RDC principal Sean Slater’s design skills are in demand among developers seeking to turn enclosed malls into mixed-use hubs. But at the same time, the architect said, several of these projects are stuck in drawing-board limbo. The holdup isn’t public opposition or lack of financing; it’s the power granted to anchor stores in their leases and reciprocal easement agreements.

“The big hang-up is these existing REAs with department stores,” Slater said. “The owner of the mall cannot make real changes without gaining access to or control of the REAs for that property. A tenant like Macy’s might be hanging on to their parcel, with the ability to squash any potential plans for that site.”

Also check out: Mammoth Mall Makeovers Answer the Housing Crisis

Mall reinventions are on the upswing, but experts emphasize the need to tread carefully when dealing with tenants that could slow or stall projects by withholding their approvals. To boost the odds of breaking the logjam, they encourage would-be mall redevelopers to:

• conduct in-depth due diligence into leases and REAs early in the planning process
• be deliberate about when and how to tell mall retailers about redevelopment plans
• engage constructively with key retailers rather than treating them as adversaries
• team with municipal officials and community groups to encourage progress

Why REAs Loom Large

The term “mall landlord” conveys the sense of a single actor in control of its own kingdom. But a better analogy for the typical 80- or 100-acre mall site is that of a neighborhood of different property owners: not only the landlord but also anchors like Macy’s, Boscov’s, Dillard’s or Nordstrom.

In that context, REAs — also referred to as conditions, covenants and restrictions —  are a bit like the covenants that protect property owners in a neighborhood association. “The REA is the mechanism by which those [property-owning] tenants agree to how the property is going to be managed, parking ratios, who is going to take care of what, how insurance will be handled and so on,” said Greensfelder Real Estate Strategy founder and managing principal David Greensfelder. “More to the point, they are also where those parties’ different use and exclusives rights are protected.”

In addition, retailers that lease space from the landlord may enjoy similarly powerful refusal rights, exclusives and other protections, including language that prevents the landlord from changing the property’s REA or CC&Rs without their consent, noted Ballard Spahr partner Tina Makoulian. The attorney has represented mall REITs and other landlords in negotiations with anchor stores over planned redevelopments. “If a portion of the mall is going to be redeveloped, then an anchor tenant or grocer — Target, for example — will typically have rights over use, as well as building, and other restrictions on operations,” she said. “They tend to have a lot of say over what happens at the mall.”

Many REAs include site plans that carve out protected areas of control: geographic fiefdoms for specific property-owning tenants. “That retailer may have a say over anything happening or any tenant the landlord wants to bring to the protected area,” Greensfelder explained. “Every single party to the CC&R has an approval right, so changes generally must be unanimous.”

Some of these documents protect the landlord by using proscriptive language, such as “unreasonably withheld or conditioned,” to limit retailers’ ability to block new tenants or redevelopment plans, Greensfelder noted. In plenty of other agreements, though, key tenants enjoy “sole and absolute” approval rights over what happens both on their property and elsewhere on the mall site.

For mall owners seeking to pull off ambitious redevelopments, therein lies the rub.

“There might be one little restaurant pad that, because it is independently owned and has a say under the CC&Rs, could be completely holding up the redevelopment of a 100-acre project,” Greensfelder said. “That tenant is sitting there saying, ‘No, I want $20 million for my piece of property that is worth $5 million, and my vote is so important, I know you’re going to give it to me. I’ll hang out here until you figure it out.’”

REAs/CC&Rs generally run with the land, meaning that the buyer of an anchor tenant’s property also gains control over any rights granted under the REA. In fact, Greensfelder said, speculators have been known to snap up well-located parcels in hopes of one day winning paydays from landlords that want to redevelop these sites. “When you buy that parcel, you buy a seat at the table in granting or not granting approvals under the REA,” the consultant noted. “Other people now need to play ball with you.”

Cushman & Wakefield vice chair and Americas retail capital markets practice leader Mark Gilbert added: “Over the years, it wasn’t uncommon for anchors like JCPenney to sell a piece of their land to restaurants or tire, battery and accessory users. If you’re going to redevelop the whole mall site, the different property owners with their intertwined relationships need to cooperate, which is why these projects can be so complex.”

According to Slater, certain department store chains tend to drive hard bargains in pursuit of concessions. “Those department store boxes are very valuable when the department store knows what the developer wants to do,” the architect said. “On one mall project we were working on, the department store kind of rose out of the darkness and said, ‘We want a new building and two new parking garages, and after that we want to be able to do whatever we want with our parking lot.’” The negotiations are ongoing, Slater said.

Reading the Fine Print

As they start planning mall redevelopments, landlords should ask their real estate attorneys to analyze the protective clauses and restrictions in all title documents, leases and REAs/CC&Rs, advised Makoulian. These can vary tremendously from mall to mall, the attorney noted.

For example: Though anchors were at the height of their power decades ago, some of the oldest legal agreements often contain fewer protections, not more. “Documents for older malls from the 1950s or ’60s often are quite vague, without many parameters around approval rights,” Makoulian said. “Back then, tenants didn’t draft 100-page REAs. It was a simpler time. For a mall with a more recent vintage, though, it would be typical to see pages and pages of specific approval standards and use and redevelopment restrictions.”

Over the years, many malls also evolved a “bifurcated set of standards,” in which tenants have absolute discretion over some property decisions but less say over others, she said. Adding another layer of complexity, different anchors may have negotiated special treatment for themselves along the way. “Maybe at some point, a replacement anchor came in and negotiated new approval rights or restrictions,” the attorney said.

