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KEEPING THE CASH REGISTERS RINGING:

THE CHALLENGES FACING RETAIL REAL ESTATE

By: Gail M. Stern

I. INTRODUCTION AND UPDATE

A LOOK BACK AT 2009

Prior to 2009, we thought the first 8 years of the new century were challenging in the

retail real estate world. Traditional malls were dying, there was massive consolidation among

traditional department stores, lifestyle and power centers were dotting the landscape, Katrina hit,

and specialty retailers were struggling.

Further, there was almost no new mall development. Some would say that by 2000, the

United States was simply over-malled. Other factors contributing to lack of development

included growth of REITs, lack of new specialty tenants and anchors, development of power and

lifestyle centers, and online shopping.

Then came 2009, where we saw the worst economic times in our generation, massive

unemployment, deep decline in consumer confidence, an increase in bankruptcies and an almost

complete lack of real estate financing.

General Growth Properties (“GGP”), one of the largest shopping center developers, filed

for Chapter 11 in April 2009, primarily to deal with over $20 billion in maturing debt. Less than

a year later, and after potentially turning the SPE bankruptcy remote structure upside down, GGP

received approval of a reorganization plan. The plan extended the maturity date for all loans,

and allowed GGP to use its centralized cash management system. In exchange, GGP agreed to

various loan modifications to address SPE issues and any future bankruptcy filings.

Deadmalls.com just “celebrated” its 10 year anniversary. Its home page starts with

“Welcome to Retail History” and gives a great sense of the changes in retailing in the past

decade.

The only slightly bright spot coming out of 2009 was the holiday season. U.S. retailers

performed better than expected, and certainly better than the disastrous 2008 holiday season.

Sales, however, were far below 2007 results.

WHAT’S IN STORE FOR 2010

Although there has certainly been some improvement in the economy, no one is

expecting retail to rebound quickly. The problems that existed in the first decade of the 21st

century still exist. In addition, one can expect additional loan and lease defaults, new

bankruptcies, continued consumer insecurity and a lack of new tenants. Shopping Centers Today

described the “new face of retail” as “loads of high-profile bankruptcies and tons of lost jobs,

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sales sinking, values shrinking, occupancy dropping, vacancy topping – and still no bottom in

site.” The good news for retailers – rents are likely to continue to slide.

Lack of capital will also detrimentally affect retail going into this decade. Not only will

capital for new centers be virtually non-existent, even capital for renovation of successful centers

will be limited. Maturing loans on existing centers will need to be extended by lenders, or more

developers will file for bankruptcy or hand over the keys to the lenders. Lack of capital will also

negatively impact the roll-out of new tenant concepts.

Rent renegotiations have become rather commonplace, particularly with struggling

tenants. If a developer has a choice of an empty space, or a reduced rent on an occupied space,

the latter will be the choice. It is critical to developers that their malls remain tenanted, even if

income is reduced.

Across the country, the trend to update old and tired retail shopping centers and malls

continues through creative revitalization and redevelopment. Redevelopment may involve “de-

malling” all or part of an existing mall as well as relocating existing anchors and in-line tenants.

The process is costly and time consuming; the results, however, can yield tremendous benefits

for developers, tenants and ultimately consumers. Numerous legal and business obstacles arise

during the redevelopment process. Legal issues involving rezoning, re-platting and re-

subdividing are commonplace, as well as practical and community issues related to utilities,

signage and overall concerns from neighbors and the local community. In connection with

redevelopment and expansion, at least one developer has used condemnation as a strategy to

acquire premises and lease rights.

Existing owners of retail shopping centers and malls continue with revitalization and

redevelopment in order to attract a stronger customer base as well as ensure that the property

remains financially strong. As part of de-malling, the traditional regional mall consisting of

three to five department store anchors, numerous in-line small shop tenants and a food court, is

changing. Part of the impetus for redevelopment is based upon long-term sustainability and the

need to give consumers what they want.

Redevelopment projects involve various uses such as: movie theaters; big box retailers

as anchors; lifestyle open air mall and strip centers; and mixed-use centers, including offices and

residential uses. Redevelopment projects that involve de-malling require landlords to focus on

four major areas of concern: (1) local community and governmental issues; (2) anchors; (3) in-

line tenant concerns; and (4) financing and lender issues. Within each of these categories,

attention must be given to the appropriate parties and issues in order to ensure a successful

redevelopment. Poor planning and lack of communication can create costly delays.

Existing anchors present unique issues to a landlord when contemplating a

redevelopment project. Recorded reciprocal easement agreements already in place and perhaps

outdated contain specific rights, including no-build areas, that need to be negotiated and

addressed. Land owned by some anchor tenants may need to be re-conveyed in order for the

landlord’s redevelopment project to move forward. Infrastructure issues related to parking,

signage and traffic flow will all need to be addressed with anchor tenants. In most situations,

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existing agreements require anchor consent to alterations or changes to the permitted build areas,

common areas, roads, and other elements. Anchor tenants traditionally carry much more

leverage than in-line tenants, and a landlord must gain the cooperation of the anchors to

successfully redevelop. Anchors often use these situations to obtain benefits and further leverage

with the developer.

As developers and tenants together look for new ways to expand retail and bring

consumers back into the stores, all will be thinking outside of the box. An increased focus on

infill urban development, as well as international expansion, may produce results. Developers

continue to seek international brands for expansion in the U.S.

All must recognize that there are shopping alternatives and habits that will affect

permanently the success of retail real estate. For example, the way companies sell, through the

internet and other direct-to-consumer methods, has affected the success of shopping centers, but

not to the extent once anticipated. However, as more retailers place direct links in their stores,

revenues to landlords may be affected, particularly with regard to percentage rent. Consumers’

need to consume has also impacted center operations – notably with regard to operating hours.

Black Friday, used to start at 9 a.m. on the Friday after Thanksgiving. Some retailers have

pushed that back to 6 a.m., while others now start on Thursday night. Some developers have

attempted to force their specialty tenants to maintain the same vastly extended hours (6 a.m. –

midnight) as the anchors, with questionable success and results. Over the last several years, the

growth in sales of gift cards – both by retailers and the malls – has pushed the Christmas

shopping season well into January, skewing fourth quarter results and reducing retailers’ profits

as gift card recipients wait until January to take advantage of post-holiday pricing.

II. GETTING A RETAIL DEAL DONE

All of these changes have had a substantive, if not at times, dramatic, impact on the

landlord-tenant relationship and the lease. The impacts have not been all one-sided.

Rent

The key struggle in a deal today is the rent. Before now, there was almost an assumption

that rents would increase when a new lease was negotiated. Developers are pushing to keep

rents up, which affects the value of the center and ability to borrow, while tenants maintain that

rents should decrease. Likely, rents in top tier centers will be flat or increase, while rents in less

desirable centers will decrease. Interestingly, tenants with greater financial issues have been and

may going forward be able to achieve lower rents.

CAM and Other Expense Pass-throughs

To ensure predictability of income, developers are converting expense pass-through

charges to fixed fees. In some cases, just CAM charges are fixed, but often the fixed charge is

more inclusive and covers other pass-through expenses such as insurance and marketing.

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Although in-line tenants may be willing to convert to fixed charges, they must have a

certain level of protection. In lieu of the extensive descriptions previously used to outline the

charges included in CAM or other pass-through charges, tenants can protect themselves by

spelling out the landlord obligations related to the common areas and shopping center,

maintenance of certain levels of insurance, and establishment of marketing funds.

Fixed charges benefit both developers and in-line tenants. The most difficult part of the

process is setting the initial number. Developers want to build in a “cushion” to protect

themselves. In-line tenants want to keep the first year amount as low as possible to reflect actual

charges.

Landlords also benefit from fixed charges because it eliminates expensive and time-

consuming audits. However, there is some risk to landlords if there are unexpected expenses,

such as increased security requirements or unforeseen weather events.

Co-tenancy

To protect against the fallout from a changing shopping center, developers are looking for

more flexibility in co-tenancy provisions (i.e., required operations by other tenants). Developers

are attempting to secure the right to replace traditional department stores with other types of

uses. In some cases, developers may wish to redevelop the entire parcel previously occupied by

a department store. Other times, developers are filling some or all of the box with junior anchor

stores, movie theaters, restaurant uses or more in-line space.

In-line tenants are pushing back and attempting to ensure some level of protection in the

changing landscape. Although the transformation of a traditional shopping center into a mixed

use development after the departure of a department store helps to maintain the developer’s

income stream, some traditional in-line tenants are insisting on remedies to protect themselves in

the event the shopping center evolves in a manner which was not anticipated. Shopping center

redevelopment does not always translate into a successful environment for a traditional in-line

tenant dependent on the customer base brought in by the more traditional shopping center

department stores.

