19 Sep 2017

GLOBEST: Why Lease Restrictions Challenge New Retail

By Carrie Rosenfeld | Orange County

As published on GlobeSt.com, September 18, 2017

CC_Ben-Terry

Terry: “Restrictions exist, and directly negotiating special permission with existing tenants is the only option.”

TUSTIN, CA—As in any negotiation, how much you are going to concede regarding lease restrictions depends on who has the leverage, Coreland Cos.’ VP of retail brokerage Ben Terry tells GlobeSt.com. In the new retail environment, heavily dominated by intensive parking uses like restaurants, gyms and services, a major pain point for owners and brokers alike has been issues associated with lease restrictions. Once an objective to protect a shopping center’s traditional retail mix, these limitations are no longer as relevant and often pose a dramatic roadblock for today’s deals.

We spoke with Terry about lease restrictions and how they are affecting lease negotiations in the retail environment.

GlobeSt.com: Why has restriction language become a major pain point for today’s lease negotiations?

Terry: Shopping centers are completely different today, dominated by food and service uses and light on traditional retail. Restrictions put in place in the ’70s, ’80s and ’90s were intended to prevent landlords from leasing to uses that didn’t provide synergy. Twenty years ago, the last thing an anchor retailer wanted was a gym, too many restaurants and a bunch of office, medical and service tenants. Today, tenants are realizing that some of these categories have evolved. They do provide synergy and, in more challenged markets, the non-traditional use is better than a vacant neighbor.

GlobeSt.com: What are the most common restrictions posing challenges?

Terry: Food limitations and fitness-use restrictions seem to pose the greatest challenge. In the past, these restrictions were written to prevent large gyms from opening and taking all the parking. Now there are so many different variations of “gyms.” With the evolution of yoga, spin and other specialty gyms, retailers and landlords are realizing that they are not just a drain on parking and can bring energy to a shopping center. That said, restrictions exist, and directly negotiating special permission with existing tenants is the only option.

GlobeSt.com: How are these situations impacting today’s lease negotiations?

Terry: To start, the added time required to get approval from an existing tenant introduces an additional layer in the negotiation process. Then there is the uncertainty, since leases are often signed contingent upon landlord getting said approvals. Most importantly is the financial impact. Even if a tenant is ultimately fine with the use, it will often finesse the restriction into an opportunity to get “something” in the form of rent concession, a one-time payment or additional options amended to its lease.

GlobeSt.com: How do you best address restrictions in new leases?

Terry: You do your absolute best to avoid them. However, that’s not always feasible. When negotiating with an anchor tenant, it’s important to remind them why there is a need to omit certain restrictions. Trends will continue to lean towards food, entertainment, service and medical uses, and even the possible integration of residential. Help them understand the landlord’s vision for the center and the positive impact a future non-traditional use can make. As in any negotiation, how much you are going to concede depends on who has the leverage.

Restrictions are a legitimate requirement to protect one’s business, but they can’t be unreasonable because we can’t predict what retail centers will look like in 10 or 20 years. At that point, there will be a whole new conversation between landlord and tenant—like how to handle driverless cars!

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