Six Operational Concerns When Splitting Up a Shopping CenterDecember 4, 2019
There are a wide array of reasons why shopping center owners may want to split up their shopping centers, from reducing ownership exposure in local markets, to adding value by creating new parcels for development, to increasing marketability by accessing different prospective buyer pools. Before embarking on any ambitious redevelopment or outparcel plans, however, shopping center owners should be aware of the common pitfalls and concerns associated with this approach. Some of the broad categories of issues to consider include,operational issues, exclusives and use restrictions, building restrictions and requirements, and zoning and land-use requirements. This article will explore the first category: operational issues.
Operational issues pertain to the practical implications of physically dividing the shopping center. Can the shopping center continue to physically operate in pieces after the redevelopment, as it did as a whole, prior to the redevelopment? In order to answer this question, at a minimum, you need to review your underlying lease documents, zoning regulations, title and recorded documents. You will also need to address at least six key concerns.
- Taxes. You will need to review your leases to determine what the process may be for allocating taxes among your tenants. Customarily, the allocation is based upon the square footage of the individual tenant compared to the square footage of the shopping center as a whole or the square footage of the buildings therein. If your redevelopment plan anticipates subdivision, then you may be creating a new tax parcel, as well. By creating a new tax parcel, you will most likely change how the individual tenant’s taxes are being calculated by changing the denominator of that pro rata calculation. You will need to take this into consideration and you will also need to determine if your leases permit you to create new tax parcels without tenant consent. Depending on the number of tenants in your shopping center, this could be a very time consuming task to coordinate, especially if lease amendments are needed.
- Parking. If you are redeveloping your shopping center, you are also probably affecting some portion of parking spaces on your site. Many leases contain reserved or exclusive parking areas. Many reserved parking obligations are based upon a computation or ratio of some number of spaces per square footage of the premises. If you are going to be carving off parking spaces from your shopping center, you must determine whether or not the remaining parking spaces will be sufficient to satisfy any cumulative reserved parking ratio requirements that will remain. Obviously, if there are any exclusive parking areas in any of your leases, you will need to make sure you are not interfering with those areas as part of your redevelopment. If you are, then you may need to seek waivers from the affected tenants. Finally, a review of the local zoning ordinance will be required to determine if your remaining and new parcels will comply with applicable zoning requirements.
- Stormwater Detention Analysis. If your plans call for new construction, then you will need to be sure to conduct additional stormwater detention analysis to make sure that your new construction will not affect the existing buildings. Will your existing detention basins be sufficient to handle post-development stormwater runoff? Are your current detention basins located on the existing property, the outparcel, or do they straddle both? Who will be responsible for maintenance of these detention facilities going forward? If your analysis determines that the current infrastructure is inadequate, then you may need to expand existing capabilities, infrastructure or detention basins. Of course, any deficiencies will need to be addressed during construction and will undoubtedly increase your overall costs of development.
- Signage. Another area of concern that is of great interest for your tenants is signage rights. You will need to review your leases to determine what signage rights your tenants have. Do any of your tenants have “favored nation status” with respect to the shopping center signage, requiring you to give them the largest or most visible signage on all pylon and/or monument signage in the shopping center? If so, what does “shopping center” mean now? Is your existing signage located on the parcel that you are selling off or treating as an outparcel? If so, you will need to create and provide for easement rights between the new parcels, allowing access for construction, maintenance, repair and replacement of signage. If your plans call for additional signage on the remaining property, you will need to review zoning regulations to determine if you will be able to add additional signage to your remaining lots and how much signage is allowed.
- Maintenance Obligations and Cost-sharing. A major operational consideration will be how to handle maintenance obligations and cost-sharing for the shopping center and the new parcels. You will need to review the existing obligations in your leases as well as any recorded declarations or reciprocal easement agreements. The typical arrangement for maintenance obligations is to have a single owner/landlord maintain everything in the shopping center (e.g., paving, striping, snowplowing, maintenance of lighting, etc.) and all of the tenants contribute their pro rata share of those costs. However, if you are selling off one or more lots, there may be multiple owners post-closing. You must consider who will be responsible for all of the maintenance costs and how the cost-sharing scheme will be administered going forward. Will each owner be responsible for the maintenance of that portion of any infrastructure located on its lot, or will there be one responsible property manager selected by all owners to maintain everything? Will owners have self-help rights? Lien rights? These questions will need to be answered, addressed, documented and recorded. If possible, for simplicity, all of this should be handled while there is still one common owner of the entire shopping center.
- Master Declarations and Reciprocal Easement Agreements. Once you have reviewed, analyzed and determined all the operational issues that need to be addressed, you will want to make sure that they are documented and recorded appropriately. Most shopping centers already have an existing Master Declaration or reciprocal easement agreement in place, which deals with many of these issues. These documents will have to be pulled and reviewed to make sure that they adequately address these concerns for the intended redevelopment. Do they provide for adequate access easements, utility easements, signage easements, drainage and detention issues and maintenance and shared cost obligations as mentioned above? If they do not, it will be necessary to amend the documents accordingly. Finally, in connection with any amendments that may be required to address these operational concerns, an owner may consider imposing additional restrictions on the overall property, including the parcels to be sold off. Owners may wish to impose use restrictions to protect existing tenants and their exclusive use rights applicable to the site. Additional restrictions may be desired to dissuade competitive uses. Owners may wish to impose a uniform architectural scheme on all the properties.
Clearly, there are many considerations to work through when planning your redevelopment or parcel sale, and this article has only briefly summarized the operational concerns. As always, shopping center owners should consult with legal counsel to navigate the risks and opportunities associated with this approach.
Marc A. Angelone is a Partner in Hinckley Allen’s Real Estate group in Boston and is the Co-Chair of the firm’s Retail group. Marc, together with Lee Kolber and Walt Burton, presented a more detailed analysis of this topic at the 2019 ICSC US Shopping Center Law Conference.PDF