Co-tenancy rights are critical for tenants in new centers, but because there are so few

planned now, there is less focus on this point at this time.

Other issues arise in connection with co-tenancy remedies, including types of alternate

rent, duration of alternate rent and termination rights. Attached are sample clauses that address

many of the issues that arise in the co-tenancy context.

Use Clauses, Operating Covenants, Exclusive Clauses and Radius Restrictions

Use clauses, operating covenants, exclusive clauses and radius restrictions have become

increasingly important in lease negotiations. Use clauses set forth the uses that a tenant may

make of the leased premises. Use clauses may also specifically restrict the tenant’s use of the

premises by limiting either the lines of business in which the tenant may engage or the items

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which the tenant may sell from the leased premises. Operating covenants require a tenant to

keep the premises open for business and operating continuously throughout the term of the lease,

usually during certain hours and days. In addition, operating covenants may require the tenant to

operate at specified levels of activity. Exclusive clauses restrict the landlord’s right to lease

other premises in the shopping center by granting the tenant the exclusive right to engage in a

certain line of business or the sale of specific products. Radius restrictions prohibit the tenant

from engaging in a competing line of business within a specified geographical area.

Obviously, use clauses, operating covenants, exclusive clauses, and radius restrictions

serve many purposes for both landlords and tenants. They aid in achieving “ideal” tenant mixes

and increased customer traffic. They may be necessary to attract new tenants, and they may

prevent “dark stores.” All may affect assignment and subletting and all are particularly relevant

in connection with percentage rent leases. Therefore, a brief review of percentage rent is

required.

A percentage lease is one which bases rent, in whole or in part, on sales, profits, income

and receipts derived from the leased premises. Typically, the lease establishes a minimum rental

which must be paid regardless of sales. The lease will also provide that a percentage of gross

sales must be paid on any sales above a specified base or breakpoint. Some percentage leases do

not provide for a minimum base rent, while others provide for a nominal base rent, but most

include a substantial base rent which covers the landlord’s fixed costs.

For use clauses, operating covenants, exclusives and radius restrictions, it is important to

view each lease separately; the type of center and other factors will determine how important

these clauses are in any particular situation.

Careful drafting of these clauses is also important. A change of a word may render these

clauses unenforceable. One must also specifically address enforcement and remedies for breach,

as it may be almost impossible to prove actual damages.

Internet Sales

In calculating gross sales for purposes of percentage rent, tenants and landlords typically

agree to carve out certain non-core business retail transactions that are not based on the sale of a

tenant’s product directly to the in-store consumer. Notwithstanding the amount of internet based

transactions today, typical gross sales exclusions may not adequately address a tenant’s internet

sales (and similarly, but not discussed here, telephone and/or any other method of electronic

order placement and/or acceptance). As retailers expand their platforms to include internet based

selling, tenants should consider carving out internet sales on at least two levels – internet sales

originated outside a tenant’s premises and internet sales originated from within a tenant’s

premises.

A sale over the internet may be placed from a tenant’s web page, whereby the customer is

free, from his or her own computer, to browse inventory and purchase selected products, which

are usually shipped directly from a warehouse (versus a tenant’s store) to the consumer’s home.

A tenant’s lease should clearly exclude these types of internet sales from a tenant’s gross sales

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because there is no nexus between a tenant’s premises-based product sales and the sale that

originated on its web page, and the product is shipped from another location to the customer.

Most landlords and tenants would not dispute this transaction as an exclusion from gross sales.

However, in the event a tenant has installed a computer or other electronic terminal

within its leased premises, landlords and tenants have differing opinions. Including sales from

the in-store computer depends on, among other things, the product offered, physical location of

the product and where the consumer receives the product. From a tenant’s perspective, if a

customer can place an order from an in-store computer for goods not offered for sale from the

premises that are shipped from a remote location directly to the customer, the sale should be

excluded. A tenant may argue the customer is no different than one that merely browses its

inventory without consummating an in-store sale and further that the tenant incurs, at least on an

enterprise wide level, different costs for storage and distribution when the product is not in the

store. Landlords may disagree because the customer is physically standing in the space being

rented.

If, however, a customer can place an order from an in-store computer for goods located at

the premises (either on the floor or in the storeroom) and immediately thereafter receive the

goods within the premises, the sale should legitimately be part of gross sales. In this instance, the

use of the terminal would be akin to a self-checkout at a grocery store and a tenant would be

challenged to assert an exclusion from gross sales.

Tenants and landlords should, however, be aware of potential use and exclusive issues if

the in-store computer is not dedicated to goods permitted or prohibited, as the case may be, in

accordance with use and exclusive clauses. To avoid potential conflict as a result of this issue,

landlords and tenants should work closely to understand the product lines offered in the store and

online.

FUTURE OF SHOPPING CENTERS

Retail real estate will continue to evolve as all parties work to keep shoppers in malls.

Continued developer and department store consolidation is expected. A significant number of

malls are likely to fail within the next five years. No tenant will want to be the last one to turn

out the lights, so co-tenancy and kick-outs will continue to be heavily negotiated. REITs’

continual need to grow Funds From Operations will impact leverage, rent and operations

generally. Developers need to keep shopping interesting and entertaining, as do retailers.

Everyone will need to adjust to technology changes. All we can be certain of is that the future of

malls may be unknown, but not uninteresting.

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EXHIBIT A

Alternate Replacement Provision for Additional Development Flexibility

An Alternative Comparable Replacement Tenant for purposes of this Section ___ shall mean a

comparable retail fashion department store, which offers retail fashion merchandise of a nature,

quality, mixture and quantity currently offered (or expected to be offered) by the Key Tenant it is

replacing (or if not yet open, offered as of the initial opening of such Key Tenant).

Notwithstanding the foregoing, Landlord shall have the right, with respect to only one (1) Key

Tenant, to have an Alternative Comparable Replacement Tenant be deemed to mean one of the

following:

1. An area comprised of “big box” retail tenants, with each “big box” tenant occupying

at least ______ square feet of contiguous space, and with each “big box” tenant

having at least ______ years retailing experience, and each of the caliber found in

other comparable shopping centers;

2. One “national” or “regional” retailer (as those terms are commonly defined in the

retail shopping industry) operating under one (1) trade name;

3. A movie theater with a minimum of ____ screens; or

4. A lifestyle addition to the Shopping Center being occupied by a combination of small

shop “national” or “regional” retail tenants, each with at least five (5) years retailing

experience, and each of the caliber found in other comparable shopping centers, and

including fountains, restaurants, and other public amenities in an integrated and

cohesive cross-shopping experience.

Notwithstanding the foregoing, to qualify as an Alternative Comparable Replacement:

1. The tenant(s) must have entrances accessible to customers in the enclosed Shopping

Center mall area during normal mall hours;

2. The tenant(s) must be open and operating for business from at least ______ percent

(___%) of the gross leasable area previously occupied by the Key Tenant being

replaced; and

3. Such tenant(s) shall not include any of the following:

a. __________________________[prohibited named replacements will vary

depending on the tenant’s type of business];

b. A sporting goods store;

c. An office supply store;

d. An appliance store;

e. An automobile services, sales, or rental facility;

f. A pet store, pet supply store, or pet clinic;

g. A home improvement store; or

h. A store offering as its primary use, the sale of discount merchandise.

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EXHIBIT B

Sample Construction/Possession Co-tenancy Provision

Notwithstanding anything contained in this Lease to the contrary, Tenant shall not be required to

accept Landlord’s delivery of possession of the Premises (nor shall Rent accrue) unless Landlord

has provided Tenant with a written certificate from an authorized officer of Landlord (the

“Certificate of Occupants”), verifying that (a) at least ___________ percent (___%) of the

leasable floor area of the Shopping Center is leased to occupants obligated to be open and

operating for business to the public on or before the Grand Opening Date (as defined in Section

___), and (b) the tenant doing business under the trade name _______, is obligated to be open

and operating its premises for business to the public on or before the Grand Opening Date, and

(c) the tenant doing business under the trade name _________________, is obligated to be open

and operating its premises for business to the public on or before the Grand Opening Date, and

(d) at least seven (7) Preferred Occupants (as defined herein below) are obligated to be open and

operating their respective premises for business to the public on or before the Grand Opening

Date.

A “Preferred Occupant” shall mean any Occupant operating under any of the following trade

names: _________________________________________________.

In the event Landlord fails to provide Tenant with the Certificate of Occupants (as defined

above) on or before ______________ (“Possession Co-Tenancy Sunset Date”), Tenant may

terminate this Lease (“Possession Co-Tenancy Termination Right”), without penalty or

repayment of any portion of the Construction Allowance (as defined in Section____),

immediately upon written notice (“Possession Co-Tenancy Termination Notice”) to Landlord,

which notice must be given, if at all, anytime during the period commencing on the day

following the Possession Co-Tenancy Sunset Date and continuing until the one hundred

twentieth (120th

) day following the Possession Co-Tenancy Sunset Date (provided, however, that

Tenant may not terminate the Lease if Landlord has met the conditions set forth above prior to

the date Tenant elects to terminate the Lease).

