Much ink has been spilled over the last few years discussing and analyzing the great American “retail apocalypse.”
Every announcement that a retail chain is closing all or a portion of its stores triggers a tidal wave of stories crowning Amazon and the internet-based retail revolution it helped spawn with the laurel wreath of victory over its arch enemy, the traditional brick-and-mortar retail store.
Invariably, the defenders of these traditional stores, while forced to acknowledge the rise of e-commerce, try to attribute each particular closure at hand to a myriad of additional factors, including crippling debt loads (a self-inflicted and somewhat pervasive issue in the retail sector over the last decade), the fact that the per-person retail square footage ratio in the United States is grossly out of line with those of every other country in the world (suggesting that the current meltdown is merely the sign of a needed market correction and not a seismic shift) and the general realignment of the retail industry from commodity retail to specialty or experiential retail.
While remaining agnostic as to the arguments on both sides of this debate, one fact is unassailable: the closure of thousands of retail stores throughout the United States over the last decade has resulted in the loss of approximately 3.5 billion square feet of retail space and ruined countless malls.
Ironically, crafty legal thinking has helped further the demise of malls. “Co-tenancy” provisions, long a staple of the retail lease, allow a tenant to reduce its rent or terminate its lease if certain other tenants at a shopping center cease to occupy their space. Consequently, the effect of the Toys ‘R’ Us bankruptcy or the decision by big-box retailers such as JCPenney and Macy’s to close hundreds of stores ripples across the retail landscape with exponential consequences.
As with every aspect of a capitalist economy, the loss of retail space will invariably open doors to thoughtful entrepreneurs. Real estate’s driving mantra has always been, and remains, finding the highest and best use for land.
Just as obsolete factories have been converted into trendy residential lofts and office space, prime situated retail properties are already starting to be converted to new uses. The traditional suburban retail mall, with acres of fallow parking lots, is as a general matter ripe for redevelopment.
Of course, this does not mean that every defunct shopping center can or will be readily converted into a mixed-use facility. The cliched truism about the importance of “location, location, location” in any real estate development cannot be understated in this context.
Although every development or redevelopment has common challenges and threshold issues (e.g., getting your site properly entitled or re-entitled to lawfully allow the contemplated development or redevelopment), the redevelopment of the traditional suburban mall has its own unique legal pitfalls and difficulties, the foremost being the web of third-party rights and owner obligations endemic to this asset class.
The owners of outparcels, for example, typically have a variety of rights, including the rights to traverse and park in the mall’s parking areas, use the mall’s lighting, infrastructure and-or other amenities, as well as require the mall owner to keep the common areas clean, in good working order, lighted and secure.
Similarly, tenants, within their leases, will often have rights in connection with the mall’s operations and common areas. A supermarket, for example, may have the right to place shopping cart corrals within the common parking areas, and an apparel tenant may have exclusive parking rights over a portion of the common parking area.
Finally, if the shopping mall has been structured as a horizontal condominium, portions of (or even different floors within) the mall will be owned by different owners and likely subject to a complicated condominium regime replete with rules and obligations relating to each unit and the condominium as a whole.
For legal counsel, any redevelopment of a retail property will almost certainly involve navigating your client through the perilous shoals of these conflicting rights, all of which were implemented to allow the property to be operated as a single, integrated retail shopping facility.
This means that you must begin any potential retail redevelopment by scrutinizing, in painful detail, all of these divergent rights. Once these rights are identified and digested, you will need to strategize with your client and chart a path towards your intended outcome.
Factors such as the relative negotiating strengths of the various parties must be scrutinized. For example, will an outparcel owner be benefited or burdened by introducing a residential component into the shopping center? Will an adjacent condominium unit owner be prepared to sacrifice some of the common parking in exchange for the potential additional foot traffic that a new office building may bring?
Concessions, whether monetary or otherwise, must be expected and planned for. Unforeseen complications, such as a tenant bankruptcy and the myriad of issues such a filing can engender, must also be considered. And, of course, counsel must measure the impact on any restructuring of these underlying rights on the short term and long term financeability of the retail asset.
The bottom line when it comes to retail redevelopment is that no one-size-fits-all blueprint for success exists. Each and every situation is highly fact specific, the only constants being that the process will undoubtedly be long, arduous and costly.
However, thorough and thoughtful lawyering can significantly improve the chances that your client does not simply weather the “Retail Apocalypse” but rather successfully repositions his or her retail asset in a manner that maximizes its value, effectively turning lemons into lemonade.
Ira Teicher is a real estate partner in Stroock & Stroock & Lavan’s Miami office. He has more than a decade of experience representing developers, hedge funds, pension funds and other real estate opportunity funds on real estate transactions. Contact him at firstname.lastname@example.org.