Go-dark: Tenant has right to stop operating under defined circumstances
Notes: (1) If co-tenancy covenants are not being met, or location is not working for tenant: go dark—or compromise by continuing to operate and pay percentage rent only; (2) tie in with assignment and subletting and percentage rent (clearly if tenant not operating, landlord receives no percentage rent); (3) tenant right to close (go dark) for repairs, renovations, inventory (not deemed to violate use or continuous-operations clauses).
Grand opening—co-tenancy: Tenant’s obligation to open for business/rent commencement depends on satisfaction of co-tenancy requirements.
Notes: (1) X percentage of shops in the mall to open simultaneously or certain designated stores to be open or ready to open; (2) grand opening (all stores to open simultaneously) considerations; (3) tenant “black-out dates” (don’t want to open off-season or with insufficient time to maximize seasonal sales).
Gross Leasable Area (G.L.A.): The total area of floor space (in square feet) available for lease to retail shops and for consumer services and entertainment, including restaurants (not limited to selling space alone; for example, may include storage space).
Notes: (1) Measured from center line of joint store partitions and from outside (front and back) wall spaces; (2) excludes the anchor stores; (3) tenant must be careful to specify that charges based on pro-rata share are to be calculated on “leasable” area, not “leased” area.
Kick-out: Tenant (and sometimes landlord) has the right to terminate lease under defined circumstances.
Notes: (1) Tenant needs if business is failing (determined using measurable parameters such as percentage decrease in sales); (2) if tenant rolls out many stores in street locations, tenant may want to cherry pick as to which underperforming stores to close (e.g. a Starbucks that saturates an urban commercial district).
Parking ratio: The ratio of parking spaces to the parcel of land is usually expressed in the number of car spaces per 1,000 square feet of rentable area.
Notes: A 500,000-square-foot mall with a parking ratio of 5 means that for every 1,000 square feet of building, there are five parking spaces. This means there are 2,500 parking spaces for this mall.
Percentage rent: Rent computed based on tenant’s gross sales at the premises.
• Gross sales defined: Broad definition of gross sales, on and off premises; tenant seeks to limit scope of definition—add exceptions and exclusions.
• Calculation: Tenant pays a percentage of sales above a certain amount (called the “break-point”); calculation of natural break-point: divide fixed rent by an agreed-upon percentage; tenant then pays that percentage of sales above the break-point dollar amount. Example: base rent = $100,000; percentage = 3 percent; “natural” break-point is $100,000; divided by 3 percent = $3,333,333; so tenant will pay 3 percent of gross sales above $3,333,333; typical percentage rents: grocery stores, 1 to 2 percent; retail, 3 to 6 percent; food courts, 8 to 10 percent; fine dining, 6 to 8 percent; theaters, 12 to 15 percent.
• Typical exclusions from gross sales: wide-ranging list. Comps (customer returns), credit card fees, taxes, refunds, intercompany transfers of merchandise, uncollectible accounts (if later collected, then included), for restaurants, including sales from apparel and costs attributable to repair or replacement of items under warranty; costs of alterations, decorations and the like performed in individual tenant’s spaces; cost of repair for which landlord is reimbursed by insurance; (big one here): any item of repair or replacement which by standard accounting practice is required to be capitalized; costs reimbursed by tenants; off-site management personnel and overhead; brokerage leasing commissions; and similar.
Notes: Tenant: (1) already spending substantial sums in its own advertising, marketing and promotion programs; (2) limit to proven marketing and advertising programs; (3) try for an annual cap.
PruneYard case: The 1980 Supreme Court case holding that First Amendment freedom of speech protection extends to granting public access to shopping center premises.
Note: The shopping center as today’s village commons.
Tenant mix: The selection of tenants based upon compatibility with a view toward maximizing sales and profitability for all.
Trade area: The geographic area from which will be drawn 70 percent to 80 percent of shopping center sales.
Notes: The optimally defined trade area takes into account all aspects of detailed demographics and others such as population density, housing, “lifestyle” issues and the like.
Trade name: Tenant must operate under a trade name
Notes: (1) Tenant needs flexibility to change if changing trade name of other stores in chain; (2) provide for right to use different name especially if lease is assigned or there is a sublet.
Jeff Margolis is founding principal of the Margolis Law Firm in New York City, where he specializes in “dirt law”—buying, selling and leasing. He writes monthly for The Commercial Observer on legal issues.