Let’s face it. In the post recession market, Developers and Owners are ready to look for opportunities to build, expand, alter and modify their properties. Although likely not as robustly as to pre-2008, there is retail, office and industrial re-development and expansion happening as we read these words. And with this change in the market comes an inevitable challenge between Landlords and Tenants as to their rights and obligations as new development moves forward and existing product is modified, altered and expanded. The focus of this post is to delve into the issues relating to what these parties should discuss, plan for, and work through during the growing pains. One of the struggles is to determine the rights and responsibilities of the owner and the tenant when a dormant or unimproved property experiences growth and (yikes!) prosperity. As reflected below, change may not ultimately be a problem for either party. Although there is a lot of advice for tenants, landlords can certainly benefit from this discussion.
PLANNING FOR CHANGE
For large retail or multi-use properties this may not be an issue as the Owner, Anchor Tenants, Shop Tenants, out parcel owners and smaller users may have signed off on an overall Operating Agreement, Reciprocal Easement Agreement (“REA”) or other recorded Declaration relating to the development, alteration, use and modification of both the Gross Leaseable Area (“GLA”) and/or the Common Area. If not though, here are some considerations to review as the parties move through the process of negotiation and operation:
1. CAM Charges
With increased use or development come changes in CAM and GLA. This may be a win – lose situation for Tenants unless they have negotiated specific rights regarding the increased or decreased GLA. If the Landlord expands the size of the GLA, then the Tenant may receive a benefit in the form of decreased CAM expenses (as a % of GLA), yet the increased use or increased size of the project may negate or offset this precaution. Landlords will often demand that increases in either or both of these changes be absorbed by the Tenant. Depending on the size and power of the Tenant, these may be issues for push-back, walk away or acceptance. However, the result may not be totally negative to Tenants as increased GLA often results in decreased percentage of CAM costs. Certainly a plus. The rub comes when the Landlord increases the common area without expanding the Tenant base and square footage, based on voluntary or involuntary reasons.
The equation here for Landlords and Tenants is what is allowed by zoning approval and governmental authorities and what is required for Tenants to properly serve their customers. Most leases define a ratio of a certain number of parking spaces per usable square feet. Obviously this would diminish if the size of the Center, Building or Industrial Park increases without a commensurate increase in parking. Legal or governmental requirements may guide the equitable result here, but if not Tenants need to protect themselves.
3. Access and Common Easements
If not governed by an REA, the Landlord may alter these important amenities with increased development or expansion of GLA. There is usually a minimum backstop with zoning requirements, but Tenants should also protect their anticipated use of common driveways, access points and cross-ways within the project. For Anchor Tenants, this is usually an academic affair as their rights to use are guided by recorded documents or specific private agreements. Smaller tenants are the ones that need to be careful as they hear or anticipate increased development in the project. While leverage is always a factor, Tenants should not shy away from a discussion with the owner about reasonable use and access.
4. Increased Usage of Utilities and Resources
Absent specific lease requirements and separate metering, this should also be a concern to Landlords and Tenants. Case study: grocery Anchor Tenant contracts with Landlord to build and ground lease a significant new part of the project. Increased foot traffic is a boost to all existing Tenants, but what about CAM expenses and other shared costs that are not pre-allocated to ALL Tenants. Again, a discussion with the Landlord sooner rather than later is best. In the best of worlds, all of these costs should be proportionately borne by all Tenants, but that is often the challenge when the Anchor weighs in and the other Tenants do not join the conversation.
5. Signage and Visibility
Sometimes this can be one of the biggest battles for landlords and existing Tenants in an expansion situation. No longer is the pylon sign and the lights or the signage on premises adequate in many tenants’ eyes to draw existing and potential customers to their places of business. The bright lights and major signage of an additional large Anchor Tenant can change the best business plan developed by a smaller Tenant. If not protected, get ahead of this long before the Anchor moves in. And Landlords, this will not necessarily hurt you in the long run. A more vibrant center overall is better for all involved.
6. Potential Relocation
Depending on the lease language, this may be a forgone conclusion. However, if the center is re-developed or expanded, Tenants should always discuss this issue with their Landlord. Especially if franchised, this may be crucial in the survival of the business. Obviously, more successful and influential tenants will have more leverage to avoid a potentially problematic relocation to another part of the center. However, Landlords should also take heed. Placing that successful restaurant or specialty store to a location in the hinterlands of the new center may eventually come back to bite you as well! Each Landlord and their Tenants know the synergies of their project – and the introduction of new development and new tenants are bound to change that equation. So, be careful when planning and get input from your existing businesses. Remember, they often are the major source of funds to pay your loan….