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Perimeter and Outparcel Redevelopment
in Retail Centers: Due Diligence
and Documentation
Today’s faculty features:
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THURSDAY, APRIL 26, 2018
Presenting a live 90-minute webinar with interactive Q&A
Kathleen Dempsey Boyle, Partner, Meltzer Purtill & Stelle, Chicago
Sindhoo Nackeeran, Meltzer Purtill & Stelle, Chicago
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FOR LIVE EVENT ONLY
Perimeter and Outparcel Redevelopment
in Retail Centers:
Due Diligence and Documentation
Kathleen Dempsey Boyle Sindhoo Nackeeran
Meltzer, Purtill & Stelle LLC Meltzer, Purtill & Stelle LLC
300 South Wacker Drive, Suite 2300 300 South Wacker Drive, Suite 2300
Chicago, Illinois 60606 Chicago, Illinois 60606
[email protected] [email protected]
(312) 987-9900 (312) 987-9900
Overview – Changing Trends in Retail
The New Economic Reality
• Internet sales and retail mismatches are driving a unique flip-
flop away from parking intensive megastores – creating new
opportunities
• In the past, big box users were very focused on large parking
fields
• Downsizing of existing boxes, store closings and zoning code
reductions in required parking spaces have freed up retail
space and parking lots
6
The New Economic Reality
• Some retail centers don't work in the manner originally
configured – owners want to transform their sites
• Brightest spots in retail development are the surge of interest
in restaurants and "service oriented" retail – a perfect target
for outparcel development
7
The New Economic Reality
• Moving from one development model to another is creating
opportunities
• Single tenant outparcel and small strip perimeter developers
have remained active
• Buyers still seek single tenant assets even if tax code is in
flux
8
Legal Hurdles
• Legal concerns often outweigh physical or geographical
constraints to redevelopment
• Municipalities take an active role in redevelopment
• The proverbial "second bite" at the apple to fix perceived
issues or force updates to new codes and ordinances
• Lenders and existing loan constraints may play a role
• Existing restrictions impacting the property being
redeveloped may need to be revised
9
Outparcel Development
• Parcel of land that is in front or on the side of a larger
development
• Usually located near one or more public streets
• May or may not be subdivided
• Typical construction:
o Outparcel building of 6,000 square feet or less
o One to three tenant spaces
10
Perimeter Development
• Large multi-tenant building/strip center
• Conversion of single tenant building to multi-tenant (such
as Toys “R Us or anchor store)
• May or may not be subdivided
11
THE PLAYERS
• SHOPPING CENTER OWNER – THE OWNER OF THE LARGER
DEVELOPMENT
• SHOPPING CENTER TENANTS – TENANTS IN THE LARGER
DEVELOPMENT
• SELLER – SELLER OR GROUND LESSOR OF OUTPARCEL (MAY
NOT BE THE SHOPPING CENTER OWNER)
• BUYER – BUYER OR GROUND LESSEE OF OUTPARCEL
• OUTPARCEL TENANTS – OWNERS OR TENANTS OF THIS OR
OTHER OUTPARCELS IN THE SHOPPING CENTER
12
THE REFEREES
MUNICIPALITY OR LOCAL GOVERNMENTAL AUTHORITY
• NON-DISCRETIONARY GOVERNMENTAL REQUIREMENTS – EARLY
DUE DILIGENCE
o DRAINAGE REQUIREMENTS
o IMPACT FEES
o TAP FEES
• GOVERNMENTAL PERMITS – PUBLIC RESTRICTIONS
o PARKING
o LANDSCAPING AND GREENSPACE
o DRIVE-THROUGH’S
o USE
o SIGNAGE
o SUBDIVISIONS OR TAX PARCELS
13
THE REFEREES (continued)
RECORDED PRIVATE PARTY RESTRICTIONS AND APPROVALS
• CONSTRUCTION, OPERATION AND RECIPROCAL EASEMENT
AGREEMENTS, CC&R’s, REA’s (“REA’s”) – DIFFERENT NAMES
BUT SAME EFFECT
o EXISTING REA’s
o AMENDMENTS OR NEW REA’s
• LEASES AND MEMORANDA OF LEASES
o CONTROL AREAS, PARKING AND VIEW CORRIDORS
o USES
o SIGNAGE AND AESTHETICS
• OUR ROAD MAP – TITLE AND SURVEY REVIEW
PHYSICAL CONDITION AND GEOGRAPHY
• THE MOST PRACTICAL REFEREE EVER
14
MUNICIPAL PERMITTING – ASSESSING THE COST AND RISK
SITE AND USE ISSUES:
• PARKING
o PARKING RATIOS
o PARKING SPACE SIZE AND CONFIGURATION
o OUTPARCEL PARKING REQUIREMENTS
o SHARED PARKING
• DRIVE-THROUGH’S
• LANDSCAPING AND GREENSPACE
• USES – ZONING AND VARIANCES
• SIGNAGE
o ON-BUILDING
o DIRECTIONAL
o MONUMENTS AND PYLONS
• SUBDIVISIONS AND TAX PARCELS
15
PRIVATE PARTY RESTRICTIONS
Recorded Restrictions on Development and Use
• Have long durations and often certain parties have the option
to extend at their expiration
• Declaration - Imposed by a single owner prior to
development of a larger tract
• Agreement – Imposed by more than one owner
• Declaration and Agreement have the same effect – just
different origins
16
PRIVATE PARTY RESTRICTIONS (CONTINUED)
DEALING WITH EXISTING REA’S
Master REA – Is the outparcel part of the “official” Shopping Center
per a Master REA or is it subject to different restrictions?