In the event Tenant elects to terminate this Lease as set forth hereinabove, Landlord shall, within

thirty (30) days after the date on which Landlord has received the Possession Co-Tenancy

Termination Notice, reimburse Tenant for its actual and reasonable out-of-pocket costs in

connection with Tenant’s legal fees associated with the review and negotiation of this Lease and

Tenant’s architectural design fees associated with Tenant’s preparation of documents, as

liquidated damages.

Notwithstanding anything contained in this Section to the contrary, Tenant’s Possession Co-

Tenancy Termination Right shall be null and void and of no further force and effect in the event

Tenant accepts Landlord’s delivery of possession of the Premises prior to the Possession Co-

Tenancy Sunset Date.

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EXHIBIT C

Sample Co-Tenancy Provision

A. If at any time during the Term either or both of the following shall occur:

(I) Any of the retail fashion department store tenants identified as ___ <trade

name> ____, ____ <trade name> _____, and ____<trade name> ____

(collectively, “Key Tenants”, or singularly, “Key Tenant”), which are

occupying ______ square feet, ___________ square feet, and ______square

feet of floor area respectively in the locations identified on the Site Plan

attached as Exhibit A as being occupied, or to be occupied, by such Key

Tenants (collectively, “Key Tenants’ Premises”, or singularly, “Key Tenant

Premises”), or Comparable Replacement Tenants of such Key Tenant or Key

Tenants, as defined below, shall fail to be open for business to the public

within at least ninety five percent (95%) of the floor area of the Key Tenants’

Premises; and/or

(II) At least [number] (##) of the following specialty retailer co-tenants; ___<trade

name> ____, ____ <trade name> ____, and <trade name> ____ (each,

“Specialty Retail Tenant”, or collectively, “Specialty Retail Tenants”); which

are occupying premises in the location identified on the Site Plan attached as

Exhibit A (each “Specialty Retail Tenant Premises”, or collectively,

“Specialty Retail Tenants Premises”), or Comparable Specialty Retail

Tenants, as defined below, fail to be open for business to the public in at least

ninety-five (95%) of the floor area of the respective Special Retail Tenant

Premises; and/or

(III) Less than (a) eighty percent (80%) of the gross leasable floor area of the

[enclosed mall of the Shopping Center] [the retail improvements] shown on

the Site Plan, which gross leasable floor area of the Shopping Center shall in

no event be less than _____ square feet of gross leasable floor area; and/or

less than (b) eighty-five (85%) of the gross leasable floor area of Level ____

of the Shopping Center shown on the Site Plan, which gross leasable floor

area of Level ____ shall in no event be less than ____ square feet of gross

leasable floor area, (which calculations of gross leasable floor area in clauses

(a) and (b) shall exclude the floor area of the Key Tenants’ Premises to the

extent that it is open for business), is occupied by Permanent Retail Tenants

(as defined below) which are open for business to the public;

(the requirements set forth in clauses (I), (II) and (III) of this paragraph (A)

being hereinafter referred to as the “Co-Tenancy Requirements” or

individually as a “Co-Tenancy Requirement”), then in the event of a violation

of any one or more of the Co-Tenancy Requirements:

(i) If Tenant has not yet opened for business in the Demised

Premises, Tenant shall not be required to open for business in the

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Demised Premises, and the Commencement Date shall not occur

until such time as the Co-Tenancy Requirements have been fully

satisfied; and

(ii) If Tenant has opened or elects to open for business in the

Demised Premises, Tenant’s obligation to pay Minimum Rent,

Percentage Rent, Additional Rent and all other charges

(collectively, “Rent”) shall abate (effective retroactively to the

first day of such violation), and Tenant shall pay a reduced

monthly gross rent equal to the lesser of: (i) ____ percent (___%)

of Gross Sales, or (ii) ____ percent (___%) of the monthly

installment of Minimum Rent, such amount to be paid monthly

in arrears on or before the thirtieth (30th

) of each month; and

(iii) If any such failure continues for more than ninety (90) days,

Tenant shall have the right, at any time thereafter, to terminate

this Lease by notice to Landlord (“Tenant’s Termination

Notice”), which right shall continue until Landlord remedies the

failure of the applicable Co-Tenancy Requirement. In the event

Tenant exercises its right to terminate under this paragraph, this

Lease shall terminate effective upon the date specified in

Tenant’s Termination Notice (regardless of whether the failure is

cured following the date Tenant gives such notice) with the same

effect as if such date was the scheduled expiration date of this

Lease; and

(iv) If any violation of any Co-Tenancy Requirement or Co-Tenancy

Requirements continue for more than ninety (90) days, Tenant

shall have the right, at any time thereafter, to discontinue its

operations in the Premises for such periods and from time to

time, as Tenant, in its sole discretion, may determine, in which

case Tenant’s monthly gross rent, in lieu of Rent shall be equal to

____ percent (___%) of the monthly installment of Minimum

Rent.

B. For purposes of this Lease, the phrase “Comparable Replacement Tenant” shall mean

a Permanent Retail Tenant (as defined below) which is reasonably acceptable to

Tenant and currently defined in the retail industry as a retail fashion department store,

which has a regional or national reputation, which offers retail fashion merchandise

of a nature, quality, mixture and quantity and with a retail service level currently

offered by the Key Tenants as of the date hereof (or upon such Key Tenants’ initial

opening for business fully stocked if not yet open as of the date of this Lease) and

which shall in no event include without limitation any bookstores, furniture stores,

toy stores, pet supply stores, sporting goods stores, hardware stores, home

improvement stores, drug stores, grocery stores, supermarkets, theaters, cinemas,

warehouse clubs, clearance, discount or wholesale price stores, or any so-called

“value” retail stores (which would include, without limitation, Kohl’s, Target, Wal-

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Mart and K-Mart). To qualify as a Comparable Replacement Tenant under this

paragraph, such tenant shall operate within at least ninety-five percent (95%) of the

floor area of the Key Tenant Premises occupied by such Key Tenant being replaced.

C. For the purposes of this Lease, the phrase “Comparable Specialty Retail Tenant”

means a Permanent Retail Tenant reasonably acceptable to Tenant which has a

regional or national reputation and which is currently defined as a specialty fashion

retailer within the retail industry and which shall offer fashion merchandise with price

points, product quality, mixture and quantity, and a retail service level currently

offered by any one of the Specialty Retail Tenants. To qualify as a Comparable

Specialty Retail Tenant under this paragraph, such tenant shall operate within at least

ninety-five percent (95%) of the floor area of the Specialty Retail Tenant Premises

occupied by such Specialty Retail Tenant being replaced.

D. For the purposes of this Lease, the phrase “Permanent Retail Tenants”, or singularly

“Permanent Retail Tenant”, shall mean Retail Tenant(s) (as hereinafter defined), other

than Tenant and affiliates of Tenant, occupying space in the Shopping Center that has

been professionally designed and fixtured, and operating in a first class manner under

a lease with a fixed term of a continuous period of at least three (3) years in duration

without any discretionary termination right (including without limitation any so-

called “kickout” right), other than such termination rights arising solely from co-

tenancy, casualty, condemnation, and Landlord’s default, which would allow such

Retail Tenant or Landlord to terminate or cancel its lease within such three (3) year

period. Permanent Retail Tenants shall not include any tenants or occupants of

kiosks, pushcarts, or other selling areas in the Common Areas, seasonal or fad

tenants, or occupants under any license or similar agreement. For the purposes of this

Lease, the phrase “Retail Tenants”, or singularly “Retail Tenant”, shall mean

tenant(s) operating for the primary purpose of the sale of merchandise at retail and

which shall not include, by way of example, without limitation, any cinema, theater,

restaurant, beauty salon, office, library or arcade.

[ALT] Key Tenant Closing Due To Casualty, Etc.

In the event that any Key Tenant, or Comparable Replacement Tenant, is closed for

business as a result of casualty, condemnation, or events of force majeure, such event

shall not constitute a violation of the applicable Co-Tenancy Requirement, provided

that such Key Tenant or Comparable Replacement Tenant is at all times diligently

pursuing reopening for business and provided further that in no event shall such Key

Tenant or Comparable Replacement Tenant be closed for business for a period that

exceeds one hundred eighty (180) days, in which event such closure shall be deemed

a violation of the applicable Co-Tenancy Requirement retroactive to the date of such

casualty, condemnation or force majeure event.

