The Dirt Dictionary, Part I: How to talk the talk of shopping centers

SHOPPING CENTER: A group of retail and other commercial establishments that is planned, developed, owned and managed as a single property. On-site parking is provided. The center’s size and orientation are generally determined by the market characteristics of the trade area served by the center. The two main configurations of shopping centers are malls and open-air strip centers.” – from the I.C.S.C. website

The hallmark of the shopping center lease is the interdependence of various tenants on one another and the special relationship between landlord and tenant, with each looking to the other to promote the “product.” The shopping center lease has many unique aspects and, in fact, a different vocabulary from the office or urban retail lease. “G.L.A.,” “CAM charges,” “go dark,” “exclusives” and the like pepper the deal-making dialogue.

While the shopping-center world is sometimes thought of as indeed from another planet, the savvy broker or his counsel should have at least a passing familiarity with the nomenclature employed in this specialized area of leasing.

So, here goes.

Anchor stores: Typically the department stores (in regional enters) and supermarkets (in community centers) that figuratively anchor a shopping center. Usually located at the ends or corners of the center, Macy’s, Sears, Belk’s and the like are the main draws and thus the economic anchors of shopping centers.

Big-box stores: Large stand-alone stores, featuring a single line of products, with varying market niches. Examples include pet stores (Petco), toy stores (Toys“R”Us), office supply stores (Staples) and no-frills discount stores that sell in volume (Target). See “category killer.”

Black Friday: The shopping day after Thanksgiving in the United States when retail stores generate their highest sales. Black refers to the accounting term as a business moves from loses in red ink to gains in black.

Brick and mortar: Traditional retail establishments as distinguished from online stores.

CAM: Common Area Maintenance.

CAM charges: Reimbursement to a landlord of expenses incurred in Common Area Maintenance. Examples include electricity, insurance, security and maintenance of the parking lots.

Category killer: A large national chain store specializing in one line of products, such as home improvements, office supplies or toys, that can overwhelm both smaller and more diverse competitors because of its size, variety of merchandise and prices. See also “big-box stores.”

Common areas: The areas of a shopping center shared by some or all of the co-tenants, such as walkways.

Continuous operations: Mandatory days and hours that a tenant is required to be open, fully stocked and operating. Notes: (1) Landlord: Tenant must operate, not simply pay rent and go dark; a “dark” store diminishes foot traffic in the mall and is bad P.R.—also means no percentage rent; landlords try to keep all tenants in line; (2) a “major” tenant will not agree to a continuous-operations clause; (3) relates to other clauses such as exclusives granted to tenant; (4) if a tenant is not operating, that tenant should not have benefit of the exclusive; (5) right to “go dark” under certain circumstances—see below; (6) tenant wants to make sure landlord agrees to keep parking areas lighted during restaurant’s special hours—also adjacent common areas (esp. for restaurants).

Co-tenancy: Tenant’s obligations (especially rent) are subject to the opening/operating of other tenants in the shopping center; lease stipulates that a reduced rent or no rent be paid until an agreed-upon percentage of the center is occupied.

Notes: (1) Landlord will say no penalty for co-tenancy “default” as in “Don’t blame me, I’m trying my best to keep this center fully leased. If there’s a closing, it’s not my fault.” (2) Tenant: Needed to assure flow of customers—also relate to opening requirements; tenant: I need anchor X to be open and operating, or a remedy if less than a specified percentage of in-line tenants are open and operating; (3) landlord may also insist on a sales percentage decline test, with tenant getting relief only if it can objectively establish a loss; (4) compromise: allow tenant to pay percentage rent only; (5) a restaurant lease might provide no required opening until adjacent movie theater has opened; (6) as to anchors: Open? What if an anchor closes? As to percentage of other inline tenants—need minimum percentage of same open and operating; some special emphasis for restaurant tenant where, for example, having movie theater open and operating is essential to tenant’s business; (7) if co-tenancy criteria not met, tenant remedies: convert over to percentage rent only, go dark, terminate lease.

Exclusives: Tenant granted the exclusive right to sell certain merchandise lines and or items in the shopping center.

Notes: (1) Focus on categories, rather than specific products; (2) issue of what land is burdened by the exclusive: entire shopping center? Adjacent land owned by same or related entities; (3) restaurant context: shopping center can support only so many pizza parlors and taco stands (distinguish from retail clothiers).

