U.S. retailers face some troubling times ahead, but that doesn’t mean brick and mortar stores will become extinct. Retail is moving towards a new chapter, reinventing itself and offering a more exciting shopping experience. The retail of the future will look very different from what we see today, according to the National Retail Tenants Association.
As landlords reinvest and develop their properties into mixed use centers, occupancy costs will increase for both the landlords and tenants.
As landlords reinvest and develop their properties into mixed-use centers, occupancy costs will increase for both the landlords and tenants. Paul Kinney, executive director of the National Retail Tenants Association (NRTA), says “these changes mean new expenses for the tenant.”
He explains that “for tenants, this transitioning period means serious risk of overcharges from incorrect allocations due to expanded and reconfigured centers, or added uses which are more complicated and time-consuming to keep track of and reconcile. A teaching conference such as NRTA’s Expanding Knowledge Conference will provide lease analysts with additional training related to occupancy cost reviews.”
The person responsible for negotiating the lease needs to understand what the property will look like, now and in the future, to protect the tenant from cost allocation overcharges. Any square footage that is deducted out of the gross leasable area within the subject property needs to be clearly stated in the lease, Kinney says.
Proactive tenants are preparing for the increases in occupancy cost by adding lease language to protect themselves. Kinney warns that tenants need to be forward-thinking when negotiating leases in order to incorporate their short and long term strategies. He urges tenants to “create an occupancy cost review process to avoid possible extra costs that may be passed through in CAM expenses that are pooled and allocated with mixed-use space.”
For example, capital expenses related to the building, structure, expansion, initial installations or construction for the property should explicitly be disallowed in the lease, according to the NRTA.
As landlords change the mix of services and stores in their shopping centers, tenants may choose to change the mix of their products or even have a different name and profile geared to that type of mall. Accordingly, the Use Clause will need to be well thought out.
Lease language related to early termination, assignment, sublease, kick-out rights, tenant expansion and reduction, and co-tenancy violations needs to be negotiated with a “what if” strategy in mind, the NRTA reports.