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Lifestyle centers risk collapse because of cotenancy clauses.
There's always been a level of skepticism surrounding lifestyle centers. In an industry not known for innovation, suddenly a new mold has taken hold. Properties have been turned inside out. Developers are spending more on design, materials and landscaping.The projects have few or no anchors. And, gasp, some even allow vehicular traffic down the middle of the center. But the concept has caught on like wildfire and even traditional mall developers who said they'd never build lifestyle centers now have them in their pipelines.
So everything's worked out, right?
Not so fast.
It turns out there's a secret about lifestyle centers that few of those in the know like to talk about and if things don't work out, projects across the country face the prospect of collapsing like so many houses of cards.
The problem: With few large anchors at lifestyle centers, some of the most popular and powerful in-line tenants have taken to seeing themselves collectively as a project's new anchors.
Working together, a cadre of retailers are dictating terms in their leases and demanding generous cotenancy options. Today, it has become common for a retailer to get these "kick-out" or "pick-up" clauses in their leases with a list of five, six or even 10 names of other tenants that have to be in the center. If inferior retailers replace them, they reason, the center could deteriorate in quality, reducing traffic from the upscale kind of shopper they want.
"It's not the exception. It's the rule now," says Ross Glickman, CEO of Urban Retail Properties. "Not only are they for new centers and not only do you have them for opening, but this is now ongoing. ...It's a problem in that it's another hurdle that an owner/developer has to cross."
Paying the piper
If a landlord doesn't deliver as promised, tenants have the option of opening late, paying reduced rent or even pulling out of a project altogether. But it's not just on the front end. If any of the retailers named on the cotenancy list leave the project before the end of their term, concessions kick in, all the way up to early termination. The result: if one key retailer ends up leaving a...