RE88C14: Retail Trends on Lease Negotiations

Approved July 3, 2014

1. INTRODUCTION
   1. Retail Trends/Effects Upon Lease Negotiations
      1. Category killers
      2. Wall Street / REIT (Real Estate Investment Trust)
      3. Big Box Retailers
      4. Internet/E-Commerce impact
   2. Retail lease is more about the consumer and demographic trends.
   3. Unique from any other real estate sector
   4. Retail leased space is a profit center and asset for the retail tenant.
   5. A partnership is required between retail property owner and retail tenant.
   6. Objectives of Retailers: profitability, stability, flexibility, “Exit” Strategy, store closures, consolidations, change of retail strategy, the economy, etc.
   7. Retail Property Classifications: Defined by trade area and tenant mix
2. EXCLUSIVITY AND PROHIBITED USES
   1. Tenant demands that the shopping center limits other tenants’ rights.
   2. Limit merchandise similar use products and services within their premises.
   3. Tenant may want to restrict landlord from leasing to competitors in the same building.
   4. Landlord may want to restrict tenant from operating or subletting to certain uses.
   5. Landlord wants to restrict uses that are not in the best interest of the property or other tenants.
   6. Penalties might be imposed by either side for violation of this clause
   7. Landlords do not want to give exclusives; limits future opportunities and difficult to enforce.
3. RADIUS RESTRICTIONS
   1. Language that the landlord will not lease to a tenant’s competitor within an agreed trade area (miles) from subject property.
   2. Tenant may agree to not open up in the same radius.
   3. Need to define radius
   4. What if tenant has 2 partners and 1 partner does a separate project? Under a different name?
   5. Affects landlord’s percent rents, free trade and marketing other space.
4. PERCENTAGE RENT
   1. Measures the amount of rent a tenant is obligated to pay as a percentage of sales, services, and rentals. Sales generated at the leased space over a specific period of time. A rent as a percentage of annual gross sales.
   2. “Gross Sales” are defined and tenant may have exclusions.
   3. Tenant wants a “break-point” prior to sharing in any percent rents. How a break point is established?
   4. Landlord audit rights
   5. How percentage rents differ from base rent and how they may be negotiated as a combined rent obligation?
5. ADDITIONAL RENT/REIMBURSEMENTS
   1. Tenant responsibility to pay any other operating expenses, real estate taxes in addition to base rent.
   2. Referred to as “Pass-Throughs” because the landlord is passing the building expense through to the tenant.
   3. Need to be clear on the definition of “operating expense.” Examples of operating expenses and any red flag issues for the tenant.
   4. Defining if costs include capital expenditures
   5. Possible profit center for the landlord
   6. Tenant negotiating for audit rights. “Stops” and/or “Caps” on expenses
6. CO-TENANCY
   1. Tenant need for synergy of the shopping center to be maintained.
   2. The requirement of the shopping center to maintain a percentage of retail space open and occupied with retail tenants.
   3. Tenant can impose penalties.
   4. Landlord may want rights to replace an anchor tenant. Tenant may restrict the time for replacement and the type of tenant that would be acceptable.
7. CONTINUOUS OPERATIONS
   1. Tenant occupies the entire premises continuously, actively and diligently.
   2. Stipulates tenant must operate on specific days or specific hours.
   3. Default issues
   4. Helps “in-line” tenant with assurances of “anchor” tenant presence
   5. Issues for tenants not wanting to comply such as seasonal businesses or non-peak customer times.
   6. Counters tenants that may “Go-Dark”
   7. “Going Dark” is a Tenant’s Exit Strategy due to minimal sales
8. PARKING
   1. Designated areas for employees and retail customers
   2. Discuss overflow parking in retail
   3. How parking issues can be different for retail buildings?
   4. How issues differ from multi-tenant v. free-standing retail building?
   5. Parking spaces vs. parking ratios and demands trends for retail and security issues
9. SIGNAGE CLAUSE
   1. Tenant’s rights to signage, location, font, color, illumination, size, and cost to be paid and any restoration issues.
   2. Fire or bankruptcy sale signs
   3. Landlord’s and tenant’s control on signage and approval rights

References: It is recommended to the instructor that sample retail lease clauses are used with the material. Instructor should be aware of any new courts cases that may be included with these retail clauses.

International Council of Shopping Centers (ICSC)