximize sales.

For years, those unilateral agreements created an environment for healthy regional malls.

And that is what I think we need to bring back. Another critical part of anchor leases and operating documents are specific approval rights over types of uses which may not be included in a  (often written as a “first class”) regional mall or shopping center. Some specific restrictions make you wonder. No funeral halls or crematoriums. No rendering facilities (so you don’t have to look it up like I did the first time I came across it, an animal processing plant). And, speaking of rendering plants, no abattoirs (slaughterhouses).

But, wouldn’t you love the opportunity (in the right environment) to have an Alamo Drafthouse? A Lifetime Fitness? A Whole Foods? A Main Event? Today, the majority of these agreements still specifically prohibit uses like movie theaters, health clubs, schools, supermarkets, automobile sales, entertainment facilities and so many other uses we would love to have in our centers – the uses that would make for a strong mixed use property, or for a city center type concept.

Residential? Office? No WeWork or multifamily permitted. How about a new city hall or library? Not permitted.

Naturally, you have the option to go to the anchor that has that restriction language in its agreement to try to get it released. But, as is so often the case in our industry, despite the fact that it would be good for all parties involved, the release of that restriction is going to cost the landlord – financial implications, and, much more importantly, time – often to the point where the opportunity for this currently restricted use goes away to another property where the restriction does not exist. And, that lost opportunity may have been a one time opportunity.

So, yes. Bring back the 70s. If I need to wear marshmallow shoes and wide ties and lapels so that we can see some unilateral releases from anchors, I will gladly do so.

This is a critical time in the evolution of retail. Give the landlords the opportunity to change the tenant mix at a property to what is now, and what will be in the future, the new highest and best uses for the center.

Comments | Posted in Commercial Real Estate, Malls, Office Properties, Retail Leases, Shopping Center, Uncategorized

An approach to lease administration and due diligence

April 14, 2019

When we are verifying rents at a property, we do all of our calculations – prorata shares, caps, breakpoints, CPI calculations, lease year language applications and so on – prior to looking at what the current landlord has done. I don’t know about you, but I can be fairly easily led by what someone else has done because, well yes, it does make sense. But, doing the calculation first forces you to calculate what you believe is right. The current owner’s calculations then become a kind of answer key. If I calculate what the landlord had calculated, then we are good.
However, if I calculate one amount, and a landlord has calculated another, I have an opportunity to either correct my calculation, or correct theirs. This act of reconciling the billings (or even just verifying the abstracts) is where so much opportunity lies.
Because there are thousands of details per lease, and sometimes hundreds of charges per tenant per year, this industry has a tendency to “do it the way we did it last year.” If a mistake was made, it is perpetuated throughout the term of the lease. If an interpretation of a lease clause or application of lease language may have been made incorrectly , again, it is perpetuated through the lease term.
Someone applies a cap after a first partial lease year to a partial year charge instead of an annualized first year charge. Then the third is calculated off of the second, the fourth off of the third. In those subsequent years, the cap is being applied correctly, but off of an incorrect charge.
A lease defines outparcels as excluded areas, and any pad is set up as an excluded area. Once and done. No one will question that prospectively. But, what if the lease defined “outparcel” as any premises not fronting on the enclosed common area.  That issue is perpetuated.
If I review a landlord’s calculation and see that outparcels are excluded, I can easily see that language in the lease and concur with their billing. But, if I read the lease first, I am absolutely going to see that “outparcels” also include non-fronting. I will calculate the charge excluding not only those pads, but the non-fronting areas as well. And, after I have done my calculation, I will see that my calculation and the landlord’s calculation varies. And, right there is where you find the upside.
In a world of “do it the way we did it last year,” our method is brutally, truly brutally, time consuming.
But, honestly, with this method, there is money. There is always money.

Comments | Posted in Commercial Real Estate, Malls, Office Properties, Retail Leases, Shopping Center, Uncategorized

It’s just a couple of days

March 31, 2019

We will not complete the date fields in a lease abstract until we know which dates we are going to use as the Commencement Date and the Rent Commencement Date. That can be incredibly frustrating for anyone that has to deal with us.

Think about that. You’ve just executed a lease and you want a final abstract so you can start using the information to run a rent roll or do some  projections. You are confident it is going to open by February 1. Just use that date Jack!