Go-dark: Tenant has right to stop operating under defined circumstances

Notes: (1) If co-tenancy covenants are not being met, or location is not working for tenant: go dark—or compromise by continuing to operate and pay percentage rent only; (2) tie in with assignment and subletting and percentage rent (clearly if tenant not operating, landlord receives no percentage rent); (3) tenant right to close (go dark) for repairs, renovations, inventory (not deemed to violate use or continuous-operations clauses).

Grand opening—co-tenancy: Tenant’s obligation to open for business/rent commencement depends on satisfaction of co-tenancy requirements.

Notes: (1) X percentage of shops in the mall to open simultaneously or certain designated stores to be open or ready to open; (2) grand opening (all stores to open simultaneously) considerations; (3) tenant “black-out dates” (don’t want to open off-season or with insufficient time to maximize seasonal sales).

Gross Leasable Area (G.L.A.): The total area of floor space (in square feet) available for lease to retail shops and for consumer services and entertainment, including restaurants (not limited to selling space alone; for example, may include storage space).

Notes: (1) Measured from center line of joint store partitions and from outside (front and back) wall spaces; (2) excludes the anchor stores; (3) tenant must be careful to specify that charges based on pro-rata share are to be calculated on “leasable” area, not “leased” area.

Kick-out: Tenant (and sometimes landlord) has the right to terminate lease under defined circumstances.

Notes: (1) Tenant needs if business is failing (determined using measurable parameters such as percentage decrease in sales); (2) if tenant rolls out many stores in street locations, tenant may want to cherry pick as to which underperforming stores to close (e.g. a Starbucks that saturates an urban commercial district).

Parking ratio: The ratio of parking spaces to the parcel of land is usually expressed in the number of car spaces per 1,000 square feet of rentable area.

Notes: A 500,000-square-foot mall with a parking ratio of 5 means that for every 1,000 square feet of building, there are five parking spaces. This means there are 2,500 parking spaces for this mall.

Percentage rent: Rent computed based on tenant’s gross sales at the premises.

• Gross sales defined: Broad definition of gross sales, on and off premises; tenant seeks to limit scope of definition—add exceptions and exclusions.

• Calculation: Tenant pays a percentage of sales above a certain amount (called the “break-point”); calculation of natural break-point: divide fixed rent by an agreed-upon percentage; tenant then pays that percentage of sales above the break-point dollar amount. Example: base rent = $100,000; percentage = 3 percent; “natural” break-point is $100,000; divided by 3 percent = $3,333,333; so tenant will pay 3 percent of gross sales above $3,333,333; typical percentage rents: grocery stores, 1 to 2 percent; retail, 3 to 6 percent; food courts, 8 to 10 percent; fine dining, 6 to 8 percent; theaters, 12 to 15 percent.

• Typical exclusions from gross sales: wide-ranging list. Comps (customer returns), credit card fees, taxes, refunds, intercompany transfers of merchandise, uncollectible accounts (if later collected, then included), for restaurants, including sales from apparel and costs attributable to repair or replacement of items under warranty; costs of alterations, decorations and the like performed in individual tenant’s spaces; cost of repair for which landlord is reimbursed by insurance; (big one here): any item of repair or replacement which by standard accounting practice is required to be capitalized; costs reimbursed by tenants; off-site management personnel and overhead; brokerage leasing commissions; and similar.

Notes: Tenant: (1) already spending substantial sums in its own advertising, marketing and promotion programs; (2) limit to proven marketing and advertising programs; (3) try for an annual cap.

PruneYard case: The 1980 Supreme Court case holding that First Amendment freedom of speech protection extends to granting public access to shopping center premises.

Note: The shopping center as today’s village commons.

Tenant mix: The selection of tenants based upon compatibility with a view toward maximizing sales and profitability for all.

Trade area: The geographic area from which will be drawn 70 percent to 80 percent of shopping center sales.

Notes: The optimally defined trade area takes into account all aspects of detailed demographics and others such as population density, housing, “lifestyle” issues and the like.

Trade name: Tenant must operate under a trade name

Notes: (1) Tenant needs flexibility to change if changing trade name of other stores in chain; (2) provide for right to use different name especially if lease is assigned or there is a sublet.

jamargolis@newyorkleaselaw.com

Jeff Margolis is founding principal of the Margolis Law Firm in New York City, where he specializes in “dirt law”—buying, selling and leasing. He writes monthly for The Commercial Observer on legal issues.