Kiosks -- for all you microretailer wannabes out there....

Here's a neat little piece about renting kiosks in the LA Times. I don't really remember seeing them in malls as a little kid, but installing them made so much sense. By putting them in what was once common area of the center you essentially create found money. (There are also common area carts, which is a slightly different beast; contact me if you want to know more.)

It can also be a win-win for both parties. As the article says, kiosks can be a cheaper way for beginning retailers to get into the business, perhaps with a cheap(er) and short(er) term lease. And for landlords, while the rent may be cheap, on a per square foot basis the kiosk can be great.

But if you are thinking about opening a bead shop for the holidays, remember a few things. The break-even costs are not low, the hours can be brutal (you have to be open whenever the mall is, which can be 70+ hours a week), and there's plenty of competition even in a recession. But if you have an itch to do retail, are not on a huge budget, but also do not want to say to yourself, "If only I'd opened my own business..." then this is an entry-level way to do it. Just be cautious in signing anything as a tenant, and get a good lawyer to look over the mall's almost certainly one-sided lease form so you are at least aware of your obligations.

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TIFs -- call me skeptical, but...

Is this what TIF money is meant for? Moving Willis, a company that got a great deal at Sears Tower PLUS naming rights, from three downtown locations to one consolidated one? Does anyone seriously think they are moving to Oak Brook or Schaumburg? Or is this a condition to the lease? Are there better ways of spending money? Or is this proposed subsidy a good thing for Chicago and money well spent? I am a fan of good TIFs, but I'm not sure whether this is a good one. Perhaps others have opinions more informed than I.

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Such a Deal!

The Tribune reports that Sears Tower is being renamed Willis Tower. But the London-based insurance broker is only taking 140,000 sf of space at $14.50 per foot net. Note that the word "initially" was used, so there are surely expansion options and perhaps even so-called "must-take" options in the lease. We don't know the length of the term from this story or any extension options, how much the rent does or does not increase with time and what other concessions are in the lease.

So on the surface at least this looks like a tremendous deal for Willis. First, the rent is reasonable and the naming rights to an iconic building are priceless. Well, I guess they aren't priceless any more. Until I know the whole story, I just call it a heck of a good deal for the tenant. And hey, the landlord gets PR, cash flow and occupancy!

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More on co-tenancy clauses

I alluded to co-tenancy clauses in leases a few months ago in the context of Sears, but I am going to bring it up again after reading this story raising yet more about the topic.

For you newbies and novices, here's the scoop. A tenant with leverage-- be they big boxes, national retailers with pull or other credit tenants -- will ask for (and, in this market, get) a clause in its lease giving it the option to terminate the lease if a certain tenant (or tenants) in the shopping center terminates its lease or goes dark (i.e., closes while paying rent). Example: if Circuit City goes bankrupt in a shopping center with other tenants that have a co-tenancy clause for CC, those tenants now have the right to walk form their leases. All of a sudden your leased-up center is half-empty. Some tenants also negotiate a right to walk if retail sales do not reach a certain level.

Anyway, you get the picture: a vicious cycle, or at least a spiral. That is why, as the story say, you could see why some landlords may have additional strain or worse. I do not want to get into my own strategies for dealing with these issues, but they are certainly something a careful lawyer considers on day one of the letter of intent.

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Illinois court rules against tenant exclusive

Crain's moved a story this morning regarding a dispute over a tenant exclusive involving the InterContinental Hotel in Rosemont. As I understand it, Capital Grille occupied a standalone pad in the project under a lease that prohibited another “high-end steakhouse themed restaurant concepts serving liquor with price points above $22.00 per entrée” in the project. Apparently several types of competing restaurants were named.

Apparently an Italian restaurant was supposed to go into the hotel but then blew out of the deal. Along came Wildfire, which was not listed among the competitors although it does sell steaks above $22.00 per entree and is a pretty classic supper club type atmosphere, though certainly noisier and more lively than Capital Grille, in my opinion. The developer's hand was forced because the franchisor declared a breach under its franchise agreement for not having a restaurant on site (and then granted an extension), although you wonder in this market if you can raise the old impossibility/force majeure defense like everyone else is or make it go away through other means....