But, if you have followed this blog at all, you know that a day here or there can make all of the difference in the world. Seriously?  All of the difference in the world?  Surely, you’re exaggerating? Maybe not quite that extreme, but it could mean the difference in the term by a year. It could make a difference in when a tenant has a right to terminate based upon sales. It could make a difference in the lease year end for percentage rent purposes. It could make a difference when a guaranty ends. It could make a difference in a tenant’s operating covenant. It could make a difference in when an exclusive expires. It could make a difference when a radius restriction expires. There are so many clauses in a lease that can be affected by just a couple of days. And, that is no exaggeration.

The three most common ways to define a Lease Year across all retail leases are: 1) Based upon a Calendar Year (where Calendar Year is 1/1-12/31), 2) A Lease Year ending January 31, and 3) 12 full months from the Rent Commencement Date. There are naturally endless variations of the definition of Lease Year, but those three cover 75%+ of all leases. Complicating the definition of Lease Year is the definition of Partial Lease Year. In some cases, a Partial Lease Year is a Lease Year. In most  cases, a Partial Lease Year is not a Lease Year because it is not a full 12 months. (There are qualifiers that you’ll see in leases regularly – something to the effect of “if a Partial Lease Year contains more than 6 full calendar months, it shall be considered a Lease Year.”)

You’re getting off track Jack! We were talking about a couple of days.

No. Not off track at all. All of these leases clauses are tied together and contingent on a couple of days. Think about a lease with a Term of five full Lease Years that defines Lease Year as ending January 31. You are confident that the lease is going to commence on February 1, 2019, so just use that date! But, let’s say that instead of the Rent Commencement Date being 2/1/19, it turned out to be 2/3/19. Two days. That’s it. In the case of 2/1/19, the first full Lease Year is 2/1/19-1/31/20. In the case of 2/3/19, the first full Lease Year is 2/1/20-1/31/21. Depending upon how that lease defines Rents (by Lease Year) and Term, the Term itself could end either 1/31/24 or 1/31/25 – a full year’s difference!

Or consider a ten Lease Year term with a right to terminate if sales for any 12 consecutive calendar months never exceed $350/sf through the end of the 5th Lease Year. Again, is the end of the 5th Lease Year 1/31/24 or 1/31/25?

Or an operating covenant that states a tenant has to operate as a _________ supermarket through the end of the 3rd Lease Year and as any supermarket through the end of the 10th Lease Year. Those dates could be contingent upon a couple of days.

Could you put in 2/1/19 and then go back and change all of the clauses if there is a change? Absolutely! But, history tells us that once that information is in the system, more often than not, it stays in the system. Yes, someone may think to change the expiration date (instead of 1/31/24 to 2/29/24) and the bump dates (from 2/1 to 3/1), but those may be (and likely are) wrong. And, rarely do the log codes (the non-financial clauses) get properly changed.

So, because the Commencement Date and the Rent Commencement Date have the potential to impact so many other clauses, we leave the definitions in the abstract as Lease Year One, Lease Year Two, etc. until we have a final date. In that way, because there are not absolute dates in the abstract, all of those dates are still open until they can be confirmed. Until that start date can truly be considered.

What’s the solution, then, if you need to run a rent roll or projections with that new lease’s rents? Use that 2/1/19 as the start date for rents, but absolutely, positively do not put other dates in to the abstracts so that those dates are still blatantly empty.

A couple of days do really matter.

(On a similar issue handled completely differently would be a start date for a lease that has commenced and is part of an acquisition. In a case where commencement may have been one or two sellers ago, you are forced to pick a date as the commencement because you know that you will never have a true absolute. You hate it, but sometimes that truly is the best you can do.)

