Realogic Lunchtime Learning September 2009 - The Current Economy and the Impact on Retail Lease Language

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The visual component of the September 2009 Lunchtime Learning from Realogic Analytics, the source for commercial real estate training.

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The downturned economy has wreaked havoc on profit margins for all commercial property owners but none more so than retail owners. If your business is affected by developments in the retail leasing world, you might want to think about attending September's Lunch and Learn at Realogic Analytics.

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Realogic Lunchtime Learning September 2009 - The Current Economy and the Impact on Retail Lease Language

  1. 1. The Current Economy and the Impact on Retail Lease Language A Realogic lunch and learn session September 24 th , 2009 Presenter: Chris Schmuker
  2. 2. What happened?
  3. 3. Realogic: Lunch and Learn Copyright © 2009, Realogic Analytics, Inc. <ul><li>Co-Tenancy </li></ul><ul><li>Go Dark </li></ul><ul><li>Unconventional Tenants / Temporary Leasing </li></ul><ul><li>Tenant Retention / Early Extensions </li></ul>“ The Current Economy and its Impact on Retail Leases”
  4. 4. Lease Clauses: Co-Tenancy <ul><li>Definition </li></ul>Copyright © 2009, Realogic Analytics, Inc. <ul><li>A clause in a retail lease which provides remedies to a tenant in the event that another tenant, typically an anchor or major tenant, ceases its operations at the property. </li></ul><ul><li>There are two types of co-tenancy clauses: </li></ul><ul><li>Opening co-tenancy (a tenant is not required to initially open until specified anchor tenants and/or a certain percentage of other tenants are open) </li></ul><ul><li>Ongoing co-tenancy (a tenant is not required to remain open if specified tenants and/or specified percentage of tenants are not open) </li></ul><ul><li>ITEMS TO LOOK FOR: </li></ul><ul><li>Anchor(s) and/or certain percentage of tenants not open that trigger(s) Tenant’s right for remedy </li></ul><ul><li>Description of remedy (typically termination or reduced rental payments, i.e., Percentage Rent in lieu of Minimum Rent) </li></ul><ul><li>Notice requirements, if any </li></ul><ul><li>Termination fee, if any </li></ul>
  5. 5. Lease Clauses: Co-Tenancy <ul><li>Key Points </li></ul>Copyright © 2009, Realogic Analytics, Inc. <ul><li>Opening, Ongoing or combined </li></ul><ul><li>Subject tenants or required percentage </li></ul><ul><li>Remedies, including Termination and rent relief </li></ul><ul><li>Termination Option or Fee </li></ul>
  6. 6. Lease Clauses: Co-Tenancy <ul><li>Example </li></ul>Copyright © 2009, Realogic Analytics, Inc.
  7. 7. Lease Clauses: Co-Tenancy <ul><li>Recent Impact </li></ul>Copyright © 2009, Realogic Analytics, Inc. Retail property managers must have a clear understanding of their properties and the ability to track current co-tenancy clauses. In the last year, there has been a large increase in retail tenants examining clauses within their leases to demand rent reductions or other concessions from property owners. This leads to reduced rental rates, decreasing revenues and further increases in vacancy rates within the sector.
  8. 8. Lease Clauses: Co-Tenancy <ul><li>Recent News </li></ul>Copyright © 2009, Realogic Analytics, Inc. From WSJ, “Empty Mall Stores Trigger Rent Cuts”, 7/27/09
  9. 9. Lease Clauses: Co-Tenancy <ul><li>Recent News </li></ul>Copyright © 2009, Realogic Analytics, Inc. From Denver Post, “Area Stores Squeeze Landlords”, 7/26/09
  10. 10. Lease Clauses: Go Dark <ul><li>Definition </li></ul>Copyright © 2009, Realogic Analytics, Inc. <ul><li>A clause in a retail lease which allows a tenant to cease operations at a property. </li></ul><ul><li>Although “Go Dark” provisions are rarely granted, other than to major national tenants, it is a very important provision to understand. This clause may be hidden in various lease provisions, such as continuous operations, hours of operation, etc. This provision varies from Continuous Operations in that it specifically grants a tenant a right to close the Premises during periods that would normally be required, without repercussion. </li></ul><ul><li>ITEMS TO LOOK FOR: </li></ul><ul><li>Trigger(s) for Tenant to cease operations </li></ul><ul><li>Notice requirements, if any </li></ul>
  11. 11. Lease Clauses: Go Dark <ul><li>Key Points </li></ul>Copyright © 2009, Realogic Analytics, Inc. <ul><li>Watch for this clause to be hidden in many different lease provisions. </li></ul><ul><li>Identify potential triggers that allow tenants to cease operations. </li></ul><ul><li>Track the landlord notice requirements. </li></ul>
  12. 12. Lease Clauses: Go Dark <ul><li>Examples </li></ul>Copyright © 2009, Realogic Analytics, Inc.