I haven't read the exclusive language, but in this case Cook County Circuit Court Judge Rita Novak on Feb. 13 denied the preliminary injunction, in part because she found the provision — which singled out a number of restaurants, but not Wildfire — too vague to be enforced in this case." In short? Wildfire gets to open, unless Capital Grille tries to take this up on appeal.

Lawyer lesson? If you are a tenant, you'd better try as hard as you can to make the exclusive as air-tight as possible, and even then remember that litigation can sometimes be a crapshoot.

Finally, I guess the upside for a meat lover is that you get your choice between two more fine restaurants in Rosemont!

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Thursday Tidbits - 2/19/09 Edition

I'm under the weather and also under the gun on several projects (it never fails), so just a few quick thoughts for the day.

On the gloomy side:

In case you missed it, commercial and multifamily loan originations are in the tank.

Mezz lenders are getting slaughtered, too.

What is it with Chicago and luxury Asian hotels? First the Shangri-La has its problems, and now it looks like the Mandarin Oriental may not get off the ground, foreclosure and all that. The speculators say it is a matter of time, but my thought is that people will try to buy time until October for obvious reasons.

And even the Fed is talking about CRE problems, although the hope is that the problems will not be as bad as the early 1990s.

On the less gloomy side:

Rob Bagguley of Transwestern has a great post at CPN about the encouraging signs of the market. I have to be reminded that there are good things going on and I thank Rob for doing so. Anecdotally I am seeing a slight uptick and thinking that perhaps people are seeing opportunity and possible bargains. I still really honestly think there's money out there that wants to buy notes and distressed deals. Here is an example in the retail sector.

I like my office in Chicago, but the thought of being on the 84th floor of Sears Tower sounds very cool. Executive suite operator has inked a 30,000 sf deal for 100 offices, a bunch of workstations and a videoconferencing center.

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Can you say operating covenant?

In an office lease, a landlord often does not care if a tenant actually uses its space so long it pays the rent.

Retail? That is a while different ballgame. Nothing looks worse than a shopping center where the tenants have "gone dark," or closed the store while still paying rent. You have a myriad of issues related to this that go far beyond the scope of a blog. I'm sure there are some articles about this phenomenon out there.

I got a kick out of a Journal story yesterday about this. Some retailers are trying to get out of deals without having to pay hefty termination fees. In the case of Office Depot, they signed 40 new leases but do not intend to open all of the stores.

So why the title of the post? In retail leasing you usually try to get the tenant to agree to continuously operate a store. This is a hard concession to extract from many national retailers, who often want the flexibility of going dark while keeping the lease to assign to another party or to reopen a store when times are better or in another concept.

Big boxes can even be tougher. One thing I did recently when confronted with this situation is to get the national retailer to open a full-service, fully-staffed store for at least one day. This at least mitigates as much as possible the Office Depot situation. And it worked, the eocnomy notwithstanding. I don't know what OD's landlords did that lets them not even open, but in this market, maybe collecting rent is better than nothing.

(H/T Traffic Court.)

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Circuit City turns to Chapter 11

First they announce store closings. Now bankruptcy, albeit Chapter 11 for the time being. Is that the whole story?

The interrelationship is more than meets the eye from the wire stories. There is definitely a real estate component to this filing.

When they announced the store closings, the question you had to ask was: how? Do the leases for the closing stores have termination rights? Landlords aren't just going to walk away smiling. A retailer with the clout of CC usually negotiates a "go dark" provision that allows the store to close but you still have to pay rent.

But under Chapter 11, the retailer can reject the leases it does not want and walk away. See this from the press release:

Under the protection of Chapter 11, the company plans to build on these recent restructuring initiatives. Through the additional flexibility that the bankruptcy process provides the company to restructure its operations, the company will continue its real estate rationalization by taking immediate steps to reject the leases at its previously closed locations. Further, as part of its restructuring efforts, the company will continue to assess the productivity of all assets, review additional cost-cutting initiatives and explore strategic alternatives to maximize the value of the business.