Comments | Posted in Commercial Real Estate, Malls, Office Properties, Retail Leases, Shopping Center, Uncategorized

The first issue to review when starting due diligence on an acquisition

March 24, 2019

In the 30+ years that we have been doing abstracts and cash flow analysis as part of property and portfolio acquisitions, there is one issue that we do a quick check for before we start the acquisition process in full force:

Rights of first refusal to purchase a property

Why that issue? A right of first refusal to purchase a property essentially gives a tenant the absolute right to purchase a property on the same terms and conditions that a prospective buyer has agreed to purchase the property. So, you sign that letter of intent to put a property under contract, and you are on the clock. Your due diligence period has begun. Though you may get your deposit back if you elect not to proceed with the purchase at the end of the due diligence period, you might be spending tens or sometimes hundreds of thousands of dollars in due diligence fees (physical, environmental, financial, demographics, site visits, etc.) that you will be out of pocket and will have to (let’s use a very technical term here) eat if you don’t move forward.

But, with a right of first refusal, you can spend that money and be ready to move forward with the acquisition, and a tenant can exercise its right to acquire the property. Guess what? Unless you have addressed it up front with the seller, you may still be out those fees. You don’t want to have the rug pulled out from under you.

So, when we get a new acquisition, we immediately go on the hunt for rights of first refusal. While you can find them in any lease, the likeliest culprits to have these rights are supermarkets and any sort of ground lease tenants.

More often than not, in retail, it is only the supermarket type tenant that will have a true right of first refusal. A ground lease or outparcel that has one will often include certain conditions to protect the landlord. Specifically, in that case, we are looking for a condition that states the right does not apply if it is being sold as part of a larger property sale. So, a fast food outparcel may have a right of first refusal, but only if the seller is marketing that parcel on its own – not as part of the entire center of which that outparcel is a part.

But, the bottom line is that taking the time to do a quick search for these rights early in the process can save tremendous headaches and dollars than if they are found later.

Comments | Posted in Commercial Real Estate, Retail Leases, Uncategorized

Considering the proper treatment of tax abatements and incentives in your leases

March 17, 2019

I have the honor of serving on our city’s development authority. It is a recent appointment, so I cannot take any credit for the great things that have been done already. As part of the appointment, I was required to take a class that included a couple of hours on tax incentives and bond financings.
While I am a neophyte serving on an incentive granting authority, we have dealt with the aftermath of abatements and incentives on hundreds of properties over the years. Using the word “aftermath” is actually intentional because, so often, the true intended benefit for the intended recipients never actually comes to fruition. (And, because I am a lease language geek, the word “aftermath” is especially meaningful as the reason it often doesn’t come to fruition is because of what happens “after math”!)
There are numerous reasons for developers asking for and governments granting incentives, but most can be boiled down to two words – but for. The area would remain or become blighted “but for” the incentives. The employer might not consider locating here “but for” these incentives. It’s an oversimplification of a lengthy process, but it is fairly accurate.
One of the simplest forms of incentives is a tax abatement. There are countless numbers of ways the abatements can be structured – full and partial, of all taxes or of one or more categories of county, school or town/city/village and so on. But, the intent is often to provide some financial incentive to the developer to help with the costs of certain “but for” necessary improvements. Something to the effect of taxes being $100,000, and they are waived for a 10 year period. Or taxes are $100,000, and they are waived at 100% for the first year, reducing by 10% per year over a 10 year period. Or, taxes are $100,000, and they will remain at that level for a 10 year period despite the fact that the property is expected to increase in value by 5, 10, 20 times once the development work is completed. In our 10 year, $100,000 per year example, the intent is to get the $100,000 per year to the landlord.
In a typical lease, what would happen? The tenant is required to pay a prorata share of taxes. The landlord would get a tax bill for $0, and the tenants would then be billed a prorata share of $0. While you could argue that the landlord was able to get additional base rent during the abatement period because the tenant did not have to pay tax, the true $100,000 intended benefit may not have been realized.
However, if the landlord anticipated this tax abatement, the abatement itself could be addressed as a separate issue in the lease. Ultimately, the tenant would be required to pay a prorata share of taxes, with taxes defined to include what taxes would have been absent any abatement. In that case, the tenants would then be billed a prorata share of $100,000 (what taxes would have been absent any abatement), would collect the tenants’ prorata shares and then would retain those amounts because there is no tax bill.
Again, an oversimplification of the issues. However, incentives, including abatements, only really work if the intended benefit is received by the intended recipient. This can be done only by properly considering the lease language – before the lease is executed.

Comments | Posted in Commercial Real Estate, Malls, Office Properties, Retail Leases, Shopping Center, Uncategorized

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