Wednesday, February 28, 2007

Organized Crime Grows in Retail Theft

n overwhelming majority, 81% of retail loss prevention executives, indicate that their companies have been victims of organized retail crime. "Even more, 93%, say they're concerned about this rising phenomenon and see the problem as getting worse, not better.
The survey was unveiled during National Retail Federation's Loss Prevention Conference and Exhibit in Minneapolis. Organized retail crime is perpetrated by teams that steal goods in order to resell them into the stream of commerce, which distinguishes it from petty thievery and shoplifting. The Retail Industry Leaders Association estimates that such organized thievery costs retailers $34 billion a year, and, during the conference, some estimates were as high as
$37.4 billion.
A year ago, just 30% of the retail loss prevention executives in the poll saw organized retail crime as a significant or severe issue.
This year, the proportion reached 41%, and several retail companies discussed their own more organized approaches to combating it.
Safeway is among them. For years, Safeway convinced themselves that shrinkage was due primarily to a combination of bad inventory paperwork and employee theft, with shoplifting a minor factor.
Approximately a year ago, the company began cross-referencing its reports in order to determine not just dollar losses, but also obtain details on the items missing. As a result, it discovered that over a brief time it had lost $6 million worth of baby formula. A video taken by a Safeway security camera showed how skillfully organized crime teams work. One member of the criminal team, which Safeway's senior investigator, called a filler, picks designated products from the shelves and puts them into a container, which might be a false- bottomed purse or even a plastic garbage bag.
As the filler works, a spotter watches out for security, and often a cruiser keeps watch over the entire process. When the container is filled, the team whisks out the door into a waiting car. Often our stores don't even know they've been victimized until hours later.
Once away from the scene of the crime, organized retail criminals convert the stolen goods into cash through a fence or middleman who takes the merchandise to an illegitimate wholesaler, who processes it through a cleaning room before selling it to a sales agent. Cleaning usually eliminates store identification and replaces bar codes.
During the same process, the expiration date on medicines or baby formula may be extended.
Safeway investigators developed a foundation for combating organized theft. It is more complicated and time-consuming that just catching a crook. It relies on interaction with law enforcement and includes arresting fillers and using traditional crime-fighters' methods to get them to inform on and identify fences.
More than half, 59% of the loss prevention executives in the NRF poll said they had recovered merchandise or gift cards from a physical fence operator, and 67% said they had recovered such goods from eFencing (internet) operations. Due to the vastness and complexity of organized retail crime, a majority, 89%, feels there's a need for a national database to track activity. 75% say they either will or are likely to participate in such a system.
Federal legislation to support the development and maintenance of a nationwide database that helps retailers and law enforcement agencies work together to eliminate organized crime is making its way through Congress. Similar legislation is underway in at least five states.
The database, the Retail Loss Prevention Intelligence Network (RLPIN), along with other networking groups, has helped both retailers and law enforcement agencies nationwide fully understand just how multifaceted organized retail crime can be. Linking related incidents of retail crime makes it easier to build higher-penalty cases at the state and federal level.
At the same time, retail loss prevention departments are expanding to include specialists in organized retail crime and in government affairs. A government relations/loss prevention manager for Wal-Mart and an organized retail crime loss prevention investigator for Walgreens told how they are collaborating to draft legislation and to educate both retailers and legislators on the significance of organized retail crime and the need for coordinated combat practices.
By working together, they have, for example, helped legalize reverse stings in 3 states. A reverse sting allows law enforcement to sell recovered or new merchandise to known fences, thus reaching beyond the store floor to a higher level of the criminal endeavor.
One of the challenges retailers face is persuading law enforcement officials at local, state and federal levels that retailers are not asking them to deal with a shoplifter. The word shoplifting is misleading. It connotes petty theft and prevents law enforcement agents from seeing the more significant dangers of organized retail crime.
From loyal shoppers to retail executives, no one is immune from the consequences of organized retail crime. As more criminals become involved in organized theft rings, it could become increasingly violent and unpredictable. This higher level of thievery calls for greater coordination among law enforcement, legislators and retailers."
from GlobeSt.Retail, June 12, 2006
For more information see;

New Life to Retail Leasing

The shopping center industry is undergoing a renaissance, and nowhere is its newfound vibrancy more evident than in the anchor store.

"As always, location is an operative factor in leasing anchors in open-air markets, but increasingly anchor leasing is also a function of the center's format.

Whether it is a lifestyle center, a town center, or a mixed-use venue, however, any center will benefit from a crossover anchor store such as Target that has successfully courted customers from all income brackets.
SuperTarget's new grocery offering rounds out the retailer's appeal for any developer, while still leaving room for a gourmet grocer such as Trader Joe's or Whole Foods.

Other large retailers that cater more to men are seeing their stock rise, such as Dick's and Bass Pro Outdoor Shops. Old-line anchors such as Macy's and JCPenny have altered their format, but are still viable anchors for any center.

Retailers are increasingly viewing markets as either underserved or growth markets, with the main differentiators being growth rate and proximity to shopping in the town center format. Mixed-use spaces are clearly the format of the future, as condos are being built at the hub of commercial spaces. At the mixed-use Village at Gulfstream Park, serving both Miami and Ft. Lauderdale, condos, houses, and retail will all center around the Gulfstream Park racing track, inviting the possibility of the sporting venue as anchor.

Despite all the changes in shopping-center leasing, it is still incumbent on developers to promote their centers and assure the success of new formats when courting anchor stores."
from Retail Traffic, May 2006 for more informationsee:
or call Ed Ayres at 713 782-2060

Tuesday, February 27, 2007

Tenant's obligation to "yield up" premises in good condition

Tenant's obligation to "yield up" premises in good condition does not apply to land outside leased buildings.
"IBM, as tenant, leased premises defined as 113,400 gross square feet in two buildings.
The lease separately defined the land on which the buildings were situated, with certain lease provisions applicable to the land.
Before execution of the lease, IBM had used the site for manufacturing purposes under other arrangements. An underground storage tank had leaked chemical waste, which IBM abated under an agreement with the landlord and the state environmental agency.
After the lease terminated, the landlord claimed that the lease obligated IBM to clean up the soil, bedrock, and groundwater to a higher quality, even though IBM was in full compliance with the earlier abatement agreement. The landlord pointed to a lease provision that called for the tenant, at lease termination, to remove its goods and effects [and] peaceably yield up to the Landlord the premises in good order and condition.
The trial court, allowing extrinsic evidence, held for the landlord, construing the lease as a whole to obligate IBM to yield up the land in good condition, free of all contamination. The appellate courts reversed, holding that the lease definition of premises was clear and unambiguous, and thus the yield up provision did not apply to the land. Whether this outcome is what the parties actually intended is impossible to say. Arguably the landlord should have lost for an alternative reason. Should not its participation in the abatement agreement estop it from subsequently claiming that the lease required abatement to a higher standard? The decision underscores the need for real estate lawyers to pay careful attention to the use of defined terms throughout documents that they draft and review. South Road Assocs., LLC v. IBM, 826 N.E.2d 806 (N.Y. 2005)."
from Probate & Property, March/April 2006