[ALT] Landlord’s Right To Demand Full Rent

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In the event that Tenant shall have paid monthly gross rent in lieu of Rent as a result

of a violation of the Co-Tenancy Requirement or Co-Tenancy Requirements for a

period of one (1) year or more, Landlord may make written demand upon Tenant to

resume paying full Rent, and if Tenant fails to terminate this Lease as provided in this

Section ____ within sixty (60) days after receipt of such written demand from

Landlord, Tenant shall be deemed to have waived its right to terminate pursuant to

this Section ___ for such violation of the applicable Co-Tenancy Requirement(s), and

Tenant shall thereafter resume paying full Rent under this Lease effective as of the

sixty-first (61st) day following the date of Landlord’s written demand.

[ALT] Landlord’s Right to Nullify Termination

Notwithstanding the foregoing, with respect to the Co-Tenancy Requirement relating

to Key Tenants, if within seven (7) days of Landlord’s receipt of Tenant’s

Termination Notice, Landlord shall provide Tenant with written notice (“Landlord’s

Replacement Notice”) and evidence satisfactory to Tenant that Landlord has entered

into binding written lease agreement(s), with a Comparable Replacement Tenant

sufficient and likely to bring the Shopping Center into compliance with the applicable

Co-Tenancy Requirement within three (3) months of the date of Tenant’s

Termination Notice, then Tenant’s termination shall not be effective for a period of

three (3) months from the date of Tenant’s Termination Notice (the “Replacement

Period”), while Landlord diligently pursues the build-out of the space to be occupied

by such Comparable Replacement Tenant. If prior to the expiration of the

Replacement Period the identified Comparable Replacement Tenant has opened for

business, and the Shopping Center is thereby in compliance with the Co-Tenancy

Requirements, then Tenant’s Termination Notice shall be vitiated and rendered null

and void ab initio. However, if upon the expiration of the Replacement Period the

identified Comparable Replacement Tenant has not opened for business, then

Tenant’s Termination Notice shall be fully effective as of the termination date

specified therein, all as if the provisions providing for the Replacement Period had

not been included in this Lease.

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EXHIBIT D

Sales D Sales Test

Operating Co-Tenancy: If during the Term, (a)(i) less than 70% of the gross leasable area

in the Shopping Center (including Tenant and any parent, subsidiary or affiliated companies of

Tenant and excluding the gross leasable area of all anchors and outparcels) is occupied by

tenants that are open and operating for business or (ii) less than * [TYPICALLY A NUMBER

THAT IS ONE LESS THAN EXISTING NUMBER OF ANCHORS] anchors or their Suitable

Replacement(s) (as defined below) are open and operating for business in the Shopping Center

((i) and (ii) collectively, the “Occupancy Failure”) and such Occupancy Failure continues for 12

consecutive months, and (c) if Tenant's Net Sales for the 12 consecutive month period from the

date such Occupancy Failure commences decrease by more than 10% as compared to Tenant's

Net Sales from the immediately preceding 12 month period (the "Sales Measuring Period") ((a),

(b) and (c) all collectively the "Operating Failure") then, provided Tenant is not in default under

the Lease beyond any applicable cure periods and is open and operating in the Leased Premises

in a manner that is at least equivalent to the operations in the Leased Premises prior to the

Occupancy Failure, Tenant shall have the right beginning on the first day of the 13th month after

the Occupancy Failure to pay to Landlord (notwithstanding anything to the contrary contained in

ARTICLE ____), in lieu of Minimum Annual Rental, Percentage Rental and all additional rental,

an amount equal to 5% of Net Sales (as defined in ARTICLE ____) not to exceed Minimum

Annual Rental and Percentage Rental otherwise payable for each and every month (hereinafter

“Substitute Rent”), payable monthly, in arrears, within 20 days following the end of each

calendar month. Tenant agrees to give Landlord written notice of Tenant’s intention to exercise

this remedy. In addition, if, within 18 months following the date on which an Operating Failure

shall have occurred, such Operating Failure shall not have been cured, Tenant shall have the

right, prior to the remedying by Landlord of the Operating Failure, to terminate this Lease by

written notice sent to Landlord and, upon a date which shall be at least 60 days following the

date of the notice, this Lease shall cease and terminate; provided, however, that if the Operating

Failure shall be an Operating Failure described in clause (ii) of this Section ___ and if, within the

18 month period during which such Operating Failure shall be continuing, Landlord shall send

Tenant a notice (the “Vitiating Notice”) that the Suitable Replacement, the information of which

shall be specified in the Vitiating Notice, shall open for the conduct of business, then any notice

sent by Tenant on account of the Operating Failure shall be void and of no force and effect, and

this Lease shall continue upon all of its terms and conditions; provided further, however, that if

the Suitable Replacement shall not open for the conduct of business within 6 months following

the date of Landlord’s Vitiating Notice, Tenant shall have the right, to cancel and terminate this

Lease by written notice sent to Landlord and, on the date which shall be at least 60 days

following the date of that notice, this Lease shall cease and terminate. In the event Tenant has

not sent the notice of its intent to terminate within 60 days after the end of the 18 month period,

then Tenant’s right to pay Substitute Rent shall cease and Tenant shall resume paying all

Minimum Annual Rental and Percentage Rental and all other rents under the Lease as if this

Section ____ was not in place.

A “Suitable Replacement” shall be any of the following: (a) another anchor; or (b) a

tenant or combination of tenants that occupy an aggregate area of at least 50% of the square

footage of the former anchor. Notwithstanding the foregoing provisions, if Tenant opens for

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business on the date required in Section ____, but subsequently fails to continuously operate in

the Leased Premises, and the Operating Failure has not been fulfilled, then notwithstanding the

foregoing provisions, the payment of Minimum Annual Rental, Percentage Rental and additional

rental shall start on the date Tenant ceases to continuously operate its business in the Leased

Premises and Tenant shall not have the right to terminate the Lease. If however, the foregoing

conditions have not been met on the date Tenant resumes to continuously operate its business in

the Leased Premises, the Minimum Annual Rental, Percentage Rental and additional rental shall

be abated as indicated above until the conditions are met, and Tenant shall regain the right to

terminate this Lease.

15

EXIT AND RESTRUCTURING STRATEGIES FOR RETAIL DEALS

By: Ann Peldo Cargile

I. INTRODUCTION

Entering into a retail deal, regardless of whether it involves a lease, ground lease or pad sale,

takes optimism. Each party enters into a new venture that it fully expects will be a mutual

success. Unfortunately, the success of a retail enterprise relies in large part on the discretionary

income of often fickle customers. The hottest concept one year may be old news the next

season. Thus, the positive expectations that abound at the front end of a retail deal must be

tempered with a certain degree of cynicism. Both sides need to craft exit tools, if the retail

operation does not succeed. This article will address options for restructuring or, if need be,

exiting a retail relationship. The discussion will focus primarily on leasing, but will also touch

on arrangements where a retailer owns a pad that is part of a larger development.

II. FRONT END PROTECTIONS

The logical time to structure exit strategies occurs during initial negotiations. Generally, a

landlord's lease form contains all the bells and whistles the landlord needs to enforce the lease,

but the tenant must expressly insist on provisions protecting its down side. Correspondingly,

many national retailers have form leases and reciprocal easements agreements ("REAs") that

protect their interests, but do not offer the landlord or owner of the development viable options if

the retailer experiences a downturn. The next section of this article discusses several common

front end protections the parties may discuss.

A. Co-tenancy

A sophisticated tenant will look for assurances that the landlord will lease and operate the

center as represented, both as a condition to the tenant opening for business and to the tenant

paying fixed rent throughout the lease term. The tenant will want a requisite number of the

proposed anchor tenants, which are the main draw to the center, to open. The tenant will also

want the balance of the center to thrive, with a minimum percentage of the small tenants open to

coax customers to stay and shop. If the center does not satisfy either of these tests, the tenant

will initially want relief on its rent, and eventually the right to terminate the lease.

Co-tenancy provisions pose a significant risk for the landlord. The landlord cannot guarantee

that any given tenant will remain in business. Even if a lease requires the tenant to remain open

and operate for business, as a practical matter, courts have routinely refused to grant landlords

the remedy of specific performance for such an obligation, on the grounds that the court cannot

reasonably monitor an ongoing business operation. Co-tenancy provisions can have a domino

effect, where one store closing may trigger rent concessions or termination rights in a number of

other leases. Thus, a wise landlord will negotiate for time to resolve a co-tenancy violation

before tenant remedies come into play. The landlord will also want to tie the tenant's remedies to

damages the tenant has actually suffered because of the co-tenancy violation. For instance, there

may be a co-tenancy violation in the center that does not materially impair the tenant's sales. If

the lease gives the tenant the unfettered right to pay reduced rent, the tenant may happily operate

for years paying a fraction of its normal rent. This devalues the center and impairs the landlord's

ability to refinance or sell it. Further, if the tenant has an ongoing termination right because of a

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co-tenancy violation, no lender or purchaser will allow any credit for that lease in valuing the

center. Therefore, all co-tenancy remedies need to expire at some point. Either the tenant must

terminate the lease or go back to full rent. A common structure for a co-tenancy provision would

therefore look something like the following:

1. Landlord has months after notice from the tenant to remedy the violation

(the "Cure Period").