While community groups and public officials may be eager to remake a dead mall that has become an eyesore, their plans, too, must account for the fine print in privately negotiated REAs/CC&Rs. “Oftentimes what I’m doing is going to the county recorder’s office, pulling the title report and analyzing the CC&Rs for the municipality,” Greensfelder said. “Officials need to understand where their tools don’t reach, as well as where they have opportunities to nudge the redevelopment along — for example, by ordinance or through zoning overlays.”

The consultant also pointed to the value of game-planning strategies based on different scenarios of property control. About a decade ago, city officials asked Greensfelder to draft a redevelopment plan for the former Vallco Mall in Cupertino, California. The consultant included one scenario in which anchor and other tenants would continue to own their own real estate, limiting redevelopment options. In another, a single entity would buy out Sears, JCPenney, Macy’s and other key retailers. The property went this latter route, and this year, owner Sand Hill Property Co. won approvals for The Rise, a 7 million-square-foot redevelopment with 2,400 residential units.

Horse-Trading, Especially over Parking

Mall anchors can stall or even kill redevelopment projects, but experts say they usually just want to do some horse-trading to improve their positions before, eventually, allowing the project to proceed. “My experience has been that eventually the different parties work it out,” Makoulian said. “Usually, there is something that the anchor tenant wants. If the landlord or developer is willing to give them that, the retailer will go along with the redevelopment.”

Truth be told, she added, grocers and department stores often are pleased when developers propose adding multifamily units as part of mall-densification projects. “They’re thinking, ‘Well, I’m going to have an extra thousand people who can walk over here and do their shopping.’”

More often than not, these landlord-anchor negotiations focus disproportionately on one detail: parking. The landlord wants to tear up asphalt to add office, hotel or residential buildings; the department store or grocer wants to make sure its customers have a place to park. “The tenant will want to know what parking ratio will be left in place after the redevelopment is completed,” Makoulian said. “If the anchor insists on a structured parking garage, that’s where the cost for the developer could run into the millions of dollars.”

Also check out:
How Much Parking Does My Center Need?
Shared Parking, Third Edition

But the intensity of the horse-trading tends to vary based on the productivity and value of the mall site, added StoneCreek Partners managing director Donald Bredberg. His firm’s real estate services include advising landlords and municipalities on mall-redevelopment strategies.

At underperforming malls with anchor and inline vacancies, even those tenants that enjoy powerful refusal rights can be cooperative, he said. “When somebody walks in and says, ‘I’ve got an idea for this location and you can stay if you wish,’ it’s rare that the retailer wouldn’t meet you in that conference room to hear the whole story,” he said. “In today’s retail environment, they understand that something needs to change.”

Moreover, today’s department stores are more willing to vacate regional malls than in the past, a trend that is creating redevelopment opportunities for landlords, said financial restructuring and bankruptcy attorney Mark Indelicato, managing partner of Thompson Coburn Hahn & Hessen’s New York office. Examples include Nordstrom’s closure of 16 full-line department stores and ongoing plans by Macy’s to shutter 125 locations over the next few years. “I’ve been doing this for 36 years, and I’ve never seen major anchor tenants leave malls at this rate,” Indelicato said. “It’s having an incredible impact.”

Timing the Discussion

When Makoulian advises developers on these projects, the attorney stresses the importance of timing: If the developer approaches the tenant about redevelopment plans too soon, the vision to which the tenant agreed could change, perhaps because the municipality insists on a different course. “That can annoy the tenant and make the developer or owner look like they don’t know what they’re doing,” she said. “You want to have conversations about one redevelopment plan, not multiple modifications.”

But if the landlord waits too long — for example, telling tenants only after a construction contract is ready to be signed — other problems could arise. “You need to go to them early enough that you can have time to address their concerns and work out any amendments to the REAs and/or the leases,” Makoulian said. “This can be complicated and could require a couple of months or longer.”

Waiting too long also makes it more likely that tenants will hear false rumors about the landlord’s plans or feel kept in the dark about the mall’s future. “We have seen litigation where the landlord neglected to speak with the anchors and they got feisty,” Bredberg said. “There’s every reason to try for engagement and not much upside in springing things on people at the last minute.”

Turning Up the Pressure

Engagement can boost the odds of advancing the project, Bredberg said, but occasionally a tenant still will make unreasonable demands or refuse to budge. Here, the landlord could consider teaming with municipal and community supporters to pressure the holdout. “Let’s say you’ve got an eyesore mall with boarded-up buildings,” the consultant said. “If four or five parties in that community are interested in seeing the project move forward, you can make that tenant the outgroup, so to speak. At some point it gets uncomfortable for them to hold up the deal, especially if the press gets involved.”

At one California mall redevelopment with a holdout tenant, residents voted with their wallets. “The tenant was assuming those residents would continue shopping at its store,” Bredberg said, “but if residents stop shopping your store because you’re the bad guy, sitting on your REA, it can be an effective form of pressure.”

Even if the negotiations are tough, hashing things out can be worth it, Slater said. The architect points to Horton Plaza, a former Unibail-Rodamco-Westfield mall in San Diego. Macy’s filed a lawsuit to halt the makeover, but Stockdale Capital Partners ultimately gained control of the site and delivered a blank canvas to RDC and design firm Rios. “We were able to rethink it in its entirety and develop a vision for a new mixed-use project,” Slater said. Delivery is set for next year.