For more information see:
713 782-2060 ask for Ed A. Ayres

Monday, February 26, 2007

Future Trends for 2007 and Beyond

Future Trends and Plans, Acquisition/Disposition Strategies and Properties Under Contract
In this week's CoStar Lead Street, we identify the new hot investment market and why one investor thinks it should be Florida residential land. We also report that: Home Depot is studying options for its HD Supply chain and Applebees for its casual dining eateries; plus we identify the latest site selection decisions and properties to come under contract. Infrastructures the New "Hot" Investment Market The infrastructure investing market will quickly rival other real estate-related investment markets - such as CMBS, REITs, and private equity - in terms of market size, according to Ernst & Young. It's the "hot" alternative investing market right now and shows little sign of cooling. Plus, the capital requirements in this sector potentially dwarf those of other markets. the accounting firm says in their 2007 outlook. With hundreds of billions of dollars needing to be spent to bring existing infrastructure up to standard in the United States alone - and trillions needed globally - the immediate impact for the construction sector is evident. However, investors and commercial developers could see tremendous opportunities in the next 10 years. The need for improved roads, bridges, ports, airports, mass transit systems, water, and energy supply - will only fuel additional development opportunities for homebuilders and commercial developers. What's less clear is whether the construction sector has the capacity to handle the weight of work required. The huge spend likely to occur may push prices of labor and raw materials far higher. However, an emerging private-funding sector fueled by pension funds, major banks may provide some of the capital needed to enable public agencies and states to push ahead with ambitious infrastructure development plans. Be Among the First To Read Lead Street Nearly 2,500 people read CoStar Lead Street each week. If you want to be among the first to know when a new CoStar Lead Street is posted, e-mail me your name, title, company and e-mail address. You can reach me by clicking on the byline above or at Buying Land for Future Residential Recovery Cypress Creek Capital Inc., a real estate investment and advisory company, has formed a new subsidiary, Cypress Creek Capital Florida Land Investors LLC, to acquire land throughout the state that is at least 50 acres, raw or developed, entitled and non-entitled, said Jan David Reese and Steven Beauchamp, company principals. "The residential land bubble currently bursting in Florida is setting the stage for a significant drop in prices," said Reese. "The slow down and adjustment period expected over the next few years should produce opportunities for Cypress Creek Capital Florida Land Investors to control major land tracts to resell when the residential market recovers." Cypress Creek Capital also owns in excess of $100 million of office and retail properties in Florida in partnership with institutional and private investors. Home Depot Studies Options for HD Supply Operations The Home Depot has decided to evaluate strategic alternatives for its HD Supply business, including a possible sale, spin or initial public offering of the business. The company said there can be no assurance that any transaction will occur or, if one is undertaken, its terms or timing. The company has retained Lehman Brothers as its financial advisor to assist in this process. "Today's announcement is a continuation of the strategic review we did in November," said Frank Blake, chairman and CEO of The Home Depot. "We are undertaking this action today because of our desire to increase our focus on our retail business. With annual revenues of approximately $12 billion, HD Supply is a healthy, growing and vibrant business, and we are undertaking this evaluation to determine whether there are strategic alternatives with respect to HD Supply that would optimize shareholder value." HD Supply is the wholesale distribution business of The Home Depot, and has nearly 1,000 locations nationwide and in Canada, and employs more than 26,000 associates. Applebees Up for Sale? Applebee's International Inc. has formed a committee of independent directors to explore strategic alternatives for enhancing shareholder value. All strategic alternatives are being reviewed. "While acknowledging a difficult macro environment for casual dining, all of our company restaurant and support center associates, as well as our valuable franchise partners, are focused on improving the things that are within our control," said Dave Goebel, president and CEO of Applebee's. "Our long-term strategies are designed to make Applebee's more relevant to all of our guests with the goal of driving guest traffic and higher average unit volumes through existing restaurants, with less emphasis on new restaurant development. Our key strategic initiatives in 2007 include continued improvement of our food, evolution of our advertising, and a greater emphasis on communicating our value proposition to our guests." Applebee's, based in Overland Park, KS, develops, franchises and/or operates more than 1,940 Applebee's restaurants operating system-wide. New Site Selections GHX LLC will relocate to a larger office building, creating a campus-like environment for its world headquarters, in Louisville, CO. The move is expected to occur in August 2007. The company will move from approximately 47,000 square feet of space in the Westmoor Technology Park in Westminster to 80,000 square feet. In addition to building and hosting an Internet-based trading exchange, GHX has developed services that support and automate numerous supply chain processes for both provider and supplier organizations. In 2006, several acquisitions resulted in new products being added to the GHX suite of services, including sales force automation tools, business intelligence services, and contract and rebate management services for the pharmaceutical industry. From 2005 to 2006, GHX doubled in terms of full time employees and today employs approximately 530 people, with more than 200 based in Colorado. GHX will add another 45 new positions at its Colorado headquarters in 2007. Advance Auto Parts Inc. , an automotive aftermarket retailer plans to open a new distribution facility in Remington, IN. It will serve Advance's growing store base in the Midwest. The company expects that the facility to open in summer 2008, making it the ninth distribution center in the company's logistics network. The completed facility will be approximately 550,000 square feet. Once the building is complete, it will be outfitted with state-of-the-art material handling systems and equipment. The new distribution facility site is adjacent to Interstate 65, providing convenient access to Indianapolis and Chicago and points beyond. Norwood Co. in Allentown, PA, will be the developer. Norwood also developed Advance's last major Distribution Center project in the Lehigh Valley area of Pennsylvania. Cytec Industries Inc. completed the site selection for a carbon fiber expansion project with Greenville, SC, chosen as the location of the company's proposed new facility. Employing capital best practices, the project is in the assessment and engineering definition phase. Pending final approval, construction is expected to begin in 2008 with plant start-up scheduled for early 2010. The expansion would double Cytec's carbon fiber manufacturing capacity and provide additional capability to meet the demand for next-generation carbon fibers. Cytec's capital investment in the expansion, projected at approximately $150 million, is in addition to a modernization and recommissioning effort completed last year at the company's existing carbon fiber manufacturing site in Greenville, which increased Cytec's annual carbon fiber production capacity by 33% and added 60 new jobs. Cytec expects to add approximately 225 additional skilled and professional jobs when the expansion project is fully operational. Be Among the First To Read Lead Street Nearly 2,500 people read CoStar Lead Street each week. If you want to be among the first to know when a new CoStar Lead Street is posted, e-mail me your name, title, company and e-mail address. You can reach me by clicking on the byline above or at NPC Contracts for Pizza Huts in the Northwest NPC International Inc. signed an asset purchase agreement with Pizza Hut of Idaho Inc.; Rocky Mountain Pizza Huts Inc.; Northwest Restaurant Group Inc.; and Northern Idaho Pizza Huts Inc. to acquire 59 Pizza Hut units located primarily in Idaho and the Spokane Valley for $27.1 million. The 51 restaurants, six delivery/carryout units and two express units generated $46.7 million in sales during the 52 weeks ended December 2006. Forty of these stores are located throughout Idaho, four in eastern Oregon and 15 in Washington, primarily in the Spokane Valley. Forty-four of these locations will be leased from the sellers on certain agreed-upon terms and 15 locations will be leased from unrelated third parties. NPC expects the acquisition to close in mid-March 2007. Consummation of the transaction is subject to approval by Pizza Hut Inc. and other customary consents and approvals. "We are truly excited about this acquisition due in large part to the high-quality restaurant teams that operate in these markets and the opportunity for future organic growth in the high-growth markets of Idaho and the Spokane Valley," said Jim Schwartz, chairman and CEO of NPC International in Overland Park, KS. "In addition, this acquisition, when combined with the 26 stores we currently operate in Portland, OR, will provide us the critical mass to leverage our above store support infrastructure and a beachhead for additional growth through acquisition in the rapidly growing mountain states." NPC International Inc. is the world's largest Pizza Hut franchisee and operates 815 Pizza Hut restaurants and delivery/carryout units in 23 states. Also Under Contract Broadway Real Estate Partners is buying the controlling interest in the 1.7 million-square-foot office tower at 450 W. 33rd St. for about $664 million, or $380.14 per square foot. The property is being sold by a venture that includes The Chetrit Group LLC and Arbor Realty Trust Inc. The investor group plans to keep a 2% interest in the property, as well as 50% of the property's 800,000 square feet of air rights. Douglas Harmon of Eastdil Secured brokered the deal. The 16-story property between Ninth and Tenth avenues was built in 1969. It is fully leased. Tenants include a host of media companies, such as New York Daily News, The Associated Press, U.S. News & World Report LP and Thirteen/WNET New York. Other tenants include J.P. Morgan Chase & Co., Financial Information Services Agency and New York & Co. Inc., according to CoStar Group information. A Grubb & Ellis subsidiary company, GERA Property Acquisition LLC, entered into a contract to purchase a Class A office building at 6400 Shafer Court in Rosemont for $21.45 million. The seller is F/B 6400 Shafer Ct. (Rosemont) LLC, a shell company of Foresite Realty Partners. Foresite Realty Partners' current headquarters is at 6400 Shafer Court. The approximately 176,000-square-foot building is currently 55% vacant, with its largest tenant being Kanbay International, which currently occupies approximately 21% of the building. The deal is expected to close Feb. 28. Dividend Capital Total Realty Trust Inc. deposited a non-refundable amount of $500,000 into an escrow account in connection with an intended acquisition of the Shackleford Office Center in Little Rock, AR. Shackleford Office Center built in 2001 is under contract for $21.32 million. It contains 101,977 square feet and is 100% occupied by the Federal Bureau of Investigation. The deal is expected to close this week. Columbia Equity Trust agreed to purchase 10201 Lee Highway in Fairfax, VA. A consortium of investors, involving Gatewood Plaza LP, Suburban Hill Joint Venture, Lisa Wassermann Gill and Carolyn Stopack Kaplan, currently own the 87,816- square-foot office property. Columbia Equity agreed to pay $17.05 million, or about $194 per square foot, and committed to a non-refundable deposit of $500,000. Closing is expected within 30 to 90 days. The 21-year-old Gateway Plaza building is currently 95% occupied. It sits on just less than 3 acres near the I-66/Route 123 interchange. Equity Inns Inc. agreed to purchase a 140-room Marriott Courtyard in the western Chicago suburb of Elmhurst from a partnership controlled by First Hospitality Group for $13.9 million, or $98,000 per key. Exclusive of the estimated market value of an adjoining outparcel which is included in the purchase price, the total purchase price equates to an average cap rate of approximately 9.5%, based upon expected net operating income for the year-end 2006. The hotel recently completed a $2 million dollar renovation and is not expected to require any significant additional capital investment. Supertel LP agreed to purchase six hotels from Budget Motels Inc. and Waterloo Hospitality Inc. for $38.6 million. The hotels are located in: Alexandria, VA (a Comfort Inn and a Days Inn); Fredericksburg, VA (two Days Inn); Bossier City, LA (Days Inn); and Shreveport, La (Days Inn). The closing date for four of the hotels is March 30, with the remaining two scheduled for July 31. Costar research department February 2007. Call or eamil ed