2. If the violation is not remedied within the Cure Period, the tenant thereafter pays

percentage rent in lieu of fixed rent [and expense pass-throughs].

3. If the co-tenancy violation continues for months (the "Cure Deadline"), the

tenant thereafter has the right to terminate the lease upon months' notice to the

landlord.

4. If the tenant ceases doing business in the center at any time prior to the Cure

Deadline, the tenant's remedies go away and full rent resumes.

5. If the co-tenancy violation continues for months (the "Tenant

Remedy Deadline"), the tenant must either terminate the lease or waive its

termination right and return to full rent.

B. Gross Sales Thresholds

Sometimes a tenant will have doubts as to whether a location will generate enough sales to

justify long term operation. In that instance, the tenant may ask the landlord for a right to

terminate the lease if its gross sales do not exceed a certain threshold. This presents several

issues for the landlord. First, the landlord will need the tenant to commit to operate in the center

long enough to attempt to grow a customer base. Second, underwriters will value the lease as if

the termination right will be exercised. Last, the landlord may find itself out of pocket for

leasing commissions, tenant improvement allowances and legal costs if the tenant terminates the

lease. The landlord can protect against loss of expenses by providing that the termination option

can only be exercised if the tenant reimburses the landlord for unamortized costs associated with

the lease. A smart landlord will also ask for advance notice of termination, in order for it to have

time to find another tenant. The landlord must also tie a termination option based on gross sales

to a continuous operations clause. If the tenant goes dark, its sale will obviously drop, so the

termination option needs to be contingent upon the tenant operating its business at full capacity.

Thus, a termination right based on gross sales will often have the following features:

1. The tenant must operate for business at least years, fully staffed, stocked

and fixtured (the "Test Period").

2. The tenant must report its gross sales to the landlord promptly during the Test

Period.

3. The tenant must give the landlord at least months' prior notice of its

election to terminate the lease.

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4. The tenant must elect to terminate the lease within days following the

Test Period or the termination option is waived.

5. The tenant must pay the landlord's costs associated with the lease, amortized over

the initial lease term [at the time the Tenant exercises the termination option].

C. Pre-negotiated Termination Options

If a tenant has a high level of insecurity on the front end, it may ask for a simple termination

option after an initial operating period, regardless of its gross sales. In such a case, aside from

gross sales reporting, the landlord will have the same concerns as for a termination option based

on gross sales, and the option will include items 3, 4 and 5 in Section B, above.

D. Landlord Solvency Concerns

Most discussions of exit strategies focus on problem tenants, but, especially in the current

environment where lenders are taking back properties, a tenant which is making a significant

investment in its space will want assurances that the lender will not terminate the lease if it

forecloses on the center. Generally speaking a lender will consent to a non-disturbance

agreement at the outset of a lease, if the tenant likewise agrees to recognize (and attorn to) the

lender as its landlord following a foreclosure. However, the tenant will not want to pay a

foreclosing lender rent if the tenant has not received allowances the landlord has promised. At

minimum, a tenant should ask for an offset right in its lease, allowing it to recover unpaid

allowances before it must pay rent. If the allowance is significant and the tenant cannot or does

not want to recoup its costs from the rent over time, the tenant may want the lender to agree to

fund any unpaid allowances if it forecloses. This may present a significant issue for the lender,

because it is one thing for the lender to receive reduced cash flow from the property, and

something else entirely for the lender to invest additional sums after foreclosure. The resolution

in this instance will likely be for the lender to require the landlord/borrower to escrow sufficient

money to fund the improvement allowance as a condition of the lender approving the lease.

These issues should all be sorted out in a subordination, non-disturbance and attornment

agreement between the lender and the tenant, which may have the following provisions:

1. Lender agrees not to disturb the tenant's possession of the premises as long as the

tenant is not in default.

2. Tenant agrees to attorn to the lender after foreclosure.

3. Lender agrees the tenant will have offset rights for unpaid allowances.

4. After foreclosure the lender will fund any unpaid allowance [If and only if the

landlord escrows the allowance with the lender pursuant to a separate

agreement].

The tenant may want additional protections from the landlord that allowances will be paid in a

timely fashion, even if the lender does not take over the property. Possible forms collateral

include a parent guaranty, if the landlord is a single asset subsidiary, or a letter of credit. The

tenant may also require that the landlord fund a build-out allowance aggressively, posting

payment with the tenant before work is done so that the tenant need never come out of pocket for

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construction costs. Of course, this last option has its down side from the landlord's perspective,

because if the tenant does not manage construction well or does not apply the money as

anticipated, the landlord could find itself out of pocket for an allowance to a tenant that never

opens in the center. Placing the allowance in escrow with a third party, such as a title company,

may provide a suitable compromise.

III. OPTIONS AFTER THE RETAILER IS IN TROUBLE

A. Overview

Although a party may try to craft exit options on the front end of the deal, this may not be

feasible for a number of reasons. First, an early termination right may prevent a landlord from

using a lease to finance construction. A ten year lease with a termination right after three years

constitutes a three year lease in the mind of a lender. Further, a retailer simply may not have

enough bargaining power to obtain a termination right. Anchor tenant deals are often breakeven

for landlords and developers, who make most of their money on the small shop spaces. The

unfortunate truth is that the small operator, who can least afford a downturn, often gets few or no

exit rights at the time it executes its lease or buys its parcel. Small operators gain their leverage

when the other side perceives that the business has a strong likelihood of failing if the parties do

not restructure the deal.

When a tenant's business starts to struggle, the tenant must address whether its exit strategy

consists of paying what is necessary to terminate the lease, or whether it can recast the economic

terms of the lease so it can survive until the lease expires. Often a solvent national tenant that

has successful stores elsewhere is worse off in negotiating an exit with the landlord than a "Mom

and Pop" store than has no other assets. For a national chain, the landlord may insist on a check,

while for a single store operator, the landlord may accept a more creative solution. Only then

should the parties move forward.

Every restructure should begin with an assessment of not only the economics of the deal, but

also what may be missing. As a preliminary matter, any party that is considering granting a

concession should require the other party to deliver an estoppel certifying that it has no claims,

offset rights or defenses to performance. If a guaranty exists, the guarantor should also confirm

that the guaranty remains in effect without defenses. If there are other gaps in documentation,

such as missing exhibits or commencement agreements, these should be plugged as well.

B. Sales, Subleasing and Assignment

1. The Retailer's Perspective

Finding another party to take over the space, by sale, assignment or sublease, presents the most

obvious means of reducing the retailer's exposure. The average landlord lease form will permit

some type of subleasing with landlord consent, and the laws of many states require landlords to

act reasonably in granting such consent. Most REAs do not prohibit the transfer of the retailer's

fee interest. However, the retailer will need to examine the documents, not only for the

provisions that expressly deal with sale, assignment and subleasing, but also for more subtle

ways a landlord or center operator can obstruct a transfer of the space. For instance, a narrow

permitted use clause can block a new operation. The original retailer's business may have failed

because of an unsuitable location. In this instance, another, similar use will not make the

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location a success. Thus, a restrictive uses clause may preclude any realistic exit opportunity for

the retailer. Further, provisions that require the retailer to operate under a particular tradename

will preclude transfer of the space unless the tenant has sold its business. Lastly, provisions

giving the landlord or center operator control over exterior signage and alterations to the space

may also obstruct a potential change in use.

2. What a Replacement Retailer May Need

Aside from the control provisions discussed above, other factors may make a site unappealing

to a replacement retailer. For instance, a lease may provide that renewal options are personal to

the initial tenant. This may make the lease unmarketable to a new tenant that needs a certain

minimum guaranteed term to amortize its front end costs in taking over the location. Other

provisions may require the tenant to submit financial statements and gross sales reports to the

landlord on a regular basis, which may not jive with the new tenant's accounting practices.

Finally, if the new tenant intends to invest in significant improvements, it may need the lender to

commit that the new tenant will not be disturbed in the event the lender forecloses on the

shopping center. Similarly, if the new user is a subtenant, it may need the landlord to commit to

continue the subtenant's occupancy of the premises if the original tenant defaults under the prime

lease. If a new retailer is taking over a pad site, it may want assurances from the center operator

as to what sums it must contribute under the REA and whether payments are current.