I also noted that company believes it will have cash for unsecured creditors, making the dirt angle even more credible. Now the question is whether this company, which has been battered by Best Buy, will make it even with this restructuring. Let's hope so.

UPDATE: Deal Junkie makes an excellent point about the inflexibility of the CMBS market in this post.

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One last thought on GGP - percentage rents

I usually do not write thrice in one day about one company, but General Growth is a major Chicago player, and its stock just plummeted more after the complaint about the short-sale listing. (So maybe I should be more concerned if the market was.)

In addition to debt coming due and the inability to access credit lines, I can see two reasons why there might be declining revenue at the company that could impact its bottom line.

One is revenue from base rent. If tenants are filing bankruptcies are walking away from malls, you get less money. And the prospects of replacing those tenants aren't great, though there might be a temporary bump in the holidays.

Another is percentage rent, also known as overage rent. For you novices, percentage rent is when a tenant pays, as additional rent, a percentage of its gross sales, usually over a certain amount (known as the breakpoint). Sometimes the breakpoint is based on monthly sales (which might differ based on the time of year, given that sales are higher in December than in March), sometimes it is based on annual sales.

On more aggressive deals there may be a higher percentage component and a lower base component, thus giving the landlord the benefit of a good store but also the burden of a bad one. (Sometimes landlords can kick out retail tenants for failing to reach certain goals, though I doubt you'll see much of that these days.)

In a bad economy, retail (including restaurants, which seem empty lately) outlets are not selling as much. This means that percentage rent will decline or even disappear if the breakpoint is not reached.

Not a huge percentage of GGP's rent revenue comes from percentage rent, but the amount is increasing annually. According to its annual reports, GGP's overage rent revenue was 2.7% of total rent revenue in 2003, and 4.4% in 2007. Thus, while the numbers are not huge, the company seems to be relying a little more on percentage rent. I don't know what sales are looking like right now, but could that make a large difference?

Maybe, maybe not. But I do know that the subject came up in the 2Q 2008 conference call and the 4Q 2007 conference call (both specifically concerning restaurants). And guidance was moved downward because of many factors, including overage rent. So this might already be priced in.
(Simon, by the way, is just as reliant as GGP on percentage rent if not more so. But its stock price is actually up about 1% YTD compared to -62% at GGP.)

The point? A slowdown in the economy would potentially impact landlords not just from a base perspective if tenants blow out of leases, but existing leases would also potentially bring in less revenue as gross sales decline. So think about that as you negotiate retail leases.

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Breaking: Judge grants TRO to Anheuser-Busch

Breaking news: Judge Martin Agran has granted a temporary restraining order to Anheuser-Busch in its dispute with Tom Gramatis.

Apparently Judge Agran is a Sox fan, so he has no dog in this fight unless there's another Subway Series a la 1906.

What the stories don't say is this will likely lead to a settlement of some sort. Under Illinois law, one of the elements necessary to grant a TRO is a substantial likelihood of prevailing on the merits. So the judge agrees with Bud's position, at least on the initial pleadings. Presumably the contract between the sign company and the new owner can be tanked or go into effect once the Bud deal is gone, perhaps as early as next year.

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Lease disputes go to a new level - red rooftops at Wrigley Field

The new owner of the so-called "Budweiser Building" across from the outfield of Wrigley Field (I remember when it was the "WGN Building") is in a tizzy with Bud over the rent. (The owner, by the way, is Tom Gramatis, who was in a tiff with Tribune Company over revenue sharing at his three rooftop clubs that ghe also owns.)

Apparently the new owner bought the building and there's a dispute as to the September rent payment. The owner has purported to terminate the rooftop lease and has inked a contract with a sign company to re-lease the space.

I have not read the lease, so I cannot say who is right here. I truly see both sides of the story.

When representing a tenant, I usually like to provide some notice and cure period -- even for rent -- before a lease can be terminated. And on the landlord's, I usually allow that. Why? Checks get lost in the mail. And apparently this was in the lease but A-B didn't pay anyway.

