Chris Brockman
With an estimated $300 billion in real estate loans coming due in each of the next 5 years and tenant demand that is flat in most markets, many shopping center owners are looking for creative alternatives to selling their holdings at a loss or simply handing them back to their lenders. One solution may be to sell off part of the center in order to raise capital to help refinance the balance of the property. However, that may be easier said than done.
Developers and secondary purchasers often do not anticipate having to sell off their centers in pieces and do not structure their underlying documents accordingly. But if you find yourself in that situation, the first two things you need to do (whether you represent the seller or the buyer) is: 1) confirm that local laws allow the center to be sold off in pieces and 2) take a look at the various recorded documents which impact the site.
Assuming for the moment that the laws of the local jurisdiction allow the center's owner to sell a portion of the center, and that the requisite cross-easement documents have been recorded to account for access, utility service and drainage, a hidden pitfall still may loom large over the success of the transaction — the terms of the existing leases.
In a number of instances, it's often been found that since the original developer never intended to sell off pieces of the center (either existing outparcels, the “big box” or the in-line space), the developer agreed to terms in the leases that could prove to be difficult, if not impossible, for the successor owner to perform. If a buyer of only a part of a center is not careful, they could inherit a lease that requires them to do things on property that they do not own (the rest of the center) without any way to get the owner of the center to assist them in meeting their obligations to their tenant.
This also can work in reverse. The classic example is the shopping center owner has agreed to give certain tenants “exclusives” or other privileges, and the owner does not remember to impose these restrictions on the outparcel when it is sold. Absent such documentation outlining the specifics of what the new owner (or its tenant) can and cannot do on the outparcel, the original owner will have no way to enforce these requirements and could find itself in default under its remaining leases.
One possible solution is for legal counsel to craft an omnibus agreement that covers the interrelationship of the different parcels, and their tenants. The focus of the agreement will depend on whether you represent the buyer or the seller.
If you represent the buyer, you only need to read the lease for the outparcel AND any recorded instruments that are binding on the outparcel. Then, you have to craft your agreement to address any obligations of the landlord that extend outside of the outparcel, such as exclusives and/or use restrictions, no-build areas or visibility corridors, cross parking rights, lighting requirements or maintenance obligations. You also will need to determine whether you need to address the terms of any of the recorded rights or restrictions that show up in the chain of title. Obviously, the same do not need to be repeated in the omnibus agreement, but you may want your seller to agree to bear the burden of some of the recorded requirements (such as disproportionate common area maintenance charges or burdensome lighting requirements).
If you represent the seller, the focus shifts slightly, as you want to make sure the outparcel is bound by the terms and conditions of all of the shopping center leases, regardless of whether those restrictions appear in the public records. In this regard, counsel can either review all of the leases or rely on your client to provide the information that needs to be included in the omnibus agreement. Either way, you want to make sure the outparcel is still bound by the restrictive terms of the various leases even though you no longer own same.
Finally, the joinder and consent of the various lenders is crucial. As we have seen during the past few years, lenders often become reluctant holders of retail property. You do not want to find out the hard way that since the lender was not a signatory your omnibus agreement has been “foreclosed out” and is no longer binding upon a parcel. The moral is to be sure you consider the rights and obligations of all of the potential parties — owners, tenants and lenders — before you decide on the proper parties to the omnibus agreement.
You also want to do it right the first time. Experience has proven that it is much easier to deal with potential issues, and get an omnibus agreement in place, before ownership of the shopping center has become splintered into a handful of different owners, each of whom may have to consult with both their individual tenant and their individual lender before agreeing to its terms.
Whether you represent a buyer or a seller, examining all the documents that either benefit or restrict an out-parcel, and making sure they work for each individual parcel of a shopping center, is key. As a seller, you want to be able to maximize the value you receive for the outparcel without having an unintended negative impact on your other parcels and tenants. As a buyer, you want to make sure that the income stream you expect from that credit worth tenant is not cut short because you cannot enforce the terms of your lease as they relate to the rest of the center. A little due diligence and forethought can give all the parties the peace of mind they desire.
— Chris Brockman is a real estate attorney with Holland & Knight LLP in Orlando, Florida.