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Page 16 — Retail Properties Quarterly — August 2017
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Denise Leal | 303.692.8838 |
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I t’s true, the glittering era
of shopping malls is dead.
Whether you blame it on the
rise of e-commerce, a cul-
tural shift toward experiences
rather than things, the oversupply
of malls or millennials in general
(when in doubt, blame a millennial),
the rapid demise of shopping malls
has been staggering.
Since the start of this year, more
than 1,500 store closures have been
announced and up to 25 percent
of American malls are predicted
to close within the next five years.
While many outdated malls already
have been demolished and rede-
veloped into open-air town cen-
ters, others have incorporated new
uses into their existing structures.
The general shift has been toward
mixed-use developments that bring
together shopping, working, living
and entertaining.
With the physical structures of
retail centers being updated, vari-
ous retail lease provisions are in
need of updating as well. Here are a
few issues to consider when draft-
ing leases in today’s retail environ-
ment.
• Allocation of operating expenses.
Traditional shopping malls gener-
ally allocate operating expenses
among retail tenants based on their
proportionate share of the total
square footage of the project.
For mixed-use developments,
however, landlords will incur cer-
tain costs that benefit some tenants
but not oth rs. Therefore, landlor
will need the ability to allocate dif-
ferent operating expenses to dif-
ferent tenants.
For example, if
a landlord cre-
ates an outdoor
seating area for
office employees
to eat lunch, the
costs of cleaning,
maintaining and
repairing such an
outdoor seating
area should be
allocated solely to
the office tenants.
Landlords should
establish separate categories of
projectwide expenses and use-spe-
cific expenses, along with different
denominators for the proportionate
shares, for each type of tenant. If
the different use components of a
mixed-use development has or will
have separate owners, the project-
wide expenses should be addressed
in a recorded declaration.
Additionally, the desired ameni-
ties and the tenant mix will change
over time. If the above-mentioned
outdoor seating area is used by the
employees and customers of the
retail tenants or the residential
tenants, a portion of the related
operating expenses should then be
allocated to those tenants as well.
Landlords should reserve the right
to determine the amenities being
offered, the tenants who are ben-
efitting therefrom and the calcula-
tion of the tenants’ share alloca-
tions.
tage rent. Percentage rent,
a form of rent that is paid based
on a percentage of gross sales, is a
stalwart of retail leases. Percentage
rent incentivizes landlords to select
a complementary mix of tenants
and provides tenants the flexibility
to pay rent based on the profits of
the business.
Today, the interplay between the
in-store experience and online sales
has made it exceedingly difficult for
landlords and tenants to determine
the gross sales that are attributable
to the physical location. If a cus-
tomer walks into a store, tries on a
couple of items, but goes home and
orders the same items online, will
the purchase be included in gross
sales? What if a sales associate
helps the customer order it online
while in the store? Alternatively,
what if a customer buys an item
online and picks it up in the store?
With many retail stores decreas-
ing their physical footprint and
storing their inventory off-site,
these retail situations are becoming
more prevalent. Furthermore, digi-
tally native brands, such as Warby
Parker and Bonobos, are using their
physical locations as “zero inven-
tory, high-experience showrooms”
rather than traditional stores for the
sale of goods. While tenants may
see a boost in online sales based on
their physical location, landlords do
not see that same boost in the gross
sales reports.
If landlords want to include a por-
tion of online sales in the calcula-
tion of percentage rent, it will need
to be captured in the lease defini-
tion of “gross sales.” One approach
is to include online sales that are
subject to state retail sales tax. In
Colorado, the “Amazon tax” requires
out-of-state companies to collect
sales tax from Colorado residents
who make online purchases. Many
(but not all) states have passed
similar laws.
Landlords and tenants would still
need to negotiate how the total
online sales are allocated among
the multiple store locations (if
applicable) and how to determine
which online sales are connected to
the physical location. These deter-
minations could require additional
information on customers’ purchas-
ing habits.
As percentage rent calculations
become increasingly complicated,
another approach is to eliminate
percentage rent altogether and
rely on other forms of rent. Land-
lords can still require delivery of
gross sales statements in order to
understand the tenants’ financial
conditions without the headache of
determining percentage rent.
• Co-tenancy requirements. Retail
leases in malls and shopping cen-
ters commonly include co-tenancy
provisions, which allow tenants to
exercise certain remedies if key ten-
ants or a certain number of other
tenants are not operating in the
shopping center. Co-tenancies often
are tied to an anchor tenant, such
as a department store or a grocery
store, under the theory that an
anchor tenant will attract a large
number of customers, which then
creates foot traffic for the smaller
tenants in the shopping center.
Heather Park
Meek
Attorney, Otten
Johnson, Denver