3. What the Landlord Needs

When a tenant requests landlord approval for a lease transfer, the landlord should review the

lease to determine whether the tenant must provide documentation regarding the proposed user

and whether there are time limits for the landlord’s review. If the lease does not specify what

information the tenant must supply, at minimum landlord should request the name, address and

organizational documents for the proposed subtenant (such as a certificate of good standing from

the state where it is organized), certified financial information for the new tenant and its

principals and a copy of the proposed sublease or assignment document. Other areas where the

landlord may have concerns include the following:

a. Is the new tenant of a character or reputation or engaged in a business

consistent with the shopping center?

b. Would the new use result in a reduction of gross sales or customer traffic?

c. Is the new user a government agency or instrumentality where the landlord

might have additional regulatory compliance issues or which would not be

consistent with a high end center?

d. Would the use result in significant increases in the use of the parking areas

or common areas by employees or visitors?

e. Is the use consistent with landlord’s desired tenant mix?

f. Does the new operator have enough experienced to ensure the success of

the new operation?

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g. Would the new use cause a violation of another lease or give another

tenant the right to cancel its lease?

h. Has the new user negotiated with the landlord to lease other vacant space

in the shopping center?

Not every proposed tenant will produce a positive set of responses for the criteria set forth

above, but a landlord may feel stuck in a situation where continuing a monthly rent source is the

only “win.” If the new tenant is not ideal, the landlord might consider improving its position

under the lease. For any sacrifice that a landlord makes, it should consider renegotiating

provisions such as co-tenancy requirements, exclusives, purchase options, expansion options,

rights of first refusal, and other restrictions on leasing to potential tenants. A tenant might be

willing to sacrifice these items in exchange for the reducing its economic exposure on the lease.

C. Rent Concessions

1. Reduced Fixed Rent

Many tenants in distress will come to the landlord and ask for a simple rent reduction. In

assessing such a request, the landlord will need to consider a number of factors, which include

the following:

a. How long will the concession last?

b. Will the tenant be obligated to repay it through higher rent later in the

lease?

c. What if the tenant defaults, should the concession end?

d. Can the landlord recover the concession if the tenant defaults? (This may

be difficult if the tenant bankrupts, but it may be possible to secure this

duty with a guaranty from another party.)

e. Can the landlord lease the space for higher rent? (If so, the landlord may

want a termination option if it finds another tenant at some point.)

f. Is the reduction personal to the tenant or would an assignee or subtenant

have the benefit? (At minimum, the tenant should not be able to sublease

the premises for more than the reduced rent without the profit first going

to repay the concession to the landlord.)

2. Percentage Rent

If a retailer cannot find another user, it may be more economical for the retailer to shutter its

space than to operate its business at that location. As discussed earlier, this can create problems

for a landlord that has co-tenancy requirements in other leases. If the landlord faces the

possibility that another tenant will terminate its lease or pay reduced rent because of low

occupancy in the center, a distressed tenant may be able to convince the landlord that a rent

concession provides a viable means of keeping not only the tenant, but also the center, afloat.

21

Percentage rent, based on the gross sales from the location, often provides a good alternative

either in combination with a reduction in fixed rent or in lieu of fixed rent entirely. Of course,

the landlord should connect any agreement to accept percentage rent in lieu of fixed rent to an

operating covenant. If the tenant were to close its business, the fixed rent must resume.

D. Lease Buyout

If the tenant is not strapped for cash, but its business suffers at a particular location, the tenant

may be able to offer the landlord a lease buyout. The actual dollar figure will depend on a

number of factors, including how long it will take the landlord to find another tenant, the cost of

retrofitting the space for a new tenant, brokerage commissions, and how much time remains on

the lease. Generally speaking, the later the buyout occurs in the lease term, the lower it will be,

since the landlord will have recovered most of its front end lease costs through receipt of rent.

E. Giving the Landlord a "Hunting License"

If all else fails, one simple way of encouraging the landlord to relet the premises is to give the

Landlord a "hunting license," that allows the landlord to terminate the lease in the event it finds

another tenant to take the space. The hunting license provides the landlord assurance that, if it

spends the time and effort to relet the premises, the original tenant will not hold the space

hostage for concessions later on. A form for such an agreement is attached as Exhibit A

IV. DO NOT FORGET THE LENDER

Parties often forget that the lender usually has the biggest economic investment in a retail

center. In most workout discussions, determining whether the lender must approve the deal

comes only as an afterthought. The landlord will want to ensure that any deal its strikes with the

tenant will not imperil its position with its lender. For instance, the landlord cannot agree to a

rent concession that would put it in default of a covenant relating to the debt service coverage or

requiring lender consent for lease modifications. Further, the lender might extract concessions

for approving a lease restructure. The lender might require the landlord to post reserves for debt

service, tenant improvements and leasing commissions. Such reserves can impair the landlord's

cash flow well beyond any rent concession requested by the tenant. Also, if the property is a

phased development, a construction lender might refuse to release funds for construction of later

phases when existing phases are not meeting pro forma projections. Thus, at the outset of any

workout discussion, the landlord should read its loan documents and visit with its lender.

V. CONCERNS WHERE THE RETAILER OWNS ITS PAD

Retail centers often combine property owned and leased by a developer and outparcels or pads

owned by the retailer. Usually such arrangements include an REA that requires each party to

perform certain obligations. The retailer will often contribute some amount toward the overall

maintenance of the parking and other common areas serving the center. If either the retailer or

the landlord gets into financial difficulty, the overall quality of the center may decline. Thus, a

well written REA will protect against this eventuality by giving the parties self-help rights to

perform obligations and collect the sums expended from a non-performing party. Often, this will

include the right to lien the property of the non-performing party for unpaid sums. An

exceptionally strong retailer or developer might even require that this lien primes the lien of any

22

lender on the non-performing party's parcel, so that the lender will ensure its borrower pays these

sums.

The operator of the center might also worry that a derelict outparcel will impair the rest of the

center. Thus, in addition to having the right to maintain that parcel if the retailer fails to do so,

the center operator may want the option to repurchase the retailer's parcel if it closes its business.

The calculation of the purchase price will have a number of permutations, including whether the

retailer has constructed improvements, how long it has had to amortize the cost and whether the

improvements have any residual market value.

VI. CONCLUSION

In the current economic environment, retail restructurings have become commonplace. The

threshold question for any retail deal is what happens if things do not go as planned. Ideally, the

parties should address these concerns when they enter into the deal. However, the parties may

still have options for restructuring that make sense if the deal gets into trouble down the road. In

any event, to formulate the best solution, each party needs to make a concerted effort to

understand the concerns and drivers for the other side. If the parties can salvage the deal, or at

least provide a temporary respite until things turn around, they both will benefit.

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EXHIBIT A

TERMINATION OPTION

THIS OPTION AGREEMENT is made as of the _____ day of _________, 20___, by and

between , a ____________________ (the “Landlord”) and

, a __________________________ (the “Tenant”).

W I T N E S S E T H:

WHEREAS, by that certain lease agreement dated

(the “Lease”), Landlord leased to Tenant certain premises known as

(the “Premises”); and

WHEREAS, Tenant desires to terminate its Lease, and Landlord has agreed to do so if

Landlord locates a replacement tenant for the Premises upon terms and conditions acceptable to

Landlord; and

WHEREAS, the parties have agreed that in the event Landlord negotiates a lease of the

Premises with a replacement tenant, Landlord shall have the right to terminate the Lease;

NOW, THEREFORE, in consideration of One Dollar ($1.00) and the premises and the mutual

covenants herein contained, the receipt and sufficiency of which are hereby acknowledged, the

parties hereto agree as follows:

1. In the event Landlord negotiates a lease of the Premises with a replacement tenant

upon terms and conditions satisfactory to Landlord in its sole discretion (the “New Lease”),

Landlord shall have the right to terminate this Lease effective as of the commencement date of

the New Lease (the “Termination Date”). If Landlord makes such election, Tenant agrees that it

shall surrender possession of the Premises to Landlord in the condition required under the Lease,

effective as of the Termination Date.

2. In consideration for Landlord’s agreement to terminate the Lease as provided

herein, within ten (10) days following receipt of the Termination Notice; Tenant shall pay

Landlord (the "Termination Fee"):

a. A fee in the amount of and No/100 Dollars ($

).

b. All rent and additional rent that would otherwise have come due under the Lease

for following the Termination Date.

c. All commissions paid by Landlord in connection with the New Lease.

d. All attorney's fees incurred by Landlord in connection with this Agreement and

any new lease.

Further, Tenant shall pay all Minimum Rent and Additional Rent when due under the Lease

through the Termination Date.