Brookfield Flips Former JPMorgan Bldgs. to Crystal River
Two-Bldg. Portfolio in Phoenix & Houston Trades for $234 MillionBrookfield Asset Management (NYSE: BAM) is selling two fully leased office buildings in Houston and Phoenix to Crystal River Capital (NYSE: CRZ) in a deal valued at about $234 million. The 1.2 million-square-foot transaction includes the 750,000-square-foot Chase Tower -- Arizona's tallest building -- at 201 N. Central Ave. in downtown Phoenix, and the 412,500-square-foot North American Technology Center at 1111 Fannin St. in downtown Houston. JPMorgan Chase anchors both buildings under 15-year, triple net leases. Toronto-based Brookfield, which teamed with Blackstone Group to acquire Trizec Properties and Trizec Canada last year for $8.9 billion, acquired the two buildings last fall on behalf of Brookfield Real Estate Opportunity Fund in a 33-property, $460 million portfolio acquisition from JPMorgan Chase. That deal also included Chicago's landmark 300 S. Riverside Plaza office building and Milwaukee's 472,500-square-foot Chase Tower. "These are high-quality acquisitions that we believe will be immediately accretive to our stockholders and reflect the benefit of our association with Brookfield's operating platforms," said Clifford Lai, president and CEO of Crystal River. The New York-based REIT is externally managed and advised by affiliates of Brookfield Asset Management. Crystal River also announced it purchased a $28.5 million investment in BREF One LLC, a real estate finance fund sponsored by Brookfield Asset Management. For more information see

The SIOR Commercial Real Estate Index

The SIOR Commercial Real Estate Index showed modest improvement with an increase of 0.30 points over February's index as reported in the May 2006 release from the Society of Industrial and Office Realtors.
"The national industrial and office property market index advanced to 119.70, compared with 119.40 in February 2006 and 115.75 in November 2005. This is good news for owners of industrial and office property. An Index Value of 100 reflects well-balanced commercial real estate conditions. Values greater than 100 represent strong market conditions favoring existing owners, as landlords and as sellers of properties. Values below 100 indicate favorable negotiating conditions for tenants and for those looking to acquire real estate.
The SIOR index, compiled from survey responses from more than 300 SIOR Industrial and Office Real Estate Brokers in late April/early May, is a diffusion index, calculated by methods similar to the Index of Leading Indicators, the Consumer Confidence Index, and the Purchasing Managers Index.
Industrial properties such as warehouses and distribution centers are further along than office in their cyclical recovery. The industrial subindex registered 122.24 in the Second Quarter, up modestly from its 121.69 score in the First Quarter. Industrials achieved very strong scores in improving occupancy and in the virtual disappearance of subleasing activity as a drag on market performance. In addition, rental rates have risen materially in two-thirds of the nation's industrial markets, compared to one year ago. Tenants find sufficient bargaining strength to extract leasing concessions in just 30% of the markets responding. Development is reaching nearly normal levels, and owners of prime land see strong acquisition demand.
Economic trends, however, are the subject of some concern as questions about the effect of both local and national economic conditions on industrial market trends returned lower scores than in the previous quarter.
The Office subindex rose 1.96 points since February, and now stands at 117.41. The Office Market is experiencing broad-based rental rate increases, driven by occupancy gains reported by just over 70% of the survey panel. Investment pricing is strong – at or above replacement cost as indicated by 79% of the respondents. Development is still lagging, however, and this presages further improvement in vacancy rates for the year ahead. Subleasing has minimal impact on offices right now, but tenants still have some bargaining power to negotiate lease concessions in about half the markets covered. In trying to capture this opportunity while it lasts, tenants have brought leasing activity to normal or higher-than-normal levels reported by the survey panelists.
Regionally, the West remains at the top of the list of market areas, with a subindex score of 136.07. Respondents from this region cite the pressure of their thriving economy on commercial real estate markets. Rental rates are rising rapidly, as demand for space is outstripping new supply. Development has not yet returned to its normal level, though builders are avidly searching for new commercially zoned land. The super-heated housing market of recent years has diverted many potential commercial locations into residential use. With the exception of development, the West scores the highest of all regions on the full range of variables covered in the SIOR survey.
The South scored 123.35, evincing considerable strength. Parts of the region are still adapting to the changes wrought by the hurricanes of 2005. Louisiana and Mississippi are dealing with population dislocations and the rebuilding of businesses. But markets with close ties to the energy industry are seeing tremendous commercial space demand. While the South does not match the West's extreme high scores for many of the index components, it does well throughout the entire list of variables. It is the region that is getting closest to its historical average in commercial development, and is virtually at the normal score in terms of the balance of negotiating power between landlords and tenants. However, the sprawling markets typical of this region have received less benefit in investment price than the other three geographic divisions.
Scarcity is beginning to drive market behaviors in the Northeast, which registered a regional score of 114.78 in the May survey. It is a sellers' market for commercial development land, even though builders are not yet rushing to market with speculative projects. As in the South, landlord/tenant bargaining power is showing good balance. Rental and vacancy trends, and subleasing conditions, all post positive responses in the Northeast tallies. Financial industry and government growth, as well as globalization in all its manifestations, have been the demand catalysts in this region.
However, respondents do note that investment pricing is still out ahead of rent and occupancy improvements, as capitalization rates remain very low. The relatively high costs here may account for a comparatively low pace of overall leasing activity, as several respondents see more lookers than takers of commercial space.
The troubled automobile industry and its network of supplier and services firms have been the long-time economic engine of the Midwest. This economic base cannot support much new commercial real estate demand at present, and this is at the root of the region's sub- par score of 97.11 in the May survey. While some improvement in conventional measures such as asking rents and overall occupancy can be seen in the numbers, leasing activity here is by far the weakest of any region, and 77% of the respondents identify the tenants as holding the dominant position at the bargaining table. Tellingly, the Midwest is the only region where the impact of the local economy is rated as hurting rather than helping the real estate markets.
The SIOR Commercial Real Estate Index is constructed as a diffusion index, a very common and familiar indexing technique for economic measures. Other examples of diffusion indexes include the Index of Leading Economic Indicators, the Consumer Confidence Index, and the Institute of Supply Management's Purchasing Managers' Index. In the SIOR Commercial Real Estate Index, a value of 100 represents a well- balanced market for industrial and office property. Values significantly lower than 100 indicate weak market conditions; values significantly higher than 100 measure strong market conditions. The theoretical limits of this Index are a low of zero, and a high of 200, though it is unlikely that such limits would be approached as long as the property markets are operating efficiently.
The Index is based on a survey questionnaire with ten topics. The topics covered are
(1) recent leasing activity;
(2) trends in asking rents;
(3) trends in vacancy rates;
(4) subleasing conditions;
(5) levels of concession packages in leases;
(6) development activity;
(7) site acquisition activity;
(8) investment pricing levels;
(9) the impact of the local economy on the property market; and,
(10) the effect of the national economy on the property market."
For more information see