On the other hand, Anheuser-Busch claims it never got an invoice for the September rent. So? Are you telling me the lease requires an invoice? Somehow I doubt that, but A-B claims it was. Assuming A-B knew where to send the money, it probably should have. The "I need a phone and fax number" excuse is a little lame, but the FEIN requirement is a little less so, especially if A-B's claim that it was required under the lease is true. You need to know who your vendors are. But then, do you want to risk a lucrative contract for such a detail? Not my call here.

Now, maybe the buyer wanted to get rid of the tenant (gee, you think? The World Series being a possibility and all that), but I can't say for sure and I certainly do not want to cast any aspersions on the landlord. That would not be fair. After all, the landlord has a right to timely payment of rent, and if it does not receive the rent, it is well within its rights to terminate the lease, and if that means more money in its pockets, that's the American Way!

In a deal like this, here's what I would have done (and for all I know, it was here): the buyer should have demanded an estoppel certificate from the tenant stating that the lease was in effect, negotiated a document subordinating the lease to a mortgage (if required by the lender), and then, most importantly, the old owner and new owner should jointly have sent a letter to A-B notifying it of the sale and directing where rent was to be paid. In any event, notice to the tenant of the sale will probably a factor the judge will focus on in deciding this matter and determining whether the lease is still valid.

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One other Lehman thought is this

This will put a HUGE hole in the Manhattan real estate market. Some months ago I mentioned that the time might be ripe to lease in Manhattan, but that the one thing that could really make things bad would be if there was trouble with the investment banks. And apparently there's already a lot of sublease space available.

Well, those days have come. If Lehman shuts its doors, that could bring another 2.2 million sf of space into the open market, some of which is owned and some of which is leased. Its Midtown HQ could fetch a billion in the open market, and predictions are that space could be 20-30% cheaper as a result of all this turmoil. How much coin are we talking?

Landlords would also sorely miss Lehman. In addition to owning its 1 million-square-foot headquarters on Seventh Avenue, the firm rents 2.4 million square feet at pricey New York addresses, including 399 Park Ave. and 1271 Sixth Ave. Lehman paid $250 million dollars in rent worldwide last year—a good slug of that amount going to Manhattan building owners. And it has committed to another $1.4 billion in leases over the next four years.

In other words, a lot. Those of you in BigLaw who read me may be thinking about your jobs, as the cuts already abounded. But in a way that seems silly since there will be so much work to be done, as well.

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Law firms know this is the time to lease

Well, in Manhattan, at least. Above the Law (citing the New York Observer) reports that a number of law firms are on the prowl for large offices in Manhattan. Does this mean rents are coming down in price? Don't know. But especially with bankers cutting back it can be a good time to jump into the market if you need space, and I think law firms are trying to take advantage of it. Landlords like large leases. I did write about this, at least respecting subleases, in Law Firm Inc. a few months ago. Without getting into it, one major issue for law firms is avoiding recourse back to the partners if the firm tanks.

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But will they make the portions larger?

I don't think that's humanly possible, and it might even be actionable. What am I talking about? Buca, Inc., known for its family-style Buca di Beppo restaurants, has been acquired by Planet Hollywood. The chain had been struggling with losses, caused in part by financial mismanagement that ended up seeing some of its execs go to jail.

(Courtesy of Traffic Court.)

Buca has some good dirt locations, and I assume PH will keep the chain running. But you never know when something ends up becoming a dirt play; e.g., Vornado's takeover of Virgin -- Michigan Avenue's gone and now the Times Square outlet will close, allowing rents to go up from $54 a foot to some $700! That's a nice jump.

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Finding money in vacant space

When times are tougher it pays to be a little creative. And since I've been working on some sign leasing lately I found this story interesting.

In short? Outdoor ad companies are paying retail landlords money to use the vacant storefronts for advertising. From what I gather it is sort of like the ads you see wrapping buses. The ads can look pretty creative. Some even include motion sensors that trigger the projection of images as you walk by.

