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Retail Pad Developments

In developing a parcel for a primary retail tenant, opportunities may be present to initiate the development of a pad or outparcel. This article discusses threshold issues that a developer should consider in the initial development of a parcel.

The developer must obviously determine at the outset whether the parcel involved would lend itself to the development of a pad or an outparcel. Among the factors to be considered would be the sufficiency of parking, access, drainage, and utilities and, most importantly, the compatibility of the potential outparcel development to the primary tenant. The primary tenant will be concerned with the nature of the use of the pad and its impact on parking and visibility. A developer would not be well served to protect the potential for an outparcel development at the cost of negatively affecting the marketability of the larger parcel itself.

Assuming that the parcel satisfies the initial threshold considerations, the developer should anticipate when negotiating the lease transaction with the primary tenant, the subsequent pad or outparcel development. The issues would include, in addition to parking ratios, permitted uses and no-build areas, common area maintenance, payment of real estate taxes, and cross-easements such as for parking, drainage, and utilities. If an outparcel or pad development is likely, the developer might even want to record a declaration (approved by the primary tenant) that creates cross-easements and implements the items referenced above.

A further consideration would be to anticipate the possibility that the larger parcel could itself be subdivided into two legal lots or, in lieu of a formal subdivision, developed by utilizing an alternative structure such as a retail condominium or, less likely, a sandwich ground lease layer in which the property owner enters into a ground lease with an affiliate for the separate portions of the larger parcel. These issues need to be addressed and anticipated in the initial lease document that is negotiated with the primary tenant. Failure to do so will complicate the potential outparcel development.