o Definition of Shopping Center
❖ Owners with foresight push hard to keep outparcels out of
the Shopping Center definition
❖ Land once assumed to be part of the overall Shopping
Center is now being carved out
Parties – How many? Who are they? How active are they?
17
PRIVATE PARTY RESTRICTIONS (continued)
• Expiration – Very important
o Do cross-easements survive expiration?
• Enforcement
o Who enforces?
o Do they still exist?
o Do they still care?
• Approvals needed to create outparcel?
o See parties above!
GROUND LEASES
• Long-term ground leases can play the same role as an REA in some cases
• Subleases and even sub-subleases may be controlling documents
• Ground lease may be used to develop an outparcel or perimeter
development without completing a subdivision
18
PRIVATE PARTY RESTRICTIONS (continued)
USE RESTRICTIONS
Is intended outparcel use allowed?
Conflict with existing uses?
Noxious uses
Creating new use restrictions
LEASE RESTRICTIONS
View Corridors – height and bulk
Control Area – no site plan changes, including parking
Use Restrictions
Signage
Should expire with the lease
19
Do Use Restrictions Run with the Land?
• Land that has been in a “defined” Shopping Center is subdivided and ownership is separated; confirm whether pre-existing exclusives or prohibited uses remain binding
• Look for recorded restrictions and controls during due diligence
Unrecorded Restrictions and Controls
• Did the owner/seller record exclusives and restricted uses?
• Will owner remember to record evidence of restrictions prior to
conveyance to a third party?
• Are all memoranda of lease recorded?
20
Practice Points
• A seller must properly do its due diligence and make sure all
surviving restrictions are recorded against the new parcel
• Restrictions should also take into account the enforcement burden
• The move towards “Landlord Covenants” in leases with strong
tenants has only made this issue more important to assess when
creating new parcels
• A buyer should ensure that if a deed restriction is imposed to
enforce a lease restriction, any restrictive covenant contained in an
unrecorded lease will also terminate with that lease
• Sometimes a simple error like leaving off an exhibit leads to
litigation
21
THE REA AND OUTPARCELS (the deeper dive)
Easements
• Access – within development and to and from public way
• Parking – is outparcel self-parked? employee parking?
• Availability of utilities and stormwater retention
• Relocation of easements to serve outparcel (e.g., utilities)
• Simple easement for access and curb cuts using existing ring
road
Construction Issues
• Staging areas
• Blackout periods
• Construction standards
22
Common Area Maintenance (CAM)
• Outparcel parking area – maintain, repair and replace along with
larger center?
• Portion of access roads
• Cost allocations
Maintenance of Outparcel, including capital repairs
Restrictions
• Permissible Building Areas (PBA’s)
• Exterior appearance
• Height and bulk – visibility
THE REA AND OUTPARCELS (the deeper dive) (cont’d)
23
THE REA AND OUTPARCELS (the deeper dive) (cont’d)
Opening or Operating Covenants
• Single tenant-oriented
• Prominent outparcel – what if it goes dark?
Signage
• Pylons – less common for outparcels
• Monuments
• On-building signage – any limits
o per side of building
o size
o tenant name only?