If you are a landlord you still have to be careful about these types of deals. The tenant has to get all the necessary permits, perhaps within a given time frame. What if the city demands that the ads be removed? What about content? You also need to make sure there is flexibility to terminate the deal if a tenant comes in to play. Found money is great and all that, but not at the cost of losing a long-term retail tenant.

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Mid-Week Tidbits

Things have been crazy, so I've been remiss in not posting daily. I'll try to improve that. A few items from other blogs caught my eye this morning.

One is the passage of a green building code in California, voluntary until 2010 and mandatory thereafter. My take? The private sector is usually, in my opinion, the better way to go about making changes in how things are done. But then, California was the leader in the anti-smoking movement and I'm not sure those bans would ever have come into place without government intervention. We'll see whether this is a folly or a harbinger of things to come. I can already see the potential litigation coming out of this.

Commercial property prices are continuing their adjustment downward. Some of that may also have to do with the sales being predominantly in smaller properties where sellers are willing to take haircuts. People who can are holding on to their trophies.

Still more pressure on the retail side with Mervyn's on the verge of tanking. This can cause unforeseen problems on the legal side. How so? More than a few retail leases may have co-tenancy clauses that allow in-line tenants to walk or stop paying rent or pay reduced rent if anchors go away.

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And here go retail vacancy rates

This is before Steve & Barry's, but Crain's reports a hefty jump in vacancy rates in the second quarter. This is not developers bringing space on line, either. Some of the projects I wrote about last year are delayed or dead. Rather some retailers are retrenching and others, as we know, are liquidating.

Is it all bad news? No. Some of it was expected. Kane County and many of the suburban submarkets were expected to rise, because retail is perhaps ahead of the rooftops. And some "bad" news is just a sensible slowdown. Walgreens, for instance, is "only" planning to open 365 stores next year instead of 500. And where the bodies with money are? Vacancies actually dropped below 4% on the north side of Chicago. So...location and money and you are probably ok. I guess that means we should expect a slowdown where I live, too, even with Bed Bath and Dick's coming in and Petsmart just opening. I guess that might mean another year or two for Panera Bread, alas.

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Another retail chain in trouble? A line on Steve & Barry's and some thoughts on defensive leasing

Boy, they weren't kidding about retail woes. Now I am reading that Steve & Barry's, a cheap chic chain, is talking to Weil Gotschal and thinking about closing 1/3 of its stores as it decides on its future.

I found the comment about defensive leasing from a Greenberg Traurig lawyer interesting. From a landlord's perspective I guess that means (for instance) watching out in a down market for big TI allowances and shelling out major money on a lease that could go south. Boy, have I seen that.

Defensive leasing also exists for tenants in an up market; this is a term I am more familiar with. In other words, tenants will sometimes take more space than needed or commit to so-called "must-take" options to add on space in the future in order to lock in possible expansion needs. This is, of course, seen more often in office leases.

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Downtown office vacancies are.....down???

You read that right, and by no small number either. Vacancies dropped by 0.6% in the last quarter and demand improved to boot.

Now, before you get too excited, let's remember that portions of two big buildings went off the market due to pending hotel conversions, and that more space is coming on line in 2009. So, while this is welcome news, it may be a bit artificial. But if it isn't....

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Make sure you notice those notices

I always get a little concerned when my clients decide to send notices under contracts without consulting me. And, thanks to Peter Olson, here's why:

Here's the recent case (Genesco v. 33 North LaSalle Partners, No. 1-07-2782) where simply a tenant didn't follow the lease's Notice provisions and therefore the tenant DID NOT properly terminate the lease. The case gets a bit complex with various equitable arguments but the basic fact was simple: tenant sent lease termination to the wrong address. So instead of a $30k lease termination fee they're on the hook for the rest of an approx. $1 million lease (high-end Loop property).

Oops. Imagine if you were a lawyer consulted on this and you blew it. Call your carrier now. Bottom line? Don't take a notice clause for granted, because if litigation ensues this is were it can end up.

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