Perimeter and Outparcel Redevelopment

in Retail Centers: Due Diligence

and Documentation

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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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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

kboyle@mpslaw.com snackeeran@mpslaw.com

(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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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?

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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

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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

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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?

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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

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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

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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)

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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

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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

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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.

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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.

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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

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Redeveloping Big Box Spaces

into Multi-Tenant Buildings

Perimeter Development

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Big Box to Multi-Tenant

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Non-Retail Premises and

Designated Parking

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Control Areas

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Perimeter Development

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Approval Issues

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Expansions and Contractions

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Shopping Center Declaration

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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

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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.

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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

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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

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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

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Making the Lender Happy

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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

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