• Directional
• Check municipal restrictions
24
25
26
When to Amend, Supplement or
Restate an REA
Amend: When moderate changes are made, provisions need to be updated, parties added or removed
Supplement: Minor changes, or financial or restriction changes between less than all parties
Restate: When provisions are stale, major changes are contemplated, or document(s) have been amended several times before
27
MULTIPLE REA’s
1. Fifth Agreement Amending and Restating Declaration of Establishment
of Restrictions, dated as of July 8, 1980, amended by:
a. Sixth Agreement Amending Declaration of Establishment of Restrictions
dated February 16, 1982; and
b. Seventh Amendment to REA Agreement dated October 25, 1990
2. First Agreement Amending and Restating Easement Restriction and
Operating Agreement, dated as of July 8, 1980.
3. Cross Easement Agreement dated as of July 8, 1980, as amended by:
a. First Agreement Amending Cross-Easement Agreement dated February
16, 1982; and
b. Second Amendment to Cross Easement Agreement dated February 6,
2006.
28
DRAFTING OR AMENDING REA’s
• Consider what new provisions are really trying to address
o Office – parking length of time, height restrictions on outparcel
buildings
o Restaurant – parking and length of time for parking; after-hours
operation; shared access
o Dollar Stores – aesthetics, tenant mix, high-end shopping
center vs. discount
o Tire and battery stores
o Signage for all of the above
o Perhaps focus on traffic management, access, parking,
protected areas and aesthetics rather than use.
29
DRAFTING OR AMENDING REA’s (continued)
• Consider the long term nature of the recorded document
o Sunset or term limit that is shorter than master REA term
o Who remains to enforce the REA?
• Consider relying on municipal requirements instead of inclusion in REA
o Parking ratios
o Signage
• Taking a cue from big box leases
o Limit the scope of any control area
o Be flexible regarding uses – focus on regulating underlying impact
o Focus on smooth operation of outparcel and center (access, traffic
patterns)
o Consider tying expiration of use restrictions to departure of tenants or
changes in uses in Shopping Center
30
Redeveloping Big Box Spaces
into Multi-Tenant Buildings
Perimeter Development
31
Big Box to Multi-Tenant
32
Non-Retail Premises and
Designated Parking
33
Control Areas
34
Perimeter Development
35
Approval Issues
36
Expansions and Contractions
37
Shopping Center Declaration
38
Carving Outparcels from an Existing
Center with Existing REAs
Tenant/Buyer Perspective – Due Diligence to be Conducted
• Review and evaluate all REA type documents affecting the center,
recorded lease restrictions and other documents
• Is consent needed for sale, or subdivision, or PBAs? From whom?
• Will Seller or Buyer take on consent process and documentation?
May be a lengthy and expensive process
39
Other Title and Survey Review
• Need to review REA site plans in detail. Look for drive-throughs, height
restrictions or curb cuts and access as they will affect the planned
development
• Check memoranda of lease for use, height and other restrictions. Also
check deeds in chain of title for any restrictions
• Check geographic location for other potential issues – airport, rail lines,
transit stops, gas station or other potential source of environmental
contamination
• Is there a lender? If so, a partial release will be necessary
NOTE: EMAIL US FOR SAMPLE DUE DILIGENCE CHECKLIST.
40
Anchor Store as Outparcel Developer/Seller
• Anchor has room in parking lot – anchors often own their parcel,
including parking
Necessary Documentation:
1. Purchase and Sale Agreement
• Important to address representations and warranties from Seller as
to approvals of other REA parties, permitted use, zoning
• Allocate responsibility for subdivision process and utility relocation or
separation
41
2. Mini-REA between Anchor/Seller and Outparcel Buyer
• Acknowledges a shopping center REA
• REA may expire at some point; certain provisions such as
easements may be permanent but if not address that here
• Cost sharing for easements
• Protections for buyer as to seller’s right to approve amendments to
center-wide REA which could adversely affect buyer’s development
(signage, parking, ring road alignment, increase of CAM charges)
• Multiple Outparcels – May have to amend the Mini-REA to
contemplate three or more total parties, rather than stacking multiple
Mini-REAs on the property
42
43
3. CAM Allocation Agreement
• Cost sharing of center-wide REA charges
o Can be in a separate CAM Allocation Agreement so as not to be
recorded in public records
o Provide how seller’s share of costs under the center-wide REA
will be split between the seller and outparcel buyer
4. Assignment and Assumption of Center-Wide REA
• There should be an assignment by seller and an assumption by
buyer of the REA as to the portion of the property conveyed
• Assignee is not REA party, but directly responsible for compliance
44
Making the Lender Happy
45
Due Diligence
• Track REA documents – make sure amendments match
underlying documents
• Determine Expiration Dates
REA Amendment or Restatement
• Take a cue from big box leases regarding use restrictions
Use Municipal Requirements to shorten the text in REA’s
CONCLUSION
46