24

3. If Landlord terminates the Lease pursuant to this Agreement, and Tenant fails to

pay the Termination Fee as and when required by this Agreement, the provisions of the Lease

governing monetary defaults shall be applicable, and Landlord shall be entitled to all remedies to

which it may be entitled at law, in equity, and under the Lease for such default. In no event shall

Tenant be entitled to regain possession of the Premises after the Termination Date. Tenant

acknowledges that Landlord has entered or will enter into a lease of the Premises to another

tenant contingent upon Tenant’s execution of and performance under this Agreement. Tenant

shall indemnify and hold Landlord harmless from and against any and all loss, liability, damages,

claims and expenses, including but not limited to reasonable attorneys’ fees, that Landlord may

suffer on account of Tenant’s breach of this Agreement.

4. Landlord hereby agrees that, if Landlord exercises its termination right, Tenant

shall be released from all obligations and liabilities of the Tenant to be performed under the

Lease from and after the Termination Date, excluding (a) the obligation to pay the Termination

Fee; (b) any indemnity obligations of Tenant under the Lease; and (c) any other obligations that

expressly survive the termination or expiration of the Lease.

5. Tenant hereby agrees that, if Landlord exercises its termination right, Landlord

shall be and is hereby released from all obligations, duties and liabilities of Landlord to be

performed under the Lease from and after the Termination Date.

6. Nothing herein shall be deemed to obligate Landlord to enter into a lease with a

replacement tenant, nor to use efforts to lease the Premises prior to leasing other vacant space in

the building in which the Premises are located, and Landlord shall have no liability whatsoever

to Tenant if Landlord, in its sole discretion, elects not to enter into such lease.

7. Tenant hereby certifies to Landlord the following:

a. The Lease is in full force and effect, has not been modified, amended or

supplemented in any way except as may be set forth above. The Lease constitutes

the entire agreement between Landlord and Tenant. No other agreement exists

between Tenant and any other party with respect to leasing, possession or

ownership of the Premises.

b. Tenant has not assigned the Lease, sublet all or any portion of the Premises or

otherwise transferred or pledged any interest in the Lease or the Premises.

c. Landlord has complied with all terms, conditions and provisions of the Lease to

be complied with by Landlord and no event has occurred and no circumstance

exists that would, with the passage of time or the giving of notice, or both,

constitute a default by Landlord under the Lease. There is no existing basis for

Tenant to cancel the Lease or to exercise any other remedy available to it by

virtue of a default by Landlord.

d. There are no charges, liens, defenses, offsets, claims or credits known or asserted

by Tenant against the payment of rent or other charges, or the performance of

Tenant’s obligations under the Lease.

25

8. This Agreement shall be binding upon and inure to the benefit of the parties

hereto, their successors and assigns.

IN WITNESS WHEREOF, the parties have executed this Termination Option as of the

day and year first above written.

LANDLORD:

By:

Title:

TENANT:

By:

Title:

26

ACKNOWLEDGEMENT OF GUARANTOR

The undersigned Guarantor hereby approves the foregoing instrument. The undersigned

acknowledges and agrees that (a) its lease guaranty dated _________________ (the "Guaranty")

remains in full force and effect, without any defense to the performance of Guarantor’s

obligations thereunder; and (b) payment of the Termination Fee is part of the guaranteed

obligations under the Guaranty.

GUARANTOR:

By:

Printed Name:

Title:

Date:

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THE CHALLENGES FACING MIXED USE RETAIL

– AN ANALYSIS OF ATLANTIC STATION –

By: Abe Schear

The various issues which need to be addressed in today’s retail lease have become far

more complicated than even a decade ago. In the traditional mall environment, the deal varied

only slightly and the issues were predictable. We understood the parameters and we understood

which tenants would likely be in which projects.

In today’s environment, with a new variety of “department stores” and fashion tenants,

which might include the likes of Costco or Target, the process has more variables. Dealing with

any mixed use project which includes retail exaggerates the possibilities.

The now five year old project, Atlantic Station, serves as a useful guide to what might be

addressed in a mixed use lease. Atlantic Station is a somewhat iconic property located near

downtown Atlanta. This project was developed on an abandoned steel mill and comprises over

130 acres. With the help of both the state and the federal government, a “No Action Letter” was

obtained in order to develop the project, sealing in historic environmental issues that could not be

economically remediated. The project was divided into various components and parcels,

including an IKEA parcel, condominium and apartment parcels, a Target parcel, multiple office

and/or residential high-rise parcels and a core mixed use parcel (actually parcels). As a caveat,

having negotiated most of the retail leases on behalf of the Landlord, it was somewhat mind

boggling how little each tenant negotiator knew about the property, how infrequently they

requested appropriate site plans or project definition information and, candidly, how

ineffectively many lease clauses were negotiated. Of course, this lesson is repeated on many

projects and it is hard to imagine an effective negotiation from the tenant’s perspective absent a

site plan which is fully understood before the lease document is read and analyzed.

Certainly in a new (or redeveloped) project (mixed used or otherwise) today, there should

be some sort of representation that the tenant does not have to take possession of the property

until a certain percentage of leases (or square footage), both anchor and in-line, have been leased

and are expected to open. The skilled negotiator will certainly want to debate the definition of an

“anchor” and this will be dealt with subsequently in this text. Should, however, the Lease not

meet the initial threshold by a certain pre-determined date, and assuming Tenant has not taken

possession, the Lease should be subject at some point to termination, either by notice or pursuant

its own terms.

Once the delivery co-tenancy threshold has been achieved and tenant takes possession of

the premises, Tenant will generally be required to open; however, until a certain higher threshold

(similarly of anchor and in-line tenants) is met, the rent as scheduled in the lease may be

reduced, often to some sort of alternative rent (a percentage of minimum rent or a percentage of

sales) for a certain period of time. Should the alternative rent be a percentage of sales, it is

customary that the alternative rent not exceed the monthly scheduled minimum rent payment. In

the event the opening co-tenancy is not met for an established period of time, tenant should argue

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that it has the right to terminate the Lease, again at a pre-determined time. Each party should

determine whether the abatement formula does or does not include additional rent.

In today’s turbulent economy, it is important for the tenant to consider every consequence

in this negotiation (and landlord as well). Tenant needs to consider the definition of an “anchor”.

For instance, is it defined by size? Is it decided by use (can it be non-retail)? If the anchor

closes and is replaced, is it then determined by size or as a percentage of the former anchor

space? Can multiple tenants which replace a single anchor tenant be defined as an anchor (i.e., a

food court in lieu of a single store)? Must a replacement be equal to or better in quality? Can

medical office replace retail? Recently, many negotiated leases have stated that in order to be

deemed as “leased”, the primary term must be for more than three (3) years or so. This forces

the issue of whether or not temporary tenants are included in included lease up. Further, and

particularly relevant in a mixed used property with multiple parcels and streets, it is important to

know what is leased and what is not and which parcel or parcels are included in that calculation.

For instance, if one parcel is un-leased and the adjacent parcels are leased, is that relevant? Also,

one might consider knowing how much space is on each level of the property. Does it matter

that second story space in a mixed used property is leased? Should all second level space be

treated similarly? Should there be a formula created for less than primary space?

All of these issues lead to the longstanding subject of ongoing co-tenancy, one which

should be contemplated as the lease is negotiated. What could occur in the area adjacent to the

Tenant? If the subject lease is near the edge of the mall or retail zone (at the goal line so to

speak) and the adjacent anchor closes, shouldn’t that alone trigger some sort of co-tenancy

failure? Is a measuring period appropriate? Similarly, if the tenant is at the other end of the mall

or zone and the anchor furthest away closes, this may in fact be a boon to the tenant and not in

any way a negative. For this reason, more and more leases seem to note that there must be a

sales decline before a remedy is allowed and, in addition, the failure to meet the co-tenancy

criteria must continue for a period of time, often twelve months. Tenant may of course be

paying some alternative rent, however, it is standard that after a period of time in alternative rent,

often twelve (12) months, Tenant must elect to either resume full payment of rent or terminate

the lease, with silence by Tenant to be deemed as an election to resume payment of rent.

One issue which seems to not be addressed very frequently is whether or not the office

building(s) within the complex, regardless of the ownership, are actually opened and whether

rent is in anyway tied to their occupancy. In an urban setting, where a retail or restaurant tenant

is going into an office building, it certainly would be prudent to note that the tenant should

receive some sort of rent abatement or protection in the event the office building is not leased to

a certain minimum percentage, since traffic would usually depend on building occupancy. This

same logic can hold true in a mixed used property where there are adjacent office buildings

which are critically important to the success of the retail and/or restaurant tenant. Issues like this

are most often not addressed and, even if the landlord is not willing to negotiate the point, simply

raising the issue may well be helpful to making headway on other issues.

