CREJ

14 / 28

Page 14 — Retail Properties Quarterly — May 2017
Leasing
T rends in retail leasing are
short in duration and highly
market specific. With shifting
consumer choice, retail land-
lords consistently face new chal-
lenges to their rent streams and delivery
of promised investor returns. Landlords
must maintain flexibility to respond
to these trends and changing market
dynamics.
In this article, we explore two emerg-
ing retail leasing trends: the decline of
large traditional merchandisers and pro-
liferation of smaller also
consider these business concerns from
the perspective of lease drafting, spe-
cifically negotiation of co-tenancy and
prohibited-use provisions. Ultimately,
landlords must have an eye toward the
future and competent representation
to administer complex leasing regimes
tomaintain the flexibility necessary to
respond to emerging trends and chang-
ing market pressures.
• Online sales and the decline of
traditional merchandisers. It is no
secret that online shopping has taken a
toll on the in-store sales of many retail
giants. Sports Authority, for example,
closed all of its stores following Chapter
11 bankruptcy in 2016, and in January,
Macy’s announced it would shutter 68
stores nationwide. Meanwhile, online
retail giant Amazon reported 2016
online sales in excess of $135 billion.
Although discount merchandisers like
TJMaxx, Ross and H&M continue to
demonstrate strong performance,many
anchor tenants once viewed as primary
drivers of traffic to shopping centers are
experiencing declining sales.
As traditional retail merchandisers
operating in larger footprints experi-
ence declining business, landlords must
consider alternative
strategies to fulfill
their obligations
under leases and
to protect their rent
streams. Consider, for
instance, a landlord’s
obligations under a
typical co-tenancy
provision, which
grants a tenant cer-
tain remedies (e.g.,
paying reduced rent
and/or termination
rights) if a portion of
the shopping center
space is closed. In lease negotiation,
tenants commonly request that a co-
tenancy violation occur when a specifi-
cally named tenant (or group of tenants)
is not open for a certain period of time.
Today, the concept of a named co-
tenant poses new risks for landlords
because tenants frequently desire the
named co-tenants to be one of these
larger traditional merchandisers that
are experiencing declining sales. Once
viewed by landlords and tenants as
rock-solid anchors, the closure of a large
traditional merchandiser can have rip-
pling effects and potentially devastat-
ing consequences for a landlord’s rent
stream if that retailer is named as a
co-tenant in a number of leases at the
shopping center.
Tomitigate this risk, landlords
are advised to negotiate alternative
mechanics for co-tenancy provisions.
For example, landlords can limit risk by
negotiating a co-tenancy provision that
triggers tenant remedies when a certain
percentage of shopping center square
footage, rather than a named co-tenant,
is not open for business.
To the extent that
a tenant requires
named co-tenants,
landlords should
define broad poten-
tial replacements
(e.g., through a
long list of preap-
proved replacements
attached to the lease
or through an expan-
sive definition of an
acceptable substi-
tute). Not only does
this drafting strategy
alleviate some risk
associated with a large merchandiser
declaring bankruptcy or shuttering a
store, it also provides landlords flexibility
to break up larger boxes into smaller
spaces for multiple tenants,making it
easier to respond to a second trend – the
proliferation of smaller operators.
• Proliferation of smaller operators.
While many traditional big-box retailers
struggle to keep pace with new eco-
nomic demands, smaller tenants, with
more specific clientele, have become
some of the most attractive concepts for
a shopping center.
For instance, consider health and fit-
ness tenants. Once dominated by large
health clubs and gyms (e.g., 24-Hour
Fitness and Bally’sTotal Fitness), small
players targeting particular industry
trends now are leading in the fitness
space. Even though they operate in
smaller footprints, concepts like Orange
Theory, Cycle Bar, CorepowerYoga and
CrossFit are not just industry leaders but
desirable tenants that can a drive sig-
nificant traffic to a shopping center.
New fitness studios are just one
example of emerging tenant trends –
landlords should think prospectively
about future tenants that may become
desirable at their shopping centers. In
terms of lease negotiation and drafting,
landlords should ensure they are not
hamstrung by long lists of prohibited
uses to accommodate attractive future
operators.
A prohibition on “health clubs,” for
example, which is found inmany leases
and declarations recorded against
shopping centers, may be problematic.
Traditionally included in declarations
and leases because of parking concerns,
this prohibition (without the carve-outs
recommended below) would prevent
a landlord from leasing to the smaller
gym operators identified above despite
the fact their operations (e.g., small
class sizes) do not pose the same park-
ing risk.
To mitigate this concern, landlords
are advised to limit the application of
this prohibition to those health clubs
“in excess of 15,000 square feet.”This
reasonable exceptionmitigates the
tenant’s concern of a large gym that
attracts a high-traffic volume at peak
hours while maintaining landlords’
flexibility to bring new and exciting fit-
ness operators to shopping centers.
In conclusion, only bymaintain-
ing flexibility over future leasing can
landlords respond to emerging trends
and changing market dynamics like
growth of online sales and prolifera-
tion of smaller operators. Landlords
should ensure they have competent
representation to administer complex
leasing regimes and respond to foresee-
able issues at the lease negotiation and
drafting stages before they threaten the
landlord’s investment in a shopping
center. s
Brinkmann Constructors is dedicated to adding the most
value to every step of the construction process by providing
guidance and creative solutions that allow us to build faster
and offer real cost-savings to our clients. We bring a sense
of accountability and ownership to every project, making
Brinkmann a trusted partner to our clients.
Brinkmann has constructed eight new DICK’S SPORTING
GOODS stores; each involved complete interior finish, and
most were completed on a five-month schedule. We recently
completed this 80,000 SF store in Broomfield, Colorado and
are currently fully renovating a store in Lakewood, Colorado.
We have a solid portfolio building retail stores and retail
development projects including site/infrastructure work
throughout the Midwest.
Let us become your trusted partner and build your next
retail project!
A TRUSTED PARTNER
TO OUR CLIENTS
ST. LOUIS │ DENVER │ KANSAS CITY
3855 Lewiston Street, Suite 100
Aurora, CO 80011
(303) 657-9700
Zach Siegel
Associate,
Brownstein Hyatt
Farber Schreck LLP,
Denver
Tal Diamant
Shareholder,
Brownstein Hyatt
Farber Schreck LLP,
Denver