Saturday, February 24, 2007

Landlord’s Refusal to Consent to Tenant’s Assignment

"A health-care provider leased space in a shopping center near a hospital campus. The lease restricted use of the premises for outpatient surgical procedures and general medical and physician's offices, including related uses and for other purposes reasonably acceptable to Landlord, and allowed the tenant to assign the lease with the landlord's consent, providing that such consent shall not be unreasonably withheld.
Two years later the hospital bought the shopping center, subject to the leases, as a strategic purchase with future hospital expansion in mind. Shortly, the tenant closed and sought to assign the lease to an entity planning to open an occupational medicine clinic, which was to provide medical services to employees of corporate clients, rather than to the general public. The hospital, as new landlord, refused to approve the assignment because the assignee would be competing with the hospital.
The district court held that the landlord acted reasonably, because the assignee's use would provide greater competition with the hospital than the original tenant's use. The court of appeals reversed, holding that the assignee's use was within the scope of the use clause's reference to general medical and physician's offices, including related uses. It considered the landlord's refusal of consent unreasonable for two reasons:
1) First, increased competition with the landlord's business is wholly personal to the landlord and does not relate in any way to an objective evaluation of the proposed assignee as a tenant.
2) Second, reasonableness must be evaluated based on the parties'
expectations as of the inception of the lease, at which time the original landlord was not a competitor in providing medical services. This is a significant decision because very few cases deal with a landlord's denial of consent for anticompetitive purposes or a successor landlord, whose interest diverges from that of the original landlord.
See Freidman on Leases § 7:3.4 (Patrick A. Randolph ed., 2004). Tenet HealthSystem Surgical, L.L.C. v. Jefferson Parish Hospital Service District No. 1, 426 F.3d 738 (5th Cir. 2005)."
for more information contact Ed at
or at 713 782-0260

Thursday, February 22, 2007

Operating Expense Escalations in Office Buildings Can be both a Blessing and a Curse.

For a landlord, escalations can be a legal and ethical method of recovering some, or sometimes all, of a property's operating expenses. But escalations can also be the biggest operational headache a landlord has to contend with during a tenant's tenure.

And from a tenant's standpoint, escalations can be the single most defining issue that determines if the landlord is trustworthy.

Escalations are frequently the cause of misunderstandings with tenants.
When not handled well, these misunderstandings can easily escalate into disputes and then into very serious legal proceedings between landlords and tenants.

Follow these 5 rules to dramatically reduce the chances of getting into escalation disputes and audits. In order of importance:

Rule # 1 – Be consistent.
Escalations are not just a function of accounting. 2 other disciplines are also involved: legal and property management. Legal is represented by the lease document. Property management is represented by operational contracts and practical processes for expense-gathering activities provided by managers and engineers.

Unlike accounting, the legal and property management concepts are sometimes based on interpretation rather than quantifiable numbers.
Being consistent is sometimes more important than being accurate. The main point is that the same methodology should be used for each year throughout the term of a lease.

Rule # 2 – Don't forget Rule # 1
Is consistency important enough to warrant being both Rule # 1 and Rule # 2? Even if you make a calculation mistake or an error of judgment about a key assumption in a base year (which benefits the tenant), the odds are reasonably good that making the same mistake in subsequent years (which benefits the landlord) will cancel out that error. What should a property manager or accountant do when he or she finds an error in a tenant's past escalation charge? The odds are reasonably good that the same mistake in subsequent years will cancel out a previous error. Not absolutely certain, so the door remains open to the possibility that 2 wrongs do not make it right. When the error benefits both the tenant and the landlord in equal measure, we will generally leave the mistake alone until a lease expires before correcting it.
However, if a mistake clearly and solely benefits the landlord, we suggest throwing consistency aside, admitting the error, recalculating the escalation charge and establishing new methodology for the remainder of the lease term. Why? Because honesty is good business. It is also a key to minimizing escalation disputes and audits.

Rule # 3 – Start with the end in mind (an audit)
Tenants don't like paying escalations any more than they like paying for parking, so plan on being questioned or challenged by a tenant or an auditor. Keep escalation records at least one year past the expiration of every lease.

Rule # 4 – Communicate effectively
Letters to tenants about escalation charges should be concise. They should include explanations for any significant expense changes (plus or minus). Brevity is of great value with this type of communication.
When you do get audited, follow the same rule and commit to doing your homework so you can communicate effectively with them. Return phone calls from tenants and auditors immediately, even if it's to tell them you are collecting the information they requested. Accept that managing the communications is as important as what is being communicated.

Rule # 5 – Use industry standardized methodology
Very little published information exists that establishes standardized methodology, other than BOMA (Building Owners and Manager's
Association) International's handbook and software. Some real estate companies continue to use home-grown logic and in-house spreadsheets developed in years past to calculate escalation charges.
But switching to industry-endorsed methodology would help those landlords avoid escalation audits, and also better prepare them to manage the audit process.