  13. 13. Lease Clauses: Go Dark <ul><li>Recent Impact </li></ul>Copyright © 2009, Realogic Analytics, Inc. Landlords must carefully undertake the negotiation on continuous operation or go dark clauses because the profitability of shopping centers depends on the tenants' continued operations and sales from their premises. With a ‘Go Dark’ clause, the tenant may discontinue its business regardless of breaking lease agreements. When breach of contract occurs, the tenant may consider terminating the lease due to decreased percentage rents and diminished value of the shopping center.
  14. 14. Lease Clauses: Go Dark <ul><li>Recent News </li></ul>Copyright © 2009, Realogic Analytics, Inc. From Canada One, “Bulletproof Your Lease Agreement”
  15. 15. Retail Leases: Unconventional Tenants <ul><li>Definition </li></ul>Copyright © 2009, Realogic Analytics, Inc. A retail lease is typically defined by the sale of goods within a premises or the retail provision of services. In the past, mall owners and operators focused on creating a viable mix of attractive tenants that would bring customers to their properties. Owners would identify retailers that added value and customer service, maintained brand identity and loyal customers.
  16. 16. Retail Leases: Unconventional Tenants <ul><li>Recent Impact </li></ul>Copyright © 2009, Realogic Analytics, Inc. As retail vacancy rates have risen to unseen heights while rent rates for shopping center space continue to decline, mall owners and operators are considering different types of tenants and leasing options for their properties. In the past, many mall owners stayed away from certain types of tenants that did not fit the traditional definition of retail leases. Today, there is more creativity in signing tenants to help improve occupancy statistics and bottom lines.
  17. 17. Retail Leases: Unconventional Tenants <ul><li>Key Points </li></ul>Copyright © 2009, Realogic Analytics, Inc. <ul><li>Mall operators attracting unconventional and temporary tenants to help increase revenues. </li></ul><ul><li>In 2Q 2009, 63 churches, 244 medical facilities and 172 schools moved into retail spaces, according to Co-Star Group. </li></ul><ul><li>However, these tenants do not always drive increased foot traffic to the centers. </li></ul><ul><li>Temporary tenant should enhance existing inline tenants to maintain harmony. </li></ul>
  18. 18. Retail Leases: Unconventional Tenants <ul><li>Recent News </li></ul>Copyright © 2009, Realogic Analytics, Inc. From WSJ, “For Toys ‘R’ Us, Holidays Are Open and Shut”, 9/15/09
  19. 19. Retail Leases: Unconventional Tenants <ul><li>Recent News </li></ul>Copyright © 2009, Realogic Analytics, Inc. From ABC New York, “Pop-up Stores become retail strategy”, 9/17/09
  20. 20. Retail Leases: Tenant Retention <ul><li>Definition </li></ul>Copyright © 2009, Realogic Analytics, Inc. <ul><li>As the economy declined over the last two years, an interesting concept took place. The shift of power transferred from the landlord to the tenant. This has forced mall owners and operators into “tenant retention” mode: </li></ul><ul><li>Tenant Retention = Revenue and Asset Value Retention </li></ul><ul><li>Landlords must consider: </li></ul><ul><li>Is the tenant viable for the long term? </li></ul><ul><li>Does the tenant have the right merchandise for the center? </li></ul><ul><li>Does the tenant add to the overall merchandise mix of the center? </li></ul>
  21. 21. Retail Leases: Tenant Retention <ul><li>Key Points </li></ul>Copyright © 2009, Realogic Analytics, Inc. <ul><li>Keeping existing tenants is key, as vacant spaces become much more difficult to lease. </li></ul><ul><li>Greater Tenant Improvements, leasing commissions and much longer downtime periods exist to replace tenants. </li></ul><ul><li>Rental rates for new leases are declining faster than rental rates for renewals. </li></ul><ul><li>Relocations and space reductions are also valuable tools to keep existing tenants healthy and create viable spaces that new tenants may find attractive. </li></ul>
  22. 22. Retail Leases: Tenant Retention <ul><li>Recent Impact </li></ul>Copyright © 2009, Realogic Analytics, Inc. While six to eight months used to be common for beginning renewal discussions, now owners are looking ahead at rollovers scheduled over the next one to two years to consider earlier extensions. Owners use sales volume trends, occupancy cost ratios, and comparisons of existing stores in their centers to national averages to make decisions on extensions. A tenant likely falls in one of three categories: Healthy, Watch-list or Critical.
  23. 23. Retail Leases: Tenant Retention <ul><li>Recent News </li></ul>Copyright © 2009, Realogic Analytics, Inc. From CoStar, “Shopping Center Execs Say Holding Onto Current Tenants it Top Leasing Strategy”, 9/16/09
  24. 24. Retail Leases: Tenant Retention <ul><li>Recent News </li></ul>Copyright © 2009, Realogic Analytics, Inc. From Retail Traffic, “Retail Landlords Grant Temporary Deferments and Barter System for Rent Reductions”, 6/30/09
  25. 25. Copyright © 2009, Realogic Analytics, Inc. Realogic Analytics, Inc. 230 W. Monroe, Suite 1000 Chicago, IL 60606 312-782-7325

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