Two words that cannot exist in commercial real estate
September 30, 2018
This past week, I was in Minneapolis with about 175 other shopping center professionals for ICSC’s John T. Riordan School of Professional Development. If you have not been, it is a tremendous experience, with tracks for leasing, management, marketing, development and leadership, with electives for finance, at levels for both newer and more experienced professionals.
While there, I heard two words that I do not expect to hear when describing commercial real estate – “always” and “never.” If you’ll look back over a year and a half of these blogs, you will see that I have been very careful to qualify lease clauses. In many cases, I am tempted to use those two words. But, week after week, as I review hundreds of new leases, I realize that always and never do not exist.
There were two “nevers” that stick out this week. One was a student adamantly stating that supermarket leases NEVER contain percentage rent clauses. And, in his particular corner of the country, in the asset class in which he operates, percentage rent clauses in grocery store leases are fewer and further between. But, as a whole, it is much more common than not to have a percentage rent requirement in a supermarket lease. Because of lower rents and lower percentage rent rates, the clause may have little impact because the tenant may be unlikely to reach the breakpoint, but it is still there.
The second “never” (actually a set of “nevers”) was used by fellow faculty members suggesting that students could not sell off portions of a shopping center in a case study because the center was REIT owned, and “REITs never sell off” parts of a shopping center. Also, you would “never” change the physical components of a center to cover previously open areas. Both of these scenarios, while infrequent, are actually not uncommon – just not in the smaller subset of the commercial real estate universe that each speaker operates in.
For every supposed absolute of “always” or “never,” there are likely (again, I am qualifying) many examples of properties or leases that contradict those absolutes. So, when you think you have learned or seen everything in commercial real estate, look again!