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Vitamin D and Retail: But Not Without Due Diligence First

We’ve all read about the question marks floating around the fate of brick and mortar retail in America. Factors like the strength of e-commerce and shifting consumer preferences (such as the popularity of urban centers over suburbia and consumers’ yearn for experiences over traditional shopping trips) are challenging landlords around the country to change the ways they think about their spaces. Some landlords are adapting to the current climate by repurposing the open area and common area spaces in their malls and shopping centers. The idea is not to replace brick and mortar retail, but rather to enhance it.

JLL surveyed 90 malls with approximate gross leaseable area in excess of 400,000 square feet that are in the process of, or have completed, substantial renovations since 2014. JLL found that nearly one-fifth of the 90 malls examined are incorporating spaces like kids’ play areas and green spaces that will benefit the community. Additionally, about twenty percent of the shopping centers studied are being redesigned as partially open or completely open air centers. These redesigns allow landlords to create malls with greater connectivity to streets and sidewalks and more green space for visitors to enjoy.

For example, in Houston, Texas, Memorial City Mall now includes a 4,000 square foot green area where community movie nights, watch parties and fitness classes are held. Brookfield Place in the Financial District in New York City hosts events in its atrium, boasts a skating rink in the winter and harbor activities in the summer. In Sacramento, California, the Downtown Plaza shopping mall became a basketball stadium and retail complex known as Downtown Commons with residential apartments and a Kimpton hotel. These redesigns have utilized both indoor and outdoor space to create micro worlds that cater to a diverse clientele for varying purposes.

But before landlords can embark on a complete overhaul of their space, they must confirm that their renovations will not cause them to be in default under any of their leases and related agreements with existing tenants. Often, tenants, and especially anchor tenants with bargaining power, are able to negotiate certain favorable terms in their leases. For example, an anchor tenant, like a department store, may have negotiated an exclusive so that they are the only tenant within the center that can sell certain goods or offer certain services for the duration of their tenancy. Those same tenants may have negotiated restrictions on the uses of neighboring tenants for broader uses like bowling alleys or movie theaters or restrictions on the signage of neighboring tenants. In certain instances, landlords may have agreed not to build higher than a certain height or disturb parking ratios. All of these restrictions may make it difficult for landlords to renovate and repurpose their space as intended. The planned upgrades at the Sunrise Mall in Northern California, for example, have been stalled due to existing tenants like Macy’s, J.C. Penney and Sears who have pointed to restrictions in their leases and reciprocal easement agreements to block development.

However, landlords too, may have some tools in their back pocket. For example, landlords may have negotiated relocation options in their leases entitling them to relocate tenants to new spaces of similar size within the retail center. This enables landlords to strategically rearrange tenants so that they can renovate and repurpose a critical mass of their center for things like green spaces. Landlords may also have the power to terminate leases if tenants are not meeting certain sales targets or harnessing enough foot traffic – a problem that is occurring all too often in today’s world. And, if all else fails, many landlords account for payment to anchor tenants in their redevelopment budgets.  In turn, anchor tenants often use the payment for renovations of their own.

In the end, however, repurposing shopping centers and malls to adapt to today’s consumer preferences seems like a win-win for all involved – making for a brighter experience for landlords, tenants and the community members served by these newly designed mixed-use, open air spaces.

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An Associate in the firm's Real Estate group, Mallory Beberman focuses her practice on representing borrowers and lenders in complex commercial real estate mortgage, mezzanine and construction financings.

Mallory counsels purchasers and sellers in the acquisition and disposition of real estate assets, including for condominium and cooperative properties, as well as developers in the acquisition of development rights and land assemblage parcels. She also represents landlords and tenants in commercial leasing transactions, including the drafting and negotiating of commercial leases, lease amendments and subleases.

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Commercial real estate acquisition, financing, development and leasing are the focus of Daniel Rottenberg's real estate practice.

Dan, a Director with the firm, has widespread experience representing owners and developers of complex mixed-use projects.