6 Tips for Reviewing Shopping Center Leases and Estoppels

Shopping centers are a critical cog in the retail machine. With over 15,000 shopping centers in the United States alone and an average occupancy rate of nearly 90%, it’s no wonder that retail is a $450 billion industry. But just because shopping centers remain a strong investment opportunity doesn’t mean they’re without their challenges. The rise of e-commerce has put even more pressure on brick-and-mortar stores with many retailers struggling to find their niche and meet customer demand online instead of in physical stores. This is why most savvy real estate investors include an extensive due diligence process for potential shopping center leases before signing on the dotted line. After all, there are many hidden pitfalls that can cost you time and money if you don’t take the time to understand everything beforehand.

Know the Basics Before You Review a Shopping Center Lease

Before you even think about reviewing a shopping center lease, you need to understand the basics of the deal. Here are some critical items to research before moving forward with a shopping center lease: – The gross rent – The amount the landlord pays the tenant for the use of the space. – The base rent – The minimum amount the tenant receives from the landlord. – The percentage rent – The amount the tenant receives from the gross rent as a percentage of the gross rent. – Renewal options – The length of the initial lease term and the length of the option to renew the lease. – Utilities – Any utility costs and how they will be shared between the landlord and tenant. – Taxes and insurance – Any tax or insurance obligations the tenant has to pay and how they will be paid. – Other lease provisions – Any other lease terms or conditions that may affect the deal such as a minimum rent clause.

Get Reviewed Documents in Writing

If you’re reviewing a shopping center lease, you should always get the lease documents in writing. This applies not just to the shopping center lease but also to all of the addenda and agreements that are associated with the lease. If there are any lease terms that you do not understand, you should ask the landlord to clarify them in writing. You don’t want to assume anything or make any false assumptions about what the lease terms mean.

Check for Repairs and Maintenance Requirements

Another critical aspect of reviewing a shopping center lease is making sure you understand the landlord’s repair and maintenance obligations. You need to make sure that the landlord is obligated to maintain common areas and comply with all applicable laws, codes, and ordinances. If there is any ambiguity about who is responsible for paying for repairs or maintenance, you should clarify it in writing. For example, will the landlord be responsible for roof repairs? Will the landlord be responsible for snow removal? If a lease has a long-term commitment, it’s important to understand the terms of the lease and how they will affect the shopping center in the future. You should also be aware of any events of default that would allow you to terminate the lease.

Make Sure You Understand CAM and VAT Clauses

You should also thoroughly review any clauses that deal with common area maintenance (CAM) or voluntary assessment financing (VAT). These terms refer to the amount of money that a tenant may be required to pay to help maintain the shopping center. CAM is the amount of money that a tenant is obligated to pay toward the costs of operating and maintaining the shared areas of the shopping center. VAT is a financing tool where tenants are obligated to pay a percentage of their gross sales as a contribution toward the common area costs. These two clauses are closely related and are often written into shopping center leases. However, they can be very tricky and confusing and you should make sure that you understand the implications of these clauses fully before signing the lease.

Carefully Review Net Operating Income Calculation

You should also carefully review the calculations used in the net operating income (NOI) calculation. The NOI is the amount of money that the shopping center will generate after deducting all of the expenses. It’s a critical metric that landlords use when leasing their properties. The NOI is used to determine the amount of the initial rent and is often used to determine the length of the lease term as well. When reviewing the NOI, be sure to include all of the landlord’s expenses. This includes expenses that may be paid by the tenant such as taxes and insurance.

Be Careful with Guarantees and Net Profit Clauses

Finally, you should be very careful with any guarantees or net profit clauses in the shopping center lease. For example, the landlord may request that the tenant guarantee the lease. This means that the tenant will be responsible for making the landlord whole if they are unable to make their lease payments. You should also be careful with any net profit clauses in the lease. For example, the landlord may ask you to agree to a net profit clause that would require you to pay any difference between the actual NOI and a predetermined amount.

Summing Up

The bottom line is that shopping center leases can be very complex documents. Be sure to understand the basic tenets of a shopping center lease before reviewing one. It’s critical to fully understand all of the clauses and provisions of a shopping center lease before you sign on the dotted line. This way, you can avoid any costly mistakes or surprises.