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SCT

Reciprocal-easement disagreements: Segmented ownership a challenge to redevelopment efforts

October 7, 2019

Residents of Fond du Lac, Wis., are growing restless with the lack of redevelopment progress at their Forest Mall. At least, they have grown impatient with the level of progress they can actually see firsthand.

Dallas-based ATR Corinth Partners — owner of this mall that has already lost JCPenney, Sears, Younkers and a Firestone auto shop, among others — is at work on a plan to bring in new restaurants and retailers, including a 160,000-square-foot Meijer grocery store. Indeed, Meijer does have a parcel under contract, but the deal requires the approval of some of the other parcel owners. And the reciprocal-easement agreements (REAs) under which these owners are operating must be renegotiated before those approvals can be secured. Typically, an REA spells out the details governing a center’s hours of operation, signage, use restrictions, parking access, cost-sharing arrangements for private roads and more. Perhaps unsurprisingly, the greater the number of owners involved, the more complicated any negotiations become.

“Certainly, there’s a lot of creativity happening with mall redevelopment,” observed Scott M. Holmes, a Phoenix-based director of national retail with Marcus & Millichap. “But it’s not without difficulty and complexity in getting all the parties together to sign off on making change.”

Such situations are becoming more common for mall owners across the country, particularly those looking to redevelop lower-tier properties, observers say. Not only are there relatively few retailers expanding substantially, but the newer concepts or digital natives opening brick-and-mortar locations are unlikely to open their first round of stores in malls located in small, out-of-the way markets, says Shlomo Chopp, managing partner of New York City–based Case Equity Partners, a value-add investment firm. Consequently, landlords may now be seeking to bring in the sorts of tenants that were restricted in the past, owing to concerns over parking, competition or type of tenant use.

“As a property owner I want to do whatever it takes to get foot traffic to my property, which means I have to be creative and try new things,” said Chopp, who is confronting similar redevelopment challenges of his own at East Town Mall, in Green Bay, some 75 miles from Fond du Lac. “But too often, adjacent property owners are shortsighted and don’t want to be flexible.”

“Retailers want to know if their new neighbors are going to be competitive or complementary, but the developer may not know who all the tenants will be yet”

Moreover, it can be difficult to persuade some property owners to commit to a redevelopment project that has yet to determine how all the pieces will fit together, even at a mall that is already losing value, notes S. Christopher Herthel, an Irvine, Calif.–based director at accounting firm Moss Adams. “It’s a chicken-and-egg thing,” Herthel said. “Retailers want to know if their new neighbors are going to be competitive or complementary, but the developer may not know who all of the tenants will be yet.”

Even so, landlords and tenants recognize that the retail landscape has changed, and many are getting beyond any traditional adversarial negotiating relationships and displaying greater willingness to work together to fill vacancies and boost traffic, notes Larry Rose, a co-founder of The MichelisRose Group, a development and investment firm in Woodcliff Lake, N.J. Rose cites the proliferation of physical-fitness and medical tenants, for example, in many contemporary retail settings: Such uses were usually restricted only a few years ago.

Plenty of good old-fashioned horse-trading still goes on, to be sure. Adjacent parcel owners tend to want property improvements, cash or similar incentives in exchange for adjusting to or waiving certain REA rights. All of this will vary, of course, given the distinct situations of the property owners and what they may be trying to accomplish, Rose points out. “But all parties are going to be much more open-minded,” he said, “if what is being proposed will drive more traffic to the mall.”

By Joe Gose

Contributor, Shopping Centers Today

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