Similarly, the mixed use property has, in many cases, overhead residential units. Should

the lease up (or sale) of the residential units be an issue which is of concern to the retail tenant?

It seems that in some cases it should be, not that the residential tenants will, in and of

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themselves, spend tremendous amounts of money in the stores; rather, the residential tenants

tend to add the evening sparkle to the property and, without the lights on, the project appears to

be less than fully successful (and perhaps less than fully secure). This is certainly an issue

which, far more often than not, is under-negotiated and one which should be considered.

Going back to the site plan, it is extremely important to understand what uses can and

cannot be on the property (which can be included within the definition of “leased”) as well as the

various burdens which a tenant may be forced to endure. This is particularly true as leases seem

lengthier and circumstances less predictable. A few considerations worth contemplating include

whether second story or non-main floor tenants should be included in co-tenancy? Should the

exclusives which are heavily negotiated be applicable to parcels which are not yet developed?

Should non-retail uses be included as leased (e.g. rehab centers, dialysis center, dental and other

medical offices)? Should exhibit space which may be leased in secondary locations be

considered as “leased”?

One other miscellaneous issue which is far more often better understood by the landlord

than the tenant is the traffic flow and the parking. For instance, at Atlantic Station the streets

have not been dedicated to the city. This is and remains a very practical management decision.

Landlord is able to, as it solely wishes, close the streets for events, for security, for traffic, for

pedestrian access, for whatever reason it desires. The tenant whose premises front a street may

in fact be on a pedestrian mall. This may not be a problem, but it is somewhat unexpected. It

may be particularly unexpected, for instance, if there is a fair on the street.

The tenant also needs to understand the ramifications of the parking facilities. At

Atlantic Station, parkers are granted two hours free parking and after that it is paid hourly

parking. This has not proven to be a problem, however, the issue of valet parking and event

parking (for events such as Cirque de Soleil, Cavalia, beach volleyball, concerts), continues to be

an issue for the landlord and the tenants. These issues are, of course, best dealt with at the

inception of the lease. Tenant needs to ask these questions to best understand the nature of the

project and ensure the viability of its business at the intended location.

Two other stray issues regarding parking include casualty and the issue of segregated

parking. Atlantic Station has nearly 8,000 parking spaces, 95% or more in a multi-level deck

beneath the buildings. Curiously, not one tenant has yet raised an issue as to what might occur in

the event that a piece of the parking lot is unavailable due to a structural problem (or worse),

everyone assuming, as in a standard retail property, that there simply will be plenty of parking.

But what about proximate access to that parking? What if entries are closed? Again, this goes

back to a failure to understand the nature of the site plan, which needs to be understood for any

mixed used and/or vertical property. The issue of non-segregated parking is also often

unaddressed (though in the case of Atlantic Station, it has not been an issue of any consequence.)

The residential towers, both the condominiums and hotels, have their own caged parking which

cannot be accessed without a specific entry card. The savvy tenant simply needs to understand

where its location is in relation to a user-friendly parking field.

Properties like Atlantic Station are usually developed with interesting tax structures.

Atlantic Station has nearly forty (40) tax parcels. These were very thoughtfully negotiated with

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the municipality. In fact, there are various tax parcels for different floors in the same building

depending on the use, with there being one for the residential users and one for the retail users.

This certainly creates a very complicated process in drafting the underlying document and, in

particular, the lease; however, it is very important that each tenant fully understands what it is

contributing to and, conversely, what is not its tax obligation. The savvy tenant should also

consider what is part of the common area and what is part of someone else’s property. For

instance, is the retail tenant to contribute to the damage caused by an overhead residential tenant?

Certainly, some of these issues will not be thoroughly understood at the lease inception and all

issues do not merit all equal consideration, however, it is important that the client best

understands the risks that it is about to undertake.

Compared to the standard retail lease, relocation in a mixed use property is somewhat

more complicated. Many of the normal considerations, such as the relocation not being

permitted in the fourth quarter of the calendar year, adequate notice, landlord paying for the

build-out of the new space, and requirements as to similar frontage, are easy for landlord and

tenant to address, but issues such as what is the “zone” which can be used for relocation need to

be fully carefully documented. The outdoor mixed used property is not necessarily consistent

with a mall. There is more than one main street and there are multiple side streets. There are

fashion areas and food areas. There are department store areas and entertainment areas.

Relocation to a good space is most often acceptable, however, there are various spaces which are

naturally and predictably not going to be acceptable. Identifying this effectively in the Lease

may be further frustrated by the fact that the mixed use project is more likely to evolve, with

expansions and reclassifications over the years.

Other issues worth contemplating in the lease negotiation involve the handling of both

trash and utilities. Trash in mixed use properties is particularly complicated in that there are

often no trash containers which are immediately adjacent to the space. The tenant needs to

understand both the costs and the manner in which trash is going to be collected. Similarly,

utilities are a very interesting issue in the mixed use property, particularly as many of them are

shared. At Atlantic Station, there is a central heating and cooling plant which services all retail

and office buildings in the property. This is very efficient and very complicated, and the tenant

wants to make certain that its utility bills are both predictable and ascertainable. The time to

make those considerations is before the lease is executed, not after.

Most lease negotiations have but two parties, the tenant and the landlord. At properties

like Atlantic Station there is the tenant, the owner, the asset manager, the property manager and

the leasing team, to name but a few. There also may be separate asset managers for the different

office buildings. Each of these groups has its own properly enunciated agenda, but an agenda

nonetheless, and it is useful to understand the role each of these parties plays. For instance, in

identifying that the leasing people are a third party contracting company, one will understand

quickly that its relationship to the property is significantly different than being an employee of

the owner. This, for the tenant, may well be useful, because there may be more willingness to

push tenant leases than might otherwise be the case in the standard mall environment.

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The mixed use property will be with us for years to come, however, the issues from

project to project will vary far more than in the standard mall property. Understanding the foot

print, knowing the vertical features, knowing about the schedule for buildings, identifying the

unique aspects of the project, all of these are relevant in crafting a correct document. It is easier

to properly negotiate the lease if these material components are identified before the lease is

reviewed.

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THE INTERNATIONAL INVESTOR

In today’s market, one where we are short of equity and debt, the question is often posed:

where are the buyers? In fact, there are numerous buyers seemingly on the sidelines, many of

them from overseas or from across our borders. There are several reasons for this, including that

United States property is certainly the gold standard of real estate, due to its predictability and

certain title, the currency exchange rate in many cases is very favorable, the value of the

properties in the United States has fallen in many circumstances further than those in other parts

of the world, international investors have greater access to capital (and are more used to placing

more equity into the property perhaps than United States investors), and there is an opportunity

to attract more international debt. Three or four years ago we found that investors were very

interested in international investment, but not terribly interested in U.S. product given the high

prices relative to the rest of the world. This has certainly flipped in the last year or two, and it is

reasonable to predict that in the years to comes, we may feel that too much of our property,

particularly prime property, is owned by entities which are not within our country.

Unlike many U.S. investors who tend to see investment as most comfortable within their

community or relatively adjacent communities, international investors seem to have a greater

willingness to widely diversify. Once they are not within their own country, be it in the Middle

East or Western Europe or South America, they in many cases simply evaluate where the best

rate of return exists, be that in Eastern Europe, the Far East or the United States. Some years

ago, the United States was definitely at the bottom of the list but, as noted above, that has altered

precipitously in the last year or two. As these international entities begin to invest in the U.S.,

they are likely to be introduced to even more opportunities and, while they will continue to have

a diversified portfolio, they will likely compliment their investments with further interests with

their U.S. partners. The international investors that we have met want an ongoing relationship

and want some predictability in asset type.

The international investor holds retail in high esteem given that it is a product that is

seemingly familiar and feels reasonably in demand (as opposed to, for instance land sales or

home development or industrial properties). The investor is able to get its arms around the

financials and often times feels that the rates of return are most secure. In many cases, the

investors are interested in some sort of value added opportunities, where the property can be

repositioned and improved (and then sold or retained for cash flow). The international investor

does expect that its local partner will have some skin in the game, however, and it is our

experience that the international investor wants to be the primary owner of the property and will

rely upon its local partner for asset management, advice and, hopefully, a long-term relationship.

Some years ago, the ICSC Conference in Las Vegas started to have an international flair,

one which promoted various international companies and their products. This was, for the most

part, meant to entice US companies into leasing space in an international development, certainly

one expansion possibility which had been embraced by multi national companies. US companies

will continue to go abroad to expand their brands and to grow sales; however, in this

environment, many of the large international investors, particularly real estate investors, will

look to the United States. They will buy malls and projects, particularly well known and well

leased projects. These international investors certainly have the capability of acquiring a

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significant amount of US retail property in the upcoming few years and owners wanting to sell

should not overlook the potential of buyers abroad.