This article briefly describes a creative financing technique that could be utilized under the appropriate circumstances to separately finance rental payments from a big box retail tenant’s lease.

We have worked with our developer clients to structure big box retail leases in a manner that would enable the developer to obtain leasehold financing with respect to a single big box tenant lease. This financing technique works best in situations in which the big box lease is close to being freestanding, in that there are few other tenants in the center and the structure of the center facilitates this type of financing. In lieu of executing the typical big box retail lease directly with the credit tenant, the developer would first execute a ground lease with an affiliate. The landlord in this ground lease structure would be the holder of fee simple title that, but for this approach, would be the landlord under the lease with the big box tenant. The ground lessee would be an entity that is owned by the fee owner or the principals thereof or would otherwise be an affiliate. The best results are obtained in this structure when the lease between the ground lessee and the big box retail tenant is utilized as the form of the ground lease (also referred to as a prime lease). We have redlined the big box tenant lease to show the tenant the manner in which its own lease was utilized to convert it into a prime lease. In this fashion, we are able to demonstrate to the tenant the fact that all of the rights and provisions that are important to it (and which are obviously contained in its lease) have been implemented in the prime lease.

When considering this structure, it would behoove the developer to work with the local municipality to determine if the leased premises can be separately taxed. Obviously this structure is also dependent upon local approvals, as in some jurisdictions a ground lease triggers the necessity to obtain subdivision approval.

This financing technique allows a developer to finance the income stream to be generated by a big box retail lease without the lender involved in that transaction having to concern itself with other development and construction activities that might take place in the center. Further, the income stream from the credit tenant is not diluted by smaller tenants who may occupy other small spaces in the center.