It's even easier to avoid escalation disputes or manage audits than you imagined. To recap the Escalation Rules again:
1. Be consistent.
2. Assume that your tenants will audit your records, so
store them in a safe place.
3. Communicate clearly and effectively about
4. Use industry-accepted methodology so your
calculations are trusted."
rom Office & Commercial Real Estate Magazine, Summer 2005 . For more inforamtion contact

Wednesday, February 21, 2007

Life Style Center will Continue to be Hot

"The traditional lifestyle center as defined by ICSC (International Council of Shopping Centers) is between 150,000 sf and 500,000 square feet. They are open-air, usually in upscale locations and have many of the same fashion and restaurant tenants. But the definition and parameters are becoming more fluid as developers build more of these centers and shoppers get to know them.
When putting them together, developers also need to keep in mind what tenants go where. The biggest flaws we see are in the site plans.
You can't put a Cheesecake Factory in the middle of a street. As much parking as we can provide them, they'll eat it all up.
Some of the more innovative, earlier lifestyle centers introduced larger sidewalks than a typical strip center, allowing more people to congregate. However, that can also be overdone. A sea of concrete is really not very friendly.
Panelists agree that adding other real estate components to lifestyle centers and making them mixed-use is the wave of the future for these developments, but that might not always be a good thing. As land becomes more expensive and in shorter supply, mixed-use properties are rapidly becoming the project of choice for most developers. And while having the right mix of uses is vital to a project's success, it's just as imperative to have the right mix of retailers.
Retail is an important part of mixed-use from an economic point of view. It also gives a project character, so the types of retailers that occupy a project can have a significant impact on its overall image. This kind of format is conducive to a blend of retailers that would not normally come together under one roof.
Mixed-use enables mall mainstays to coexist with typical open-air or lifestyle tenants, offering a wide range of merchandise. A key component to a successful development is food and entertainment.
Restaurants are critical to a mixed-use project. Most of them are the anchor tenants and drive the sales volume that we need to make projects work. They also help to make it a daytime/nighttime destination.
Mixed-use clearly has its benefits. Chief among them are that municipalities and zoning entities are likely to look more favorably on mixed-use as a smart-growth-type initiative than they would a straight-forward retail project. A successful mixed-use complex is more sustainable, less susceptible to competition. Mixed-use projects tend to be costly and need higher rents in order to make fiscal sense.
CAMs (Common Area Maintenance) tend to be much more for a mixed-use asset, because of things like parking and security. CAMs for mixed- use can be between 30% and 35% more than suburban centers.
The discussion also touched on issues such as parking and the competition for prominent positioning among the various components of a project. All the uses — hotel, retail, office, residential - want that prime corner. Therefore, it is important for the developer to to create a place where they each have visibility and identity."

Thursday, February 15, 2007

'Prenegotiated' Leases, with Built-in Compromises.

Any method of negotiation may be fairly judged by three criteria:
1. It should produce a wise agreement if agreement is possible.
2. It should be efficient.
3. And it should improve or at least not damage the relationship between the parties."
So say Roger Fisher and William Ury in Getting to Yes 4 (2d ed.
In the classic method of lease negotiation, the landlord submits its standard form, often in excess of 60 pages, regardless of the size of the relevant premises or the term of the relevant lease; the tenant reviews the proffered form; and the negotiations proceed from there.
In the case of national retail tenants, the tenant submits its standard form, but this article will assume the process starts with the landlord's submission.
This method, usually more often than not, complies with the first criterion above: It produces a wise agreement. This method, usually more often than not, complies with the third criterion: It does not damage the relationship between the parties. However, much more often than not this method fails the second criterion-and fails it
miserably: It is not by any means efficient.
This lack of efficiency is a direct result of landlords time and time again proffering to prospective tenants forms that contain numerous provisions that do not address the tenant's needs. And landlords do this knowing many tenants will complain about these clauses, and also knowing that if a prospective tenant requests that these provisions be changed, the landlord will capitulate. Although there always will be variations in individual situations, often it is the same clauses about which a tenant will complain, only to receive the landlord's standard response, followed by the standard arguments by counsel and, ultimately, the standard compromised result. This not only fails to meet the criterion of efficiency, it is a case study in inefficiency. Worse, it is inefficiency coupled with unnecessary expense in terms of legal fees incurred to negotiate the same provisions over and over again.
But there is an alternative method available that undeniably better serves criterion 2 in that it is more efficient, and arguably better serves criteria 1 and 3 as well. Although not known by any official doctrinal title, the method is for the landlord to create a standard form and proffer in the first instance what one might call a `prenegotiated' lease-that is, a lease where the landlord has built into the form as many of the conventional compromises as it finds acceptable. This serves the cause of efficiency in two ways:
a. It avoids the time and energy wasted on negotiations over clauses about which the landlord is willing to compromise.
b. It helps send the message that the likelihood of the landlord being flexible on various other clauses is not great. If the landlord was willing to be flexible on those scores, the lease form would already reflect that flexibility.
This approach results in shorter, easier negotiations, increasing efficiency, thus saving the landlord and tenant money. It probably results in wiser agreements and better tenant relations as well. And the best part is that this result is achieved without the landlord giving away any position about which it actually cares.
There is no universal list of the provisions in a lease that should be prenegotiated. There is no universal right way these provisions should come out. The individual needs (or quirks) of the particular landlord, the accepted practices in the region, the size of the relevant structure, the prototype size of any individual premises, the landlord's practices concerning the necessary level of credit- worthiness of prospective tenants and the statutory or common law of the relevant jurisdiction are but some of the factors that might affect any of the provisions to be discussed.
Here are some of the conventional compromises to which landlords and tenants often agree. In using as many of these compromised positions as a landlord finds acceptable in its standard lease form, the landlord has prenegotiated the lease and created efficiency not only by including the acceptable provisions, but by thinking through and rejecting the other provisions. Having thought through these positions in advance and deciding to reject same, the landlord will be able to respond immediately to the inevitable tenant requests to modify these particular provisions with rational arguments.
Virtually every tenant is going to want to know its initial build-out is acceptable and that thereafter it has some level of freedom to make alterations. A landlord should consider including in the form permission, without consent, to make nonstructural alterations that do not materially harm building systems, perhaps subject to a dollar cap. If a cap is included, it should not be so low as to forestall the possibility of any meaningful work being permitted. A landlord should consider allowing alterations that do not require consent to remain at lease expiration. The landlord would also be obligated to inform the tenant at the time of granting approval (as to alterations that require approval) whether the relevant approved alteration may remain at lease expiration.
Affiliates, mergers and consolidations, asset sales, public companies, estate planning-does a tenant's need for some flexibility in these provisions without requiring consent, or being subject to recapture or a rent hike or a landlord review fee, come as a shock to anyone? A landlord should consider what is acceptable-and consider volunteering it in the lease form.
ASSIGNMENT OF EXTENSION & EXPANSION OPTIONS Is this part of the bargain for which the tenant is paying, and accordingly assignable whenever the lease is assignable, or personal to the named tenant? Traditionally, on the East Coast the right was the tenant's to assign. On the West Coast, these rights traditionally have been viewed as personal to the named tenant. A landlord might consider allowing the rights to be transferred, but only to any person to whom the lease can be transferred without consent.
The landlord often starts with the position that any penny spent on anything is properly included in Common Area Maintenance (CAM), and often, but not always, provides for some type of amortization of capital items. The tenant often starts with the position that it should have no responsibility for capital items, as it has no equity in the building. A prenegotiated compromise to consider is to include in CAM only capital expenditures incurred to replace existing building equipment or reduce building operating costs (as compared to lobby renovations, art work or other changes mostly designed to attract new tenants). Such expenditures would be amortized over the useful life of the improvement (without an artificially short absolute maximum period of reimbursement), and without an interest factor (the tenant is not financing a purchase; it is paying an annual use charge).
A landlord should consider providing this right. If it does, the landlord should further consider not mandating that the tenant provide specific information as to the details of the complaint in advance of the audit. If the tenant knew the details, an audit wouldn't be needed. And the landlord should consider not mandating that the auditor be a Big 4 firm or even a certified public accountant; the required professional fees might be enough to cause the tenant to forgo the audit. A landlord should consider as well not mandating that the auditor refrain from working on a contingency fee or from contacting other tenants, although these last two points are ones landlords might be loath to relinquish.
Leases almost invariably provide landlords tremendous flexibility while very often providing tenants none. A landlord might consider providing tenants a right to terminate, especially as the term draws to a close, and might also consider granting this right if parking or access is affected even if there is no direct damage to the premises.
A landlord should consider allowing de minimis amounts of cleaning and other toxic products to be maintained in offices in the ordinary course, and consider making compliance with law, as compared to compliance with the landlord's subjective decisions, the standard of required behavior. The lease should make clear that the tenant has no responsibility for pre-existing conditions.
Absent a 9/11- or Katrina-type disaster, how often are services interrupted for extended periods of time? A landlord should consider volunteering rent abatement if services are disrupted for more than a relatively short period-maybe 72 hours.
A kick-up of basic rent is de rigeur. But a landlord should consider dropping both multipliers of CAM and broad-stroke indemnities against any and all damages, and protect itself from problems with new tenants in the delivery section of that tenant's lease.
A landlord should consider volunteering that multiple tenants in the same zone will divide the hourly rate, rather than each paying in full.
How many thousands of times has this topic been discussed? And how many times has a landlord terminated a lease without demanding the overdue rent be paid-not once but multiple times? Landlords do not desire evictions or empty spaces-they want the cash flow. Almost invariably, notice of nonpayment is delivered. So a landlord should think about putting it in the form. And it does not have to be all or nothing-perhaps on the third monetary default in any consecutive 12-month period the landlord can proceed without notice. And landlords should also consider whether requiring credit and payment history reports on prospective tenants might be a better tool to guard against nonpayment than preserving the lease clause entitling the landlord to evict without notice.
A landlord should consider whether the form, if it includes the right to accelerate rents, should also include a fair market value credit for the then-remaining value of the space upon such acceleration of rents.
A landlord should contemplate whether its purposes are not better served by acknowledging that it has an obligation to mitigate, while also objectively defining what steps will be deemed to satisfy this obligation.
Rather than simply mandating that the tenant, on demand, deliver an estoppel-a document in which the tenant is asked to make certain representations-a landlord should consider volunteering to deliver one when requested by the tenant. Given the possible volume of requests, a landlord might also contemplate including an appropriate administrative fee to be charged in connection with processing such a request.
There is no one perfect lease that works for every landlord in every setting. But if the time and effort is invested to prenegotiate a lease form, and to simply trim its length as well, the effort will be rewarded in savings of time and money, without loss of meaningful rights."
from The National Law Journal, October 3, 2005 for more information go to:

Tuesday, February 13, 2007

Negotiating Common Area Costs

Typical mall or shopping center customers expect certain things in their shopping experience. They certainly expect clean floors, a safe environment, plowed and maintained parking lots, holiday cheer in the form of decorations and the like. For those who negotiate shopping center leases, we know these basic requirements present significant issues in any lease negotiation.

The expenses for these and other aspects of making the shopping center an attractive and safe destination fall into a general category called common area maintenance (CAM). Determining what is included in CAM and who pays for it can be among the most important and challenging aspects of any lease negotiation.

The respective goals of the landlord and tenants regarding CAM seem fairly obvious — the landlord wants to pass every possible expense through to tenants, while tenants want to pay as little as possible for CAM so that available cash can be invested in inventory, sales labor and other revenue-generating uses. But taking these extreme stands can result in undesired consequences. When CAM is too expensive for tenants, they will look elsewhere for space so they do not suffer cash flow problems. And when the landlord carries an excessive share of the CAM burden, important maintenance initiatives may be delayed or neglected.

Because neither party benefits in these extreme situations, the negotiation process to arrive at a fair and reasonable distribution of CAM costs is a delicate and essential component of the landlord-tenant relationship. The negotiation of the CAM clause will typically touch on several key topics that determine the composition of CAM, its distribution among tenants, and how these costs increase over time.

Is it CAM or isn't it?

In basic terms, CAM should be based upon the landlord's actual and reasonable net costs in repairing and maintaining the common areas of the shopping center. Typical components of CAM include, but are not limited to, expenses related to cleaning, operating, managing, equipping, decorating, policing, lighting and repairing the shopping facility and parking areas as well as taxes and assessments on those facilities. Utilities, landscaping, insurance, wages and benefits of personnel and depreciation of equipment are also included. An administrative fee may also be added to CAM, often as a percentage of the CAM amount.

The tenant may seek to limit the term common area to include only parking areas and enclosed areas meant for customer use, not areas such as adjacent parcels and outdoor areas used only for certain tenants or the landlord. Some tenants seek specific exclusions. For instance, some refuse to pay any costs associated with structural, roof or exterior repairs. Many tenants take the position that common area expenses should not include capital expenditures of any kind as these are investments that add value to the landlord's property.
Landlords may argue that tenants, too, benefit from capital expenditures, such as the replacement of a deteriorated parking lot.

Other common exclusions sought by tenants are original construction and improvement costs, mortgage interest, some taxes, improvements made to tenant spaces and special services for individual tenants. Costs for attracting and signing new tenants, any reimbursed costs such as through insurance coverage, landlord executive salaries and the cost of correcting code violations are also excluded in many cases. Clearly, the final negotiated list of exclusions can have a significant impact on the actual CAM charge incurred by the tenant.

What is a fair share of CAM?

CAM costs are most often distributed on a pro rata basis among tenants of the shopping center or mall. The formula for that distribution is generally based on the tenant's square footage as a percentage of total leasable retail space. However, several variables can dramatically affect the final calculation.

The tenant's square footage must first be determined. Issues may arise regarding mechanical or non-selling space, or unusable space such as a large basement with more area than is reasonably required or desired by the tenant.

Calculation of the total square footage within the center may exclude significant portions of actual area. For instance, department stores and/or anchor stores often contribute to CAM on some basis other than square footage, so the space of those stores is not counted in the proration. Exclusion can be based on the size, classification or use of the space, so the definitions used in the CAM clause must be carefully examined. For instance, if major stores of at least 50,000 square feet are excluded from the CAM denominator, does a 60,000-square-foot cinema qualify as well? Is a cinema really a major store? Is a major store defined in the lease other than by size?

Because the result of these exemptions is essentially a subsidy of the large stores' CAM costs by smaller tenants, negotiation on this topic can be particularly contentious.

What about fees?
Most CAM clauses include administrative fees or management fees, or both. The lease may stipulate that the tenant shall pay an administrative fee in the range of 5 percent to 18 percent of the total cost of operating and maintaining the center. This fee, in essence, compensates the landlord for tending, on behalf of the tenants, to all of the important matters that make the center run smoothly. While this is a fairly standard fee, an additional management fee is less universal. From the tenant's perspective, the two fees essentially pay for the same thing and constitute unnecessary double dipping by the landlord. The landlord, however, may seek the management fee to pay for a third-party management company hired to manage the center.

Sophisticated clients may seek to limit which cost items are used in calculating the administrative fee. For instance, big ticket items such as utilities and insurance, over which the landlord may not really administer or manage, may be excluded.

How quickly will CAM costs rise?

Predictability of costs is one of many desirable characteristics that a retailer looks for in a location. As such, the use of CAM caps has become more common in the community center, strip center and lifestyle center world. These caps limit the amount by which the tenant's CAM cost will increase year to year.

Caps can be structured in a variety of ways. The simplest is a first year cap, which essentially pegs the initial year's CAM at a specific not-to-exceed amount that is set by the leasing agent when the deal is made. An ongoing CAM cap protects the tenant through subsequent years. This cap specifies that CAM cannot rise by more than a specified percentage over the previous year, with that percentage often tied to an index such as the Consumer Price Index.

Caps can be cumulative or non-cumulative. A cumulative cap allows the landlord to carry forward unused increases when actual CAM costs rise at uneven rates. For instance, if a CAM cap is 5 percent, but actual costs rise only 3 percent in the first year, the additional 2 percent could be applied to the second year so that if actual costs rose by 7 percent in that second year, the landlord could recover the entire increase. A non-cumulative cap would limit the increase to 5 percent per year.

Landlords typically insist that CAM caps exclude certain types of costs, often referred to uncontrollables. Expenses such as utility costs, snow removal and security may be excluded so that the landlord is not saddled with the full burden of unexpectedly high cost increases. Typically, a tenant will accept this uncontrollable exclusion from a CAM cap because the landlord truly has no control over these costs and allocating that risk solely to the landlord is an inappropriate distribution of responsibility.

Do the numbers add up?

A CAM clause may include an array of definitions, limits, calculations, exclusions and exceptions. All of these specifications open the possibility for errors, misinterpretations or disagreement on appropriate CAM costs for each tenant. With this in mind, tenants frequently negotiate for the right to audit the landlord's books and records to verify that only permitted costs are included in CAM and that the tenant's specific charge has been properly calculated.

These audit provisions typically designate how often audits can be initiated, how the process will be conducted, and how any discrepancies uncovered in the audit will be resolved. Landlords will seek a variety of limits on audits, including confidentiality. From the landlord's perspective, it is not appropriate for tenants to share audit information. Each lease is different and an issue discovered in a CAM audit for one tenant may or may not be relevant to a different tenant's lease.

Is there a better way?

CAM clauses are complex, the negotiations required to create them may be lengthy and their terms may cause friction between the landlord and tenant through the entire lease period. Given these truths, a fixed or flat CAM has some appeal. Pyramid introduced the concept to its portfolio in the early 1990s and some other owners have since followed suit. A fixed CAM may be based on several methods, all setting an initial CAM amount and a predetermined annual rate of increase.

A fixed CAM rises by the designated rate of increase, regardless of actual costs, so these figures will be negotiated carefully, as well the rate of increase. Setting the CAM too low results in the landlord subsidizing tenant CAM costs. Fixing the CAM too high means that the tenant overpays for the various CAM services. Larger developers with a significant national track record may be better positioned to set a realistic CAM amount than new or more regional players. A national landlord can balance CAM costs over an entire portfolio so it may be better positioned to absorb the costs associated with an unusually snowy winter, for example.

While tenants may feel they will benefit if the landlord underestimates the actual CAM costs and sets a low fixed number, the benefit may be short-lived. If the landlord cannot recoup its costs, it will be strongly motivated to cut expenses. Disputes may arise about whether minimum maintenance standards are being met and patronage at the center may decline as the center begins to show its age without necessary or important upkeep. One solution to this problem is to periodically reset the fixed number based on actual costs. However, for tenants, the reset concept is somewhat unappealing because it diminishes the fixed nature of the tenant's costs.

With a fixed CAM, landlords typically demand that tenants forgo the right to audit CAM costs as CAM essentially becomes additional rent that is not based on actual incurred costs. Administration of CAM is also simplified with fixed charges. Also, because fewer CAM details must be negotiated, closing a lease deal can generally be accomplished more quickly under this arrangement.

A difficult issue

CAM continues to be a difficult issue for both landlords and tenants.
While fixed CAM initially appeared to be the answer to so many problems from lease negotiation to lease administration, in all but the largest portfolios, it carries substantial risk for the landlord. Since we do not have a crystal ball and cannot predict exactly what will happen with costs in the future, the landlord assumes a great deal of risk in the fixed CAM situation. Therefore, pro rata CAM continues to be the most common method for payment of these expenses. Landlords and tenants need to adopt the long term view of their relationship to insure that the landlord is fully reimbursed for its costs and the tenant is receiving for its CAM investment what it bargained for - a well maintained and managed shopping center from which it can grow its business."
from Shopping Cemter Business, May 2006 for more information call 713 782-0260 or check our web site:

Friday, February 9, 2007

Tenants have the Power and more with Consent

"In a commercial tenancy, the tenant typically must obtain consent of the landlord to assign or sublet the premises. Unless specifically stated otherwise in the language of the lease, a landlord must not unreasonably withhold consent when a tenant is seeking to alienate its interest.
But what about the reverse, albeit somewhat less common, situation where a landlord must obtain tenant consent in order to further develop the property? Typically, tenant consent obligations arise in shopping centers where major tenants have negotiated the right to approve or reject further construction that affects their business.
The most recent decision addressing the reasonableness of a tenant withholding consent from a landlord is Safeway Inc. v. CESC Plaza Ltd. Partnership, 261 F. Supp. 2d. 439 (E.D. Va. 2003). In Safeway, a supermarket leased space in an Arlington, Va., shopping plaza. The lease contained a clause requiring the landlord, after completion of initial construction of the shopping plaza, to obtain Safeway's consent for any future alterations to the common areas (including parking).
The shopping plaza encompassed about 40 stores, located on the ground floor of the Plaza Block. The Safeway store opened onto the interior of the Plaza Shops mall. Therefore, customers entering from the surface parking lot would have to walk down an interior mall corridor, approximately 100 feet in length, to reach the store entrance. A two-story parking structure ran alongside the plaza between the roadway and the structure containing the stores. The question presented involved whether Safeway acted reasonably in withholding consent to the landlord's $40 million proposed renovation of the Plaza Block and surrounding area, which included the removal of the parking structure used by Safeway customers and the construction of new retail stores.
In determining whether a tenant has unreasonably withheld consent, the Safeway court first adopted the Restatement rule that places on the party seeking consent the burden of demonstrating that the other party acted unreasonably rather than objectively, and not on mere whim or caprice. The court next established what can be seen as a business judgment rule in evaluating the reasonableness of a tenant's reasons for withholding consent. When evaluating whether reasons asserted by a tenant are valid business reasons, the court will defer to the tenant's prior experiences in the industry as a basis for determining how it reasonably believes the landlord's alterations will affect the tenant's business and customers.
When evaluating whether to withhold consent, a tenant need not perform studies or hire experts to determine whether the proposed
alteration(s) by the landlord will indeed result in adverse impact(s) to its business. Instead, the tenant may draw from its prior experiences with issues such as those resulting from the landlord's proposal, e.g., reduction in parking or loss of visibility. Further, the tenant's refusal to grant consent will be examined from the time such refusal is made, not post hoc on the basis of studies conducted and data collected by the parties subsequently for the purposes of litigation, although "[t]hose studies may be relevant with respect to other issues presented.
The deference given to the tenant's concerns presents a difficult burden for the landlord to overcome. This is evidenced by the Safeway court holding, `even if post hoc studies did not support Safeway's concerns or tended to show that those concerns were unfounded or of doubtful validity, it does not necessarily follow that the concerns were therefore an unreasonable basis on which to refuse consent.'
Safeway proffered several arguments, including modification of the parking arrangement and loss of visibility, to buttress its position that withholding of consent was reasonable under the circumstances.
The court's analysis as to these individual reasons for withholding consent are worth exploring because they are probably the most common reasons for withholding consent. In addition, these factors play a key role in negotiating shopping center leases and culminate in bargained-for covenants within a lease whereby a landlord is required to obtain the consent of its tenant prior to altering the premises.
The number and location of parking spaces are very important to a shopping center tenant. In Safeway, the landlord's proposal would alter the parking configuration by eliminating a surface parking lot, leaving Safeway with only underground parking for its customers.
Safeway withheld consent on the ground that this change in parking would deter customers from its store because, in past experiences at other stores, Safeway had determined its customers did not perceive underground parking to be as safe or convenient as surface parking.
Safeway did not, prior to denying consent, conduct any parking studies, hire a traffic engineer or take site-specific customer surveys concerning the landlord's proposal.
Relying on the tenant's business judgment, the court held that `Safeway's reliance on its experience, without undertaking any study, cannot be said to be unreasonable given the Restatement standard. Safeway's concerns in this regard cannot be said to be without significance or based on mere caprice or whim or personal prejudice.' In fact, the court took its analysis one step further by referencing studies performed for trial that concluded that urban grocery store customers were indeed receptive to underground parking. Safeway even conceded that underground parking at a nearby Safeway store functioned effectively and was accepted by its customers. Nevertheless, in the court's view, this did not render unreasonable Safeway's decision to deny consent, and the court found in favor of the tenant on the parking issue.
When evaluating whether visibility was a valid business reason for withholding consent, the court in Safeway relied on K-Mart Corp. v.
Oriental Plaza Inc., 694 F. Supp. 1010 (D.P.R. 1988), aff'd, 875 F.2d
907 (1st Cir. 1989). The K-Mart court applied the same section of the Restatement as did the Safeway court. In K-Mart, the court upheld the tenant's argument that consent was reasonably withheld because the landlord's construction would impair visibility of K-Mart's building and signage.
Examples of valid business reasons recognized in K-mart for withholding consent based on loss of visibility are the inability to identify the store from the local roadways, the reduction that the loss of visibility would have on impulse shopping and the negative impact loss of visibility would have on the established street presence of the store. K-Mart's belief that these factors would reduce sales was more than reasonable in the court's view, noting that `the decision to enter a shopping center is difficult enough without removing the major incentive, the sight of the K-Mart.'
The court further acknowledged K-Mart's desire to maintain its goodwill through uniformity of its stores, which the visual obstruction would essentially tarnish. The court in K-Mart stressed the ability to protect `the kind of surroundings K-Mart bargains for when opening stores' and recognized that `without the high visibility that this K-Mart store once possessed, impulse sales will suffer.'
On the other hand, the facts in Safeway led to the conclusion that Safeway would not suffer a loss of visibility justifying the withholding of consent. This conclusion was primarily due to the fact that Safeway, even before the landlord's proposed construction, had no visibility from the street and therefore lacked the street presence at issue in K-Mart. In addition, the only Safeway sign was located on the interior of the building, and the parking structure that already existed blocked all views from the street of the entrance to the shopping plaza.
Although the court did not accept Safeway's loss-of-visibility argument, it did acknowledge that an obstruction to a storefront's visibility typically would be a reasonable ground for withholding consent. As stated by the court, `placing a building in the parking lot of a store would normally have the effect of blocking the view of the store from the street, thereby reducing, at least to some extent, the general visibility of the store.'
In distinguishing Safeway from K-Mart, the court conceded that the shopping plaza in Safeway was not the normal suburban-type center where a grocery store fronts an open parking lot in view of passing traffic. Therefore, if a tenant has established a street presence within a shopping center, withholding consent will be reasonable if the tenant in its own business judgment believes the proposed alteration by the landlord would have a negative impact on its street presence.
The Safeway and K-Mart cases demonstrate that a tenant possessing a right of consent to the landlord's additional development can have broad latitude to withhold consent based on objective reasons in consideration of the tenant's business judgment. By developing a business judgment rule for determining whether a tenant acted reasonably in withholding consent, the courts have established a trend that favors the ability of tenants to maintain their business at the expense of a landlord's ability to maximize its profits by expanding the premises.
These decisions easily could have resulted in a rule mandating that a tenant come forth with factual proofs demonstrating the adverse impacts resulting from landlord's proposal. Clearly, courts have taken into consideration that businesses engage in substantial due diligence concerning issues such as parking and visibility before choosing a store location. Furthermore, a business's desire to maintain its goodwill by having uniformity among its store locations will be deemed significant.
Finally, these decisions establishing a business judgment rule reflect that a tenant's decision to withhold consent should not be judged in a vacuum. Allowing a tenant to draw from past experiences at different locations indicates a willingness to account for future considerations and events, which are sometimes unknown, to be factored into the equation of determining whether to withhold consent." National Law Journal, March 27, 2006
To answer more of your questions please see:
or call Ed A. Ayres at 713-782-0260

Wednesday, February 7, 2007

Landlords are Charging tenants for capital improvements

Some lease charge tenants for all capital costs as an operating expense, presumably on the grounds that if you do not ask, you do not get. If read literally, that would make a tenant who is in the building at the time a roof is replaced liable for its prorate share, in a single year, of the entire cost of the roof, ignoring that the expected life span of the new roof far exceeds the term of the lease.
Capital costs are usually predictable years in advance (and so are already a component of base rent), or are usually covered by insurance if arising from force majeure, etc. The clause (in the BOMA publication) is fair, in that it offers to amortize the cost.
But it still charges the tenant for capital costs and the underlying principle is still at stake.
Another common compromise is to charge the tenant only for capital costs that reduce, or are intended to reduce – what would otherwise be operating expenses – or the rate of increase in operating expenses – so that the landlord at least recovers the cost of expense- saving equipment.
There may still be some further negotiation, such as a tenant request that the amount passed-through to the tenant under such a clause not exceed, in any given operating year, the amount of operating expense savings realized. This sounds fair but is extremely difficult to calculate, particularly given outside variables (such as the weather, the comparative cost per gallon of fuel oil). The advantage of such a clause may be that the tenant has no greater ability to challenge such a determination itself, is unlikely to audit operating expenses anyway, and its outside auditor also probably lacks the expertise to seriously challenge such a determination by the landlord." From : Guide to Writing a Commercial Real Estate Lease, published by Building Owners and Managers Association International (BOMA) For more info: contact ask for Ed A. Ayres ; President

Friday, February 2, 2007

Ill-Defined Provisions are Generally Interpreted in the Landlord's Favor.

"Many tenants focus exclusively on things like fixed rent, operating expenses, real estate taxes, insurance, utilities and sundry charges. In many office leases, the landlord is required to provide basic services which are included in the monthly rent or charged extra via the operating expense reimbursement clauses. Services typically include heating and cooling, cleaning and vacuuming, electricity, elevator services, security, water, and parking. The landlord also maintains, repairs, landscapes, cleans and lights the public areas of the building. Extra services for which the landlord typically bills extra may include special security, freight service, overtime heating and cooling, and after-hours special cleaning.
It is best for both parties to anticipate these services and specify the rates and quality of the services as well as the mechanism for requesting them. If pricing or a methodology for costing the services is omitted from the lease, the tenant can be at the mercy of the landlord. Likewise, the landlord should be fairly compensated for running a chiller all weekend during a hot summer.
Some specific examples of services that can be negotiated upfront by both parties:
• Definition of normal building hours and how operations are affected by weekend or holiday.
• Normal hours for heating and cooling.
• Performance levels for HVAC and response time for adverse conditions.
• Electrical power supply capacity.
• Method and pricing of utilities (electric, gas, water, sewer).
• Cleaning specifications and timing.
• Cafeteria, gym, daycare and parking hours.
• Elevator service and hours (passenger & freight).
By discussing, anticipating and negotiating some of these services upfront both parties can set expectations properly for extra services. The tenant will be happy with the level and quality of services and the landlord will benefit from a satisfied tenant that pays the agreed-upon charges promptly." from SS&C, May 12, 2006 For more information contact Ed Ayres at :
or